Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005337735), EUR 160.3m outstanding amount: downgraded to BB_SF from BB+_SF

Class B (ISIN IT0005337743), EUR 30.2m outstanding amount: affirmed at CCC_SF

Class J (ISIN IT0005337750), EUR 9.0m outstanding amount: not rated

Scope’s review was based on available payment information, and investor and servicer reporting as of January 2022.

Transaction overview

2Worlds S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy. The loans were originated by Banco di Desio e della Brianza S.p.A. and Banca Popolare di Spoleto S.p.A. The issuer acquired the portfolio on the transfer date, 12 June 2018, but is entitled to all portfolio collections received since 31 December 2017 (the portfolio cut-off date). The final maturity is in January 2037.

Rating rationale

As of 31 December 2021, aggregate gross collections were EUR 180.9m, which represents 83.3% of the original business plan expectation of EUR 217.3m. The main sources of total gross collections are judicial proceeds (51.1%) and discounted pay-off (DPO) proceeds (29.9%). Other sources of collections account for 19.1%, which include cash-in-court proceeds and ad-interim collections after the portfolio cut-off date. 34.9% of gross collections (EUR 63.1m) came from closed debtors (i.e. debtors for which the recovery process is completed). Cumulative net collections (gross collections reduced by the amount of recovery expenses) amount to EUR 170.0m, which is 83.7% of the original business plan expectation of EUR 203.1m.

44.4% of the class A notes’ notional has amortised. Interest on class B is subordinated to the payment of class A principal if the cumulative collection ratio or the net present value (NPV) cumulative profitability ratio falls below 85% of the servicer’s business plan target. The reported cumulative collection ratio and NPV profitability ratio are 88.0% and 114.6% respectively. Therefore, a class B interest subordination event has not occurred. There is no unpaid interest on the class A or class B notes.

The rating action is driven by the observed and expected performance of the transaction. Scope’s updated modelling assumptions reflect the agency’s view of the transaction’s future performance.

All counterparties continue to support the ratings: i) Banco di Desio and Banca Popolare di Spoleto, the two originators, regarding representations and warranties and possible payments from borrowers, especially for the cash-in-court cases; ii) Cerved Credit Management S.p.A., the special servicer; iii) Cerved Master Services S.p.A., the master servicer; iv) Banca Finint S.p.A. (successor of Securitisation Services S.p.A.), the backup servicer, calculation agent, and noteholders’ representative; vi) BNP Paribas Securities Services (Milan Branch), the account bank, cash manager, and principal paying agent; and vi) Intesa Sanpaolo S.p.A. (successor of Banca IMI S.p.A.), the interest rate cap counterparty.

Key rating drivers

Cumulative collections (negative)^1,2: Observed cumulative gross collections are 83.3% of the original business plan expectations up to 31 December 2021, i.e.: seven collection periods since closing. Since Scope’s last annual review, in the last one year gross collections accounted for 64.7% of projections in the latest business plan for this period.

Collateral appraisal values (negative): NPL collateral appraisals are more uncertain than standard appraisals. Collateral asset values which proved to be lower than initially expected, have already contributed to reductions of expected collections at the latest business plan update in 2021.¹

Closed debtors’ profitability based on Scope’s assumptions (positive)²: Profitability on closed borrowers stands at 91.9% and 101.3% relative to Scope’s original B and BBB case assumptions, respectively. Although the share of closed borrowers accounts for only 12% with regards to gross book value of the initial portfolio.

Interest rate cap (positive): An interest rate cap, with an increasing strike schedule which ranges from 0.5% to 1.25%, mitigates the risk of increased liabilities on the notes in the event of a rise in Euribor levels.

Rating-change drivers

Positive: consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the rating.

Negative: servicer performance which falls short of Scope’s collection amounts and timing assumptions could negatively impact the rating.

Quantitative analysis and assumptions

Scope analysed cash flows, reflecting the transaction’s structural features, to calculate each tranche’s expected loss and weighted average life. Scope also analysed the assets to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope updated its modelling assumptions to reflect the current performance of the transaction. The class A rating scenario (BB) incorporated a gross recovery rate of 40.3% over a weighted average life of 4.4 years. A baseline (B rating category) recovery rate of 42.3% was considered over a weighted average life of 4.3 years.

By portfolio segment, Scope assumed class A gross recovery rates of 57.4% and 15.6% for the secured and unsecured portfolios, respectively. Scope assumed B category gross recovery rates of 60.6% and 16.2% for the secured and unsecured segments, respectively.

Sensitivity analysis

Scope tested the resilience of the rating to deviations in expected recovery rates and recovery timing. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for the class A notes change compared to the assigned rating in the event of:

• a 10% haircut to recoveries: zero notches decrease;
   
• a one-year recovery lag increase: one notch decrease.

The following shows how the results for class B notes change compared to the assigned rating in the event of:

• a 10% haircut to recoveries, one notch decrease;
   
• a one-year recovery lag increase, zero notches decrease.

Rating driver references
1. Servicer business plan (Confidential)
2. Servicing reports (Confidential)

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow Model version 1.1 incorporating recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 6 August 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021; General Structured Finance Rating Methodology, 17 December 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Cash Flow SF EL Model version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings received a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it had negative impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Adam Plajner, Senior Analyst
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 25 June 2018. The Credit Ratings were last updated on 8 June 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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