Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005396061): EUR 121.9m current balance: downgraded to BBB-_SF from BBB_SF

Class B (ISIN IT0005396079): EUR 25.0m current balance: affirmed at CCC_SF

Class J (ISIN IT0005396087): EUR 5.0m current balance: not rated

Scope’s review was based on servicer, investor and payment reporting as of the February 2022 payment date.

Transaction overview

PoP NPLs 2019 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy worth EUR 826.7 million by gross book value (GBV) at closing. The master servicer is Prelios Credit Servicing S.p.A. and the special servicers are Prelios Credit Solutions S.p.A. and Fire S.p.A.. The portfolio was originated by 12 Italian regional banks. The transaction closed on 23 December 2019 and the legal maturity is in February 2045.

As of February 2022, aggregate gross collections were EUR 71.8m, which represents 137% of the original business plan expectations of EUR 52.6m. Total gross collections are split between judicial proceeds (41%), discounted payoff (‘DPO’) proceeds (21%) and other types of collections (38%).

Around 71% of gross collections (EUR 50.9m) stem from open debtors (i.e., debtors for which the recovery process is still ongoing), while closed debtors account for 29% of gross collections (EUR 21.0m) with reference to 6% of the transaction’s initial GBV. Gross collections linked to closed debtors are split between DPO proceeds (36%), judicial proceeds (9%) and other types of collection (55%).

In December 2021, the servicer reviewed downward the transaction’s original business plan. The lifetime business plan gross projections have been reduced by ca. 3%.

Rating rationale

The rating is driven by the transaction’s actual and expected performance as reflected in Scope’s modelling assumptions. Profitability is below Scope’s expectations, driving the rating downgrade. Cumulative recovery expenses are 10% of gross cumulative collections. Scope acknowledges that the transaction’s cap on legal costs is not working as expected. Scope has updated its recovery estimates assumptions considering the transaction-specific performance, developments in macroeconomic fundamentals, and peer transaction benchmarks.

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

Key rating drivers

Pace of collections (positive)¹: Aggregate net collections are above Scope’s timing expectations under the B case scenario and above the original business plan expectations.

Secured closed debtors’ profitability by Scope (negative)¹: Profitability on secured closed borrowers is 17% lower than Scope´s expectations for the B case scenario. The share of secured closed borrowers is small (5% of secured GBV at closing), considering that the transaction closed in 2019.

High recovery expenses (negative)¹. Cumulative recovery expenses are 10% of gross cumulative collections, above Scope’s expectation of 9%, showing an increasing trend over time.

Rating-change drivers

Positive. Improved secured profitability and lower recovery expenses could positively impact the ratings.

Negative. Collection strategies with low profitability and/or delayed collections may negatively impact the ratings.

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 produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope has updated its modelling assumptions to reflect the current performance of the transaction. Scope assumed a lifetime gross recovery rate of 30.0% over a remaining weighted average life of 3.7 years. By portfolio segment, Scope assumed a lifetime gross recovery rate of 48.7% and 13.5% for the secured and unsecured portfolios, 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 class A notes change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus 3 notches;
   
• a one-year recovery lag increase, minus 3 notches.

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

• 10% haircut to recoveries, minus 1 notch;
   
• a one-year recovery lag increase, minus 1 notch.

Rating driver references
1. Transaction documents and reporting (Confidential)
2. Scope research Republic of Italy – Rating Report (29 Jul 2022)

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 assumptions, 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, 5 August 2022; 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 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 the 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 has received a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit/internal analysis was considered when preparing the Credit Ratings and it has no 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
The 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: Rossella Ghidoni, Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 23 December 2019.

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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