Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005337446), EUR 134.2m: downgraded to BBB- _SF from BBB+_SF

Class B (ISIN IT0005337479), EUR 13m: downgraded to CCC_SF from B_SF

Class J (ISIN IT0005337487), EUR 8m: not rated

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

Transaction overview

4Mori Sardegna 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 1.0 billion by gross book value (GBV) at closing. Prelios Credit Servicing S.p.A. is the special servicer. The loans were originated by Banco di Sardegna S.p.A. The transaction closed on 22 June 2018 and the legal maturity is in January 2037.

As of July 2022, aggregate gross collections were EUR 137.5m, which represent 59% of the original business plan expectations of EUR 233.9m. Total gross collections are split between discounted payoff (‘DPO’) proceeds (43%), judicial proceeds (29%), credit sale proceeds (17%), other types of collections (7%), indemnity proceeds (4%)

Around 46% of gross collections (EUR 63.2m) stem from open debtors (i.e., debtors for which the recovery process is still ongoing), while closed debtors account for 54% of gross collections (EUR 74.2m) with reference to 15% of the transaction’s initial GBV. Gross collections linked to closed debtors are split between DPO proceeds (48%), credit sale proceeds (32%), judicial proceeds (9%), indemnity proceeds (7%) and other types of collection (4%).

In December 2021 the servicer reviewed downward the transaction’s original business plan. The lifetime business plan gross projections have been reduced by ca. 8%.

Rating rationale

The ratings are driven by the transaction’s actual and expected performance as reflected in Scope’s modelling assumptions. Profitability is below Scope’s expectations, driving the ratings downgrade. 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

Recovery expenses (positive)¹: Cumulative recovery expenses sustained for positions’ workout are below Scope expectation.

Timing of collections (positive)¹: The pace of collections has been faster than expected by Scope at closing. Higher than expected cumulative collections partially mitigate concerns around weak profitability.

Secured closed debtors’ profitability by Scope (negative)¹: Profitability on secured closed borrowers is 25% lower than Scope´s expectations for the B case scenario.

Underhedging of the rated notes (negative)¹: Recently, the gap between the cap agreement and the outstanding amount of class A and class B notes has significantly widened, whereas in the next payment date outstanding notes will be underhedged by 31%. In a stressed interest rate environment, the rated notes will be negatively affected.

Rating-change drivers

Positive. Improving performance on closed borrowers’ profitability, could positively impact the ratings.

Negative. The timing of collections, albeit faster than expected, shows an unstable trend. A slowdown in the pace of collections could negatively affect 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. At the B case, Scope assumed a lifetime gross recovery rate of 34.5% over a weighted average life of 5.7 years. By portfolio segment, Scope assumed a lifetime gross recovery rate of 62.8% and 7.5% 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 1 notches;
   
• a one-year recovery lag increase, 0 notches.

The following¹ shows how the results for class B notes change compared to the assigned rating in the event of:

• 10% haircut to recoveries, 0 notches;
   
• a one-year recovery lag increase, 0 notches.

Editorial Note
1. This sentence was added on 28 September 2022. In the original publication the text concerning sensitivities on class B was missing.

Rating driver references
1. Transaction documents and reporting (Confidential)
2. 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 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 has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit 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
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: Vittorio Maniscalco, Specialist
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The Credit Ratings were first released by Scope Ratings on 22 June 2018. The Credit Ratings were last updated on 18 December 2020.

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.