Rating action

Scope has completed a monitoring review of the following notes issued by BCC NPLs 2018 S.r.l.:

Class A (ISIN IT0005338717), EUR 168.9m outstanding: downgraded to B-_SF from B+_SF

Class B (ISIN IT0005338741), EUR 31.4m outstanding: affirmed at C_SF

Class J (ISIN IT0005338758), EUR 10.4m outstanding: not rated

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

Transaction overview

BCC NPLs 2018 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans that were extended to companies and individuals in Italy. The loans were originated by 21 Italian cooperative banks coordinated by Iccrea S.p.A. and by two banks belonging to Iccrea Banca S.p.A. The transaction closed on 10 July 2018 and the legal maturity is in June 2038.

As of the December 2022 payment date, cumulative gross collections were EUR 156.5m while class A has amortised by EUR 113.2m. Total gross collections are split between judicial proceeds (47,6%), credit sales (27,9%), DPO (23,7%) and other type of collections (0,8%). Closed borrowers account for 57.5% of cumulative collections, representing around 8.6% of the transaction’s initial gross book value. Closed borrowers’ collections were mainly obtained through credit sales (44.9%), DPO (35,1%) and judicial proceeds (20%). The net present value cumulative profitability ratio, computed for closed positions, stands at 90.75%, while the cumulative collection ratio stands at 52.42% of business plan expectations up to December 2022. The latter is below the 90% threshold and has triggered the deferral of Class B interest below Class A principal repayment.

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 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 have evolved since our previous rating action release dated June 22, 2021. The slow pace of collections and interest rate risk that is only partially hedged, as outlined below, are new negative rating drivers. Liquidity coverage has decreased and it is now aligned with the average of peers’ transactions, not being anymore a positive rating driver. All other rating drivers remain broadly aligned with those previously disclosed.

Key rating drivers

Lower than expected collections (negative)¹. Aggregate net collections are behind Scope’s timing assumption under B case (74,8%). Based on the servicer business plan, aggregate cumulative net collections are 52,4% of original expectations up to date.

Profitability of closed positions (negative)¹. Scope reviewed to the downside its profitability secured expectations in June 2021 due to the poor performance of the secured segment and considering that properties were sold below their market appraisal values, on an aggregate basis. As of December 2022, the profitability on secured debtors, at 75.6%, remains below Scope’s expectations under the B case assumptions. Based on Scope calculations, closed secured debtors account for around 29.9% of the transaction’s initial secured gross book value.

Interest rate risk only partially hedged (negative)¹. The interest rate cap spread only partially mitigates the risk of increased liabilities on the senior note under high interest rate curve scenarios. Scope expects the cap spread notional to fall below the class A notes outstanding balance in about one year. Additionally, the swap notional schedule is expected to fall below the class B outstanding balance in about three years.

Low recovery expenses (positive)¹. Recovery expenses amount at 6,6% of cumulative gross collections, which is below Scope assumption of 8,3%.

Rating-change drivers

Positive. In the last two payment dates the servicer closed secured positions with an above average profitability of 94%. If the trend continues, this could positively impact the ratings.

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.

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 remaining gross recovery rate of 27.9% over a remaining weighted average life of 2,9 years. By portfolio segment, Scope assumed a remaining gross recovery rate of 34.2% and 8.0% 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 change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus 2 notches;
   
• a one-year recovery lag increase, minus 1 notch.

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 reporting (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 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, 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 audit. The external 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: Rossella Ghidoni, Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The Credit Ratings were first released by Scope Ratings on 10 July 2018. The Credit Ratings were last updated on 22 June 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

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 Investor Services 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.