Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005275356): EUR 229.0m current balance: downgraded to CC_SF from CCC_SF

Class B (ISIN IT0005275364): EUR 42.5m current balance: downgraded to C_SF from CC_SF

Class J (ISIN IT0005275372): EUR 20.m current balance: not rated

Scope’s review was based on servicer, investor and payment reporting as of the January 2023 payment date.

Transaction overview

Elrond NPL 2017 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 1.4 million by gross book value (GBV) at closing. Cerved Credit Management S.p.A. is the special servicer. The loans were originated by Credito Siciliano S.p.A. and Credito Valtellinese S.p.A. The transaction closed on 14 July 2017 and the legal maturity is in July 2040.

Rating rationale

The ratings are 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 are aligned with those disclosed in previous rating action release dated May 20, 2022:

Key rating drivers

Slower than expected cumulative collections (negative)¹. Aggregate gross and net collections amount to EUR 341.1m and EUR 290.3m respectively. Total gross collections are split between judicial proceeds (67.6%), discounted payoff (‘DPO’) proceeds (22.5%), confidi proceeds (5.1%), indemnity proceeds (2.8%), credit sale proceeds (1.2%) and other types of collections (0.8%). Aggregate net collections are significantly below Scope’s expectation in the B rating case. Based on the servicer business plan, aggregate gross collections are 63.2% of original expectations. Servicer’s pace of closing borrowers is slower than the average of peer transactions.

Low profitability of secured closed positions (negative)¹. Gross collections from closed borrowers represent 22.0% of cumulative collections. They are split between DPO proceeds (58.6%), judicial proceeds (31.8%), credit sales proceeds (5.6%), confidi proceeds (2.1%), other types of collections (1.9%). With reference to secured borrowers only, based on Scope’s analysis, closed debtors account for around 9.9% of the transaction’s initial gross book value. The profitability on these debtors, at 70.9%, is below Scope’s expectations under the B case rating.

Diversion of substantial funds to class B noteholders (negative)¹. Unlike most Italian GACS NPL transactions, there is no class B interest subordination feature that is triggered by either low collections or low profitability on closed positions. The absence of a class B interest subordination trigger makes class A structurally weaker relative to other senior notes of peer transactions.

Partial hedging of interest rate risk (negative)¹. Interest rate risk on the class A and class B notes is partially mitigated by a cap agreement on the six-month Euribor. Currently, the notional of the cap agreement is 37.5% below the current balance of the rated 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 the liquidity conditions and negatively affect the collection volumes.

Senior notes’ liquidity protection (positive)¹. A cash reserve protects the liquidity of senior noteholders, covering senior fees and interest on class A notes. As of January 2023, it stands at EUR 9.4m (around 4.1% of class A notes’ principal amount after the January 2023 payment date.

Rating-change drivers

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

Negative. The timing of collections a shows a negative trend. A continuous downward trend in the pace of collections could negatively affect 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 rating case, Scope assumed a lifetime gross recovery rate of 42.6% over an outstanding weighted average life of 2.2 years. By portfolio segment, Scope assumed a lifetime gross recovery rate of 53.4% and 24.1% 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, one notch;
   
• 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 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; 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 due diligence assessment/asset audit at closing. 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: David Bergman, Managing Director
The Credit Rating was first released by Scope Ratings on 14 July 2017. The Credit Ratings were last updated on 20 May 2022.

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
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