Rating action

The transaction comprises the following instruments: 

Class A (ISIN IT0005331472): EUR 1,149.4m current balance: downgraded to BBB_SF from BBB+_SF

Class B (ISIN IT0005319139): EUR 887.7m current balance: not rated 

Class J (ISIN IT0005319147): EUR 565.0m current balance: not rated

Transaction overview

Siena NPL 2018 S.r.l. is a static cash securitisation of a EUR 24.1bn portfolio (at closing) of Italian non-performing loans originated by Banca Monte dei Paschi di Siena S.p.A., MPS Capital Services Banca per le Imprese S.p.A. and MPS Leasing & Factoring S.p.A. (the latter currently incorporated in Banca Monte dei Paschi di Siena S.p.A.). 

The portfolio is serviced by four special servicers: Special Gardant S.p.A (previously Credito Fondiario S.p.A), Italfondiario S.p.A., Cerved Credit Management S.p.A (previously Juliet S.p.A.) and Prelios Credit Servicing S.p.A.. Master Gardant S.p.A. (previously Credito Fondiario S.p.A) acts as master servicer. The class A was rated on 10 May 2018 and the legal maturity is in January 2033. Scope does not rate class B or class J.

Rating rationale

The rating drivers are 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 also consider the legal and structural protection provided to the notes, the liquidity protection, and the issuer’s exposure to key counterparties.

Key rating drivers have evolved relative to those disclosed in our rating action release at closing, dated May 2018 and remain generally aligned with those disclosed as of our latest monitoring review, dated June 2022. Relatively strong credit enhancement, material class A amortization, and a diversified servicer base mitigating servicing disruption risk, remain positive drivers. Lower than expected collections and profitability, below average liquidity protection and a slowing economy remain negative drivers.

In addition, we now consider limitations to the interest rate hedging agreement as a new negative rating driver, which stands particularly in contrast to our view at closing. Originally, the transaction was benefitting from an interest rate cap notional schedule covering expected Class A outstanding balance plus a buffer over time. The continued underperformance of the servicers compared to their business plan has fully eroded that buffer. In fact, the transaction is currently partially underhedged.

Following we disclose the transaction's updated key rating drivers:

Key rating drivers

Credit enhancement (positive)¹. The transaction was structured at closing with an above-average level of credit protection, which has so far mitigated lower-than-expected collections and profitability. And, notwithstanding poor servicing performance, class A notes have materially amortised since closing, with a current pool factor of 39.4%.

Diversified servicer base (positive)¹. Four independent special servicers limit the transaction’s sensitivity to a servicer disruption. The master servicer will assist the issuer in finding a suitable replacement in the event of a servicer disruption and the other special servicers may step in. In addition, the fee structure aligns the special servicers’ incentives with investors’ interests.

Lower-than-expected collections (negative)¹. Aggregate gross and net collections amount to EUR 2,688.4m and EUR 2,469.1m, respectively. Aggregate net collections are below Scope’s expectation at the current Class A rating. Based on the initial servicer business plan, aggregate net collections are 54.9% of original expectations. The servicers have reviewed down by 12.1% the original business plan estimates once in 2019. Notwithstanding the performance deterioration, no further update of the business plan has been released since then. Currently, the gross cumulative collection over the updated business plan is 69.5% when we exclude the collection already available at that cut-off. This is creating further uncertainty about the amount and the timing of the recovery that the services can collect.

Low profitability of secured closed positions (negative)¹. Total gross collections from closed borrowers represent 20.6% of cumulative collections. Based on Scope calculations, closed secured debtors account for around 9.1% of the transaction’s initial secured gross book value. The profitability on these debtors, at 77.5%, is below Scope’s expectations under the B case assumptions at closing.

Below-average liquidity protection (negative)¹. Liquidity available in the structure would remain a constraining rating factor, even if collateral performance were to improve. The structure contains a cash reserve equivalent to 3.5% of the outstanding class A balance, covering less than two payment dates of interest on class A and items senior thereto. This liquidity coverage is lower than peer Italian NPL transactions.

Partial hedging of interest rate risk (negative)¹. Interest rate risk on the class A is partially mitigated by a cap agreement on the three-month Euribor. Currently, the notional of the cap agreement is 6.5% below the current balance of the rated notes and could further deteriorate if servicers will continue to underperform the business plan.

Slowdown of the Italian economy (negative)². Persistent inflationary pressures combined with tighter monetary policy, and the potential deterioration of liquidity conditions could impair servicers’ performance on collections.

Rating-change drivers

Positive. An improvement of servicers´ performance could positively impact the rating.

Negative. The timing of collections 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 28.5% over an outstanding weighted average life of 5.4 years. By portfolio segment, Scope assumed a lifetime gross recovery rate of 53.9% and 10.8% 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.

• 10% haircut to recoveries, one notch;

• a one-year recovery lag increase, two 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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.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-scale. 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://www.scoperatings.com/ratings-and-research/structured-finance/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’ 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
The 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: Davide Nesa, Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director 
The Credit Ratings were first released by Scope Ratings on 10 May 2018. This is the first rating update since closing.
 
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.