Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005336992), EUR 328.1m outstanding amount: downgraded to CCC_SF from B_SF

Class B (ISIN IT0005337008), EUR 66.8m outstanding amount: downgraded to C_SF from CC_SF

Class J (ISIN IT0005337016), EUR 10.0m outstanding amount: not rated

Scope’s review was based on available payment information and investor and servicer reporting through January 2023.

Transaction overview

Aragorn NPL 2018 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans extended to companies and individuals in Italy worth around EUR 1.6bn by gross book value (GBV).

Through the 31 December 2022 collection period, aggregate gross collections were EUR 261.5m, which represents 60% of the original business plan expectations of EUR 437.1m. Total available gross collections are split between discounted pay-off (‘DPO’) proceeds (47%), judicial proceeds (37%), credit sales proceeds (12%) and other sources of collections (3%).

Around 44% of gross collections (EUR 114m) come from closed debtors (577 debtors), whose GBV represents around 17% of the transaction’s initial GBV. The net profitability on closed debtors (as reported in the servicer report) is below the servicers’ expectation, standing at 86%. Gross collections from closed debtors are split between DPO proceeds (69%), credit sale proceeds (27%) and judicial proceeds (4%).

Interests on class B are subordinated to payment of class A principal if the net cumulative collection ratio falls below 90% of the servicers’ business plan target or the NPV profitability ratio falls below 90%. This ratio is curable, and once cured, all accrued and unpaid interest are distributed senior to Class A principal payments.

According to the data provided by the master servicer for the latest interest payment date (January 2023), a class B interest subordination event has occurred as the transaction’s net cumulative collection ratio and the NPV profitability ratio are at 66.5% and 103.6%, respectively.

Rating rationale

The ratings are mainly driven by the transaction’s actual and expected performance as reflected in Scope’s modelling assumptions. Scope has updated its recovery 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 are aligned with those disclosed in previous rating action release dated May 20, 2021.

Key rating drivers

Senior notes’ liquidity protection (positive)¹. A cash reserve protects the liquidity of senior noteholders, covering senior fees and interest on class A notes. It currently stands at EUR 17.9m (around 5.0% of class A notes’ principal amount after the January 2023 payment date).

Portfolio servicing (positive)¹. Two independent special servicers limit the transaction’s sensitivity to servicer disruption. In the event of a servicer disruption, the master servicer will assist the issuer in finding a suitable replacement.

Timing of collections (negative)¹. The pace of collections has deteriorated significantly, in comparison with Scope’s closing expectations and servicers’ initial projections.

Servicers’ business plan review (negative)^1,2. In March 2022, servicers reviewed downward the transaction’s original business plan. Lifetime gross projections have been reduced by around 23%. Based on the last available servicer report, expected future net collections are not enough to repay in full the class A notes outstanding balance.

Secured closed debtors’ profitability (negative)¹. Profitability on secured closed borrowers is 28% lower than Scope´s expectations for the B case scenario.

Distorted cumulative collection ratio (negative)¹. The net cumulative collection ratio definition from the terms and conditions of the notes does not reflect the actual performance of the pool and wakens the effectiveness of the performance triggers. This could have a significant negative impact on the cash flows allocated to class A amortisation.

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

Rating-change drivers

Positive. Improving profitability and faster than expected collections from out-of-court resolution strategies could positively impact the ratings.

Negative. Legal costs higher than Scope estimate, may negatively impact the ratings eroding the net available proceeds to repay the notes.

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. The class A and class B rating scenario incorporated a gross lifetime recovery rate of 39% over a weighted average remaining life of 4.3 years. By portfolio segment, Scope assumed a class A and class B gross recovery rate of 46% and 18% 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, zero notches;
   
• a one-year recovery lag increase, zero 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, zero notches;
   
• a one-year recovery lag increase, zero notches.

Rating driver references
1. Transaction documents and periodic reporting (Confidential)
2. Updated business plan (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 relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

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, 25 January 2023), are available on https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
The model used for these Credit Ratings (Scope Ratings’ Cash Flow SF EL Model Version 1.1), is 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 Ratings 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 Ratings 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. 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: Leonardo Scavo, Senior Specialist
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The Credit Ratings were first released by Scope Ratings on 12 June 2018. The Credit Ratings were last updated on 20 May 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. A member of the Board of Trustees of Scope Foundation has a significant relationship with Société Generale SA, a related third party to this transaction. The Scope Foundation is a 20% shareholder of Scope Management SE, the general manager of Scope SE & Co KGaA (“Scope Group”). Scope Foundation has no financial or economic interest in Scope SE & Co KGaA and the main function of the foundation is to preserve the European identity of the shareholder structure of Scope Group.

Conditions of use / exclusion of liability
© 2023 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.