Rating action

Scope Ratings GmbH (Scope) has taken the following rating actions:

Class A (ISIN PTSZIAOM0009), EUR 33.5m outstanding amount: upgraded to A-_SF from BBB_SF

Class B (ISIN PTSZIBOM0008), EUR 25.0m outstanding amount: not rated

Class J (ISIN PTSZICOM0007), EUR 20.0m outstanding amount: not rated

Transaction overview

The transaction is a static cash securitisation of five non-performing loan (NPL) sub-portfolios: BCP-04, NB-01, CGD-01, BPI-01 and BCP-06. The portfolios were acquired between 2019 and 2021 through two investment vehicles (LX Investment Partners II & III), from four financial institutions in Portugal. The portfolio is serviced by Algebra Capital.

The pool at closing mainly consisted of unsecured loans (94.2% of loan outstanding balance) but also of a small share of secured loans (5.8%) and real estate-owned (REO) properties (EUR 2.4m in property value). Loans were granted to corporates including small and medium-sized enterprises (65.9%) and individuals (34.1%). Secured loans are backed by residential and non-residential properties (42.5% and 57.5% of the total first-lien property value, respectively). Properties are concentrated in the Lisbon district (32.5%). The total pool value is EUR 1.48bn, which is the sum of the total outstanding balance of loans and the total underwritten value of REO assets.

Aggregate gross collections were EUR 57.5m in the collection period to end-March 2022, which represents 172.3% of the original business plan expectations of EUR 33.4m. Total available gross collections were achieved through legal proceeds (55.9%), payment plans (27.9%) or other means of collection (16.2%). Around 2.1% of gross collections (EUR 1.2m) stem from closed debtors (331 debtors), which represent less than 1% of all borrowers.

Around 58.1% of the class A notes’ notional has amortised. Class A is strongly over-hedged through an interest rate cap in place since closing. The issuer receives Euribor exceeding 0.5% on a pre-agreed notional schedule. The current notional of EUR 71.3m is well above the outstanding class A amount of EUR 33.5m.

A class B subordination event is triggered if either the cumulative net collection ratio or net present value profitability ratio falls below 90%. These ratios were respectively 175.4% (considering only expenses) and 1,461.9% at the April 2021 payment date.

Rating rationale

The rating upgrade is mainly driven by the significantly faster collections than Scope’s expectations. Profitability on closed positions has also exceeded Scope’s expectations, although the number of closed positions is very small.

Scope nevertheless has maintained its assumption made at closing on lifetime collections, reflecting the risk of front-loaded profitability that is characteristic of NPL and REO portfolios.

The rating continues to be driven by the transaction’s actual and expected performance as reflected in Scope’s modelling assumptions. Scope’s recovery estimates consider transaction-specific performance, developments in macroeconomic fundamentals, and peer transaction benchmarks.

The ratings consider the issuer’s exposure to key counterparties.

Key rating drivers

Amortisation of class A (positive)³. Class A has amortised to 41.9% of its notional outstanding at closing, resulting in reduced cost of carry. Faster-than-expected deleveraging has resulted in a higher coverage of expected collections of 147.4% compared to around 133% at closing.

Agreements with borrowers (positive)^1,3. At closing, the servicer had agreements or payment plans with 2,219 borrowers (around 3.2% of total borrowers), which constitute regular flows of recovery amounts. After adjusting for observed borrowers payment behaviour until the end-March 2022 collection period, the remaining borrowers with payment plans at closing amount to 20.2% of Scope’s updated expected gross class A collections.

Strong alignment of interests (positive)². LX Partners is the transaction’s originator and retention subscriber, holding all mezzanine and junior notes. This feature, along with the servicing fee structure, incentivises the servicer, Algebra Capital (fully owned by LX Partners), to maximise recoveries and follow the initial business plan.

Strong interest rate protection (positive)². The structure features an interest rate cap applying to the class A notes, effective from the closing date up to the note payment date in July 2028. The interest rate cap notional adequately covers the expected class A outstanding balance under the stressed scenarios considered by Scope.

Exposure to unsecured positions (negative)¹. Approximately 94% of the pool at closing consists of unsecured loans. NPLs with no security typically have low recovery rates, particularly when they have been classified as defaulted for a long time (7.9 years at closing in Scalabis’ case) and were granted to corporates (65.9% of the unsecured pool). This concern is mitigated by the servicer’s experience and ability regarding unsecured NPLs and its performance on the transaction to date.

Overperformance event (negative)². An overperformance event would result in 10% of cash available after class A and B interest is paid being diverted to repay class B principal. This event is triggered when the cumulative collection ratio and net present value cumulative profitability both reach above 110% and only applies 12 months after the closing date.

No back-up servicer or facilitator (negative)². No back-up servicer or facilitator is in place to assist a replacement of the servicer or master servicer. However, strong liquidity, along with the master servicer’s commitment to help appoint a replacement, mitigates the risk of servicing disruption.

Rating-change drivers

Positive. Sustained collection pace and profitability or lower realised costs than Scope’s assumptions could positively impact the rating.

Negative. A significant decline in profitability and/or a delay in collections may 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 analysed the assets to project rating-conditional cash flows on gross recoveries.

Scope has maintained its main assumptions at closing on statistically modelled borrowers as well as its initial lifetime recovery assumptions on unsecured positions not covered by payment plans or agreements.

The analysis takes into account the servicer’s agreed payment plans and cash-in-court projections. Expected future collections were adjusted by excluding non-realised payments and realised over-collections (over-collections entail lower or no further collections) until the end-March 2022 collection period. For borrowers that have underperformed business plan projections and fallen behind in their payment plans, Scope assumes no further collections.

The analysis of the class A notes assumes gross recoveries of 6.8% of pool value, with a weighted average life of 3.6 years. Scope assumed gross recovery rates of 21.7% for secured loans and 5.8% for unsecured loans.

Sensitivity analysis

Scope tested the resilience of the ratings 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 would change for the rated notes in the event of:

• a 10% haircut to recoveries: one-notch decrease for class A
   
• an increased recovery lag by one year: zero notches

Rating driver references
1. Loan-by-loan data tape of the securitised pool (Confidential)
2. Transaction documents (Confidential)
3. Scope’s calculations (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 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, (Non-Performing Loan ABS Rating Methodology, 6 August 2021; Counterparty Risk Methodology, 14 July 2022; General Structured Finance Rating Methodology, 17 December 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Scope Ratings' 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/asset audit at closing. The external due diligence assessment/asset audit 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
This 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: Martin Hartmann, Associate Director
Person responsible for approval of the Credit Rating: Antonio Casado, Executive Director
The final Credit Ratings were first released by Scope Ratings on 13 August 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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.