The rating actions are as follows:

Class A (ISIN IT0005494221), EUR 125,000,000: rated BBB_SF

Class B (ISIN IT0005494247), EUR 24,000,000: not rated

Class J (ISIN IT0005494254), EUR 6,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio with a gross book value (as total gross claim amount) of around EUR 1,128m. The portfolio was originated and sold by Unicredit S.p.A. and will be serviced by doValue S.p.A. as special servicer, and by doNext S.p.A. as master servicer.

The securitised pool is mostly composed of unsecured loans (69% of the portfolio’s gross-book-value (GBV)) and of senior secured loans in a smaller share (29% of the portfolio’s GBV). Remaining exposures are junior secured loans (2.0% of the portfolio’s GBV). Loans were granted mainly to corporate debtors (67% of the GBV). Properties with first-lien mortgages are located in the north and south of Italy in comparable shares (39% of the secured collateral value, each), while 22% are located in the centre of Italy. Most of the secured loans are backed by residential assets (59% of the secured collateral value), while industrial real estate assets, commercial properties, land and other type of assets have a smaller share (18%, 16%, 3%, and 4% of the secured collateral value, respectively). The issuer acquired the portfolio at the transfer date of 3 May 2022 and is entitled to all portfolio collections received after the cut-off date of 31 December 2021 or after 28 February 2022 for a certain subset of loans.

The transaction structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B and junior class J. Class A will pay a floating rate indexed to six-month Euribor, plus a margin of 1.0%, while class B will pay a floating rate indexed to six-month Euribor, plus a margin of 9.5%. The Euribor component for class A and class B notes is capped at certain levels until January 2035. The difference between the class B Euribor interests amount and the class B capped Euribor interests amount, will be paid upon the amortisation of class A notes. Class J will pay a variable return. Interest rate risk on class A notes is partially hedged with an interest rate cap spread.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Italy and its assessment of the special servicer’s capabilities. The rating is supported by the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection, and the interest rate hedging agreement.

The rating also addresses the issuer’s exposure to key counterparties. Scope considered counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties.

Key rating drivers

doValue is already servicing about half of the portfolio (positive). doValue is already in charge of managing 55% of the portfolio’s GBV for about six years. The servicer has therefore performed most of the portfolio take-over activities for this portion of the portfolio, including the set-up of servicing strategies. The remaining portion of the portfolio was still being serviced by the seller (45% of the portfolio’s GBV).¹

Low seasoning for unsecured loans (positive). The weighted average time since default is around 3.2 years for the unsecured exposures and around 3.4 years for the junior secured portfolio. This is below the average seasoning of peer NPL transactions rated by Scope.²

Material share of recent valuations (positive). 82% of the properties (in terms of total collateral value) were valued from May 2021 onwards.²

Significant portion of unsecured loans (negative). The securitised portfolio has an above average share of unsecured loans, for which recovery rates are typically lower compared to secured loans.²

Top borrowers’ concentration (negative). The top 10 borrowers are around 17% of total GBV, which is above the average concentration of Italian NPL transactions rated by Scope.²

Significant portion of legal proceedings in initial stages (negative). Around 86% of the secured loans (in terms of GBV) are in the initial legal phase or are yet to have proceedings initiated. This results in a longer expected time for collections than for loans in more advanced phases.²

Rating-change drivers

Faster judicial recovery timings (upside). The pandemic led to a slowdown in court activity. An outperformance on recovery timing could occur if courts advance on proceeding backlogs faster than expected.

Rapid economic growth following the pandemic crisis (upside). A scenario of rapid economic recovery would improve liquidity and affordability conditions and prevent a sharp deterioration in collateral values. This could positively affect the rating, enhancing transaction’s performance on collection volumes.

Legal costs (downside). An increase of the legal expenses beyond servicer’s projections could negatively affect the rating.

Economic slowdown (downside): High inflation on the back of soaring energy and commodity prices combined with tighter monetary policy could see recession risk increase substantially. Thus, deteriorated liquidity conditions could reduce the servicer’s performance on collections.³

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 analysed the assets and derived a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope performed a specific analysis for recoveries, using different approaches for secured and unsecured exposures. For senior secured exposures, collections were mainly based on the most recent property appraisal values, which were stressed to account for, appraisal type, liquidity and market value risks. Scope derived recovery timing assumptions using line-by-line asset information, detailing the type of legal proceeding, the respective court, and the legal stage of the proceeding at the portfolio’s transfer date. For unsecured and junior secured exposures, Scope used historical line-by-line market-wide recovery data on defaulted loans between 2000 and 2019 and considered the special servicer’s capabilities when calibrating lifetime recoveries. Scope considered that unsecured and junior secured borrowers were classified as defaulted for a weighted average of 3 years as of the cut-off date. Scope also analysed historical data provided by the servicer. Scope accounted for the current macro-economic scenario, taking a forward-looking view on the macro-economic developments.

For the class A notes analysis, Scope assumed a gross recovery rate of 22.1% over a weighted average life of 6.7 years. By segment, Scope assumed a gross recovery rate of 55.9% for the senior secured portfolio and 8.4% for the unsecured and junior secured portfolio.

Scope has applied an average combined security value haircut of 53.0%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 46.2% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (12.4% on average), reflecting Scope’s view of market volatility risk.

In its analysis, Scope considered transaction’s servicer fees structure and assumed legal expenses to be above the average of peer transactions, around 10% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 65.0% to the 20 largest borrowers in the class A analysis.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in the main input parameters: the portfolio recovery-rate and the portfolio 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 class A change compared to the assigned credit rating in the event of:

•  a decrease in secured and unsecured recovery rates by 10%, minus one notch.
   
• an increase in the recovery lag by one year, zero notches.

Rating driver references
1. Transaction documentation (confidential)
2.  Loan-by-loan data tape of the securitised pool (confidential)
3. Scope research

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 SF EL Model Version 1.1 incorporating the relevant asset assumption, 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 this Credit Rating, (General Structured Finance Rating Methodology, 17 December 2021; Non-Performing Loan ABS Rating Methodology, 6 August 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating 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 its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: 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 the Credit Rating 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 has received a third-party asset due diligence assessment. The external due diligence assessment was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Rossella Ghidoni, Director
Person responsible for approval of the Credit Rating: David Bergman, Managing Director
The Credit Rating was first released by Scope Ratings on 6 May 2022.

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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