Rating action

Scope Ratings GmbH (Scope) has today upgraded the senior risk cover to AAA_SF from AA+_SF.

Transaction overview

The financial guarantee provided by the European Investment Fund (EIF) to Banca di Credito Popolare S.C.p.A. in Torre del Greco (BCP, the protection buyer) is an EU-sponsored risk transfer transaction of Italian SME credit rights, in the context of the European Investment Bank (EIB) Group SME Initiative for Italy. The credit rights were originated and will be serviced by BCP. The EIF has the right to terminate the guarantee in case the service process does not comply with initially agreed procedures and policies. Under the financial guarantee, 50% of losses incurred from the reference portfolio can be claimed by BCP from the EIF. The guarantee splits into five tranches of risk cover. Scope only assigned a rating to the senior risk cover. The guarantee terminates on 30 September 2032.

As of 31 March 2022, 90-days-past-due and defaulted loans collectively represent 1.8% of the initial reference portfolio, which is better than Scope’s expectation. The protection buyer has removed EUR 5.6m of portfolio notional from the reference portfolio. The reference portfolio amortisation is in line with Scope’s expectation.

Rating rationale

The rating upgrade is mainly driven by the better-than-expected transaction performance resulting in significant structural deleveraging. Amortisation is in line with Scope’s expectation. The significant credit enhancement also makes the instrument resilient to the economic uncertainty spurred by the Russia-Ukraine war, the Covid-19 pandemic and the slow economic recovery in Italy and the Eurozone.

The rating also continues to reflect the legal and financial structure of the transaction as defined in the guarantee agreement; the credit quality of the underlying portfolio in the context of the macroeconomic conditions in southern Italy; the servicing capabilities and incentives of BCP; and the limited counterparty exposure to BCP upon the recovery of defaulted assets. The rating also takes into account the contractual rights granted to the EIF and the existence of an external verification agent to verify the accuracy of the loss claims.

Key rating drivers

Increased credit enhancement (positive)¹. The high level of credit enhancement provides a strong buffer against potential adverse reference portfolio performance and mitigates the build-up of obligor concentrations. The senior tranche credit enhancement increased to 61.0%, from 45.2% as at the initial rating assignment (adjusted for expected losses).

Alignment of interests and transaction process supervision (positive)¹. BCP must maintain a minimum economic interest of 5% in each exposure it has assigned to the SME Initiative. In addition, the guarantee can be terminated if BCP deviates materially from its internal credit and collection policies.

Efficient guarantee mechanics (positive)¹. The loss claims under the guarantee are based on an expected loss calculation, which minimises cash flows between BCP and the EIF and significantly reduces the counterparty risk exposure to BCP.

Asset credit quality (negative)¹. Scope assumes the average credit quality of the portfolio to be commensurate with B. This reflects the high lifetime default rate, partially offset by recovery expectations.

Significant obligor concentration (negative)¹. The share of top obligors (exposure at more than 0.5%) in the portfolio remains high and increases to 70.5% as of 31 March 2022 from 64.5% at last review.

Performance data (negative)¹. Historical performance data presented to Scope at closing lacked granularity and covered a relatively short span. Scope has therefore also considered BCP’s loss-given-default estimates as well as market data.

Italy’s economic uncertainty (negative)². Besides Covid-19, the prolonged Russia-Ukraine war and increased inflation would continue to impact the Italian economy. The growth prospects would even be worse were it not for the EU’s significant and very timely recovery funds.

Rating-change drivers

Positive. A fast recovery of the Italian macroeconomy, particularly in southern regions, could lower expected defaults in the transaction, but the ratings are already at their maximum level.

Negative. Significantly worse-than-expected asset performance, e.g. in terms of realised recovery or default rates of removed loans from the portfolio, is among the factors that could negatively impact the rating.

Quantitative analysis and assumptions

Scope assumed that portfolio defaults followed an inverse-Gaussian distribution when analysing the granular collateral pool. The agency considered a portfolio amortisation and loss allocation analysis of the tranches as described under the guarantee. Scope’s analysis considered the two portfolio segments as of March 2022: secured (83.2%) and unsecured (16.8%).

Scope expects a portfolio lifetime mean default rate of 31.1% and coefficient of variation of 59.1%, taking into consideration the latest portfolio segmentation.

Defaults are defined as i) loans that are 90 days past due; ii) loans subject to acceleration; iii) a restructuring of the credit right; or iv) a subjective default. A 51.2% rating-conditional recovery rate was assumed for the senior tranche. Scope analysed the transaction under high (10%) and low (0%) prepayment scenarios.

Sensitivity analysis

Scope tested the resilience of the assigned rating against deviations of the main input parameters: the portfolio mean-default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the assigned rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for the senior tranche change compared to the assigned rating when the portfolio’s expected default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%:

• Sensitivity to default rate assumption, 0 notches; sensitivity to recovery rates, 0 notches.

Rating driver references
1. Bespoke reporting and documentation from the arranger (Confidential)
2. Scope Ratings, Sovereign and Public Sector Ratings

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 default and 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 this Credit (SME ABS Rating Methodology,16 May 2022; Methodology for Counterparty Risk in Structured Finance, 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/or 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 not received a third-party asset due diligence assessment/asset audit. However, material misrepresentation leads to loss claims being void. Default/Loss cases will be checked by external verification agent. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The external due diligence assessment/asset audit/internal analysis 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: Guang Yang, Analyst
Person responsible for approval of the Credit Rating: David Bergman, Managing Director
The Credit Rating was first released by Scope Ratings on 20 December 2018. The Credit Rating was last updated on 17 September 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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