Rating action

Scope has completed a monitoring review of the following notes issued by 2Worlds S.r.l.:

Class A (ISIN IT0005337735): EUR 147.2m: downgraded to B+_SF from BB_SF

Class B (ISIN IT0005337743): EUR 30.2m: downgraded to CC_SF from CCC_SF

Class J (ISIN IT0005337750): EUR 9.0m: not rated

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

Transaction overview

2Worlds S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy. The loans were originated by Banco di Desio e della Brianza S.p.A. and Banca Popolare di Spoleto S.p.A. The issuer acquired the portfolio on the transfer date, 12 June 2018, but is entitled to all portfolio collections received since 31 December 2017 (the portfolio cut-off date). The final maturity is in January 2037.

As of 30 June 2022, aggregate gross collections were EUR 201.9m, which represents 75.9% of the original business plan expectation of EUR 266.0m. The sources of total gross collections are judicial proceeds (51.0%), discounted pay-off (DPO) proceeds (29.3%), credit sales proceeds (6.4%), indemnities (0.2%) and other sources of collections (13.1%).

About 38.0% of gross collections (EUR 76.7m) came from closed debtors (i.e. debtors for which the recovery process is completed). Since closing, Scope estimates 14.7% of initial gross book value has been closed. Collections from closed debtors stem from discounted pay-off (DPO) proceeds (54.3%), judicial proceeds (16.9%), credit sales proceeds (15.8%), indemnities (0.2%) and other sources of collections (12.8%).

49.0% of the class A notes’ notional has amortised. Interest on class B notes have been subordinated to the payment of class A principal as the cumulative collection ratio is currently below the 85% subordination threshold. The reported net proceeds cumulative collection ratio and NPV profitability ratios are 82.9% and 111.1% respectively. Unpaid class B interests amount to EUR 1.1m.

Rating rationale

The rating action is driven by the observed and expected performance of the transaction. Scope’s modelling assumptions reflect the agency’s view of the transaction’s future performance.

All counterparties continue to support the ratings: i) Banco di Desio and Banca Popolare di Spoleto, the two originators, regarding representations and warranties and possible payments from borrowers, especially for the cash-in-court cases; ii) Cerved Credit Management S.p.A., the special servicer; iii) Cerved Master Services S.p.A., the master servicer; iv) Banca Finint S.p.A. (successor of Securitisation Services S.p.A.), the backup servicer, calculation agent, and noteholders’ representative; vi) BNP Paribas Securities Services (Milan Branch), the account bank, cash manager, and principal paying agent; and vi) Intesa Sanpaolo S.p.A. (successor of Banca IMI S.p.A.), the interest rate cap counterparty.

Key rating drivers are generally aligned with those disclosed in our previous rating action releases dated May 4, 2022 and June 8, 2021. Uncertainty regarding the payment of indemnities, further detailed below, constitutes the only new rating driver:

Key rating drivers

Sufficient liquidity coverage (positive)¹. The deal benefits from an amortising cash reserve currently at target level of EUR 7.7m, representing 4.05% of Class A outstanding notes balance. The reserve is estimated to cover senior expenses and class A notes’ interest for around 12 months.

Hedging (positive)¹. The transaction implements a cap agreement with a progressively increasing strike which mitigates the risk of increased liabilities on the notes due to rising Euribor rates.

Class B interest subordination (positive)¹. The current subordination of class B interests is positive for the class A noteholders as class A principal repayment now ranks senior to class B interest payments under the priority of payments.

Cumulative net collections (negative)¹. Aggregate gross and net collections amount to EUR 201.9m and EUR 189.6m, respectively. The aggregate net collections have underperformed relative to the initial servicer’s business plan with a cumulative collection ratio of 82.9%, triggering a class B interest subordination. Based on historical performance, we have considered a sensitivity by adjusting our timing assumptions on lifetime collections, under a B case scenario, to 7.3 years from 5.8 years at closing.

Profitability (positive)¹. Scope reviewed to the downside its profitability expectations in May 2022 by decreasing our lifetime recovery expectations, under a B case scenario, to 44.2% from 49.5% at closing. Since then, profitability on closed position has remained fairly aligned with our updated assumptions. Notwithstanding, the pace of closing borrowers is relatively slow, so we remain cautious. The yearly average of closed positions since closing stands at 3.6% relative to total GBV.

Downward revision of the business plan (negative)¹. The servicer has revised the initial business plan on four occasions with the most recent update (updated in 2022) being 19.0% below initial expectations and 2.6% below the 2021 business plan update, which reflects the uncertainty of collateral appraisal values.

Indemnities (negative)¹. Scope has been made aware of potential cash from indemnities of around EUR 15m being contested by the originator. Failure to redeem these indemnities will impair repayment of the notes.

Slowdown of the Italian economy (negative)². The adverse impact of tightening financing conditions and persistent inflationary pressures could slow down the Italian economy. This could lead to a deterioration of liquidity conditions and negatively affect the collection volumes.

Rating-change drivers

Positive. Consistent servicer outperformance in terms of recovery timing and the total amount of collections could positively impact the rating.

Negative. Servicer performance falling short of Scope’s collection amounts and timing assumptions could 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 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 gross recovery rate of 27.5% over a remaining weighted average life of 2.3 years. By portfolio segment, Scope assumed a remaining gross recovery rate of 45.0% and 7.5% for the secured and unsecured portfolios, respectively.

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 for class A notes would change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus three notches;
   
• a one-year recovery lag increase, minus three 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 one notch;
   
• a one-year recovery lag increase, zero notches;

Rating driver references
1. Transaction documents and reporting (Confidential)
2. 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 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; Methodology for Counterparty Risk in Structured Finance, 14 July 2022; General Structured Finance Rating Methodology, 25 January 2023), are available on https://www.scoperatings.com/ratings-and-research/structured-finance/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://www.scoperatings.com/ratings-and-research/structured-finance/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 had a negative 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: Elom Kwamin, Analyst.
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The Credit Rating was first released by Scope Ratings on 25 June 2018. The Credit Ratings were last updated on 4 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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