Rating action

Scope Ratings GmbH (Scope) has completed a monitoring review of the following notes issued by POP NPLs S.r.l.:

Class A (ISIN IT0005431900): EUR 129.2m: upgraded to BBB+_SF from BBB_SF

Class B (ISIN IT0005431918): EUR 25.0m: affirmed at CC_SF

Class J (ISIN IT0005431926): EUR 10.0m: not rated

Scope’s review was based on servicer, investor and payment reporting as of the 8 May 2023 payment date.

Transaction overview

POP NPLs 2020 S.r.l. is a static cash securitisation of a EUR 920m portfolio (at closing) of Italian non-performing loans originated by 15 banks. The portfolio is serviced by Special Gardant S.p.A. and Fire S.p.A. as special servicers, and by Master Gardant S.p.A. as master servicer. The transaction was closed on 23 December 2020 and the legal maturity is November 2045.

Aggregate gross collections amount to EUR 136.3m as of 8 May 2023. The source of total gross collections is mostly represented by judicial proceeds (41.3%) and discounted-pay-offs (DPOs) proceeds (27.1%). Remainder collections stem from credit sales and other type of proceeds (7.5% and 24.2%).

About 27% of gross collections (EUR 36.8m) stem from closed debtors (i.e. debtors for which the recovery process is completed) and were mainly obtained through DPOs and credit sales (35.5% and 27.6%). Since closing, Scope estimates 9.2% of initial gross book value has been closed.

The class A note has amortised by 46.5% of its notional at closing while the reported net proceeds cumulative collection ratio and NPV profitability ratios are 179.30% and 134.39% respectively. There has been no occurrence of interest subordination event as both ratios remain above the 90.0% trigger level.

Rating rationale

The review addressed a) the observed performance of the collateral as of the review cut-off date, b) Scope´s forward-looking performance assumptions, in the context of the expected macro-economic environment over the remaining life of the transaction, c) the transaction´s updated liability structure, liquidity and interest rate hedging agreements, and e) the issuer´s exposure to key transaction parties.

The main considerations on transaction’s performance beyond the key rating drivers are the following:

High profitability of secured closed positions (positive)¹. Based on Scope calculations, closed secured debtors account for around 9.6% of the transaction’s initial secured gross book value. The profitability on these debtors, at 112.2%, is above Scope’s expectations under the B case assumptions at closing.

Faster than expected cumulative collections (positive)¹. Aggregate net collections, which amount to EUR 130.1m, have outpaced Scope’s timing assumptions under the B case at closing. Based on the servicer business plan, aggregate net collections are 179.3% of original cumulative net expectations.

Low recovery expenses (positive)¹. Cumulative recovery expenses, at 4.6% of cumulative collections, are significantly below Scope’s lifetime assumption of 9%.

Key rating drivers

The transaction's key rating drivers continue to be aligned with those disclosed on our initial rating action release, dated December, 23, 2020, except for the negative rating driver related to the presence of a significant portion of legal proceedings in initial stages. While at closing Scope expected a weighted average recovery timing of 6.3 years at the B case, driven by the estimated length of legal proceedings, at the current review Scope expects a weighted average recovery timing of 4.5 years, with judicial proceeds driving most of the recoveries so far.

Rating-change drivers

Positive. An increased share of secured closed borrowers showing recoveries above Scope expectations could positively impact the ratings.

Negative². Slowdown of the Italian economy driven by persistent inflationary pressures combined with tighter monetary policy, and the potential deterioration of borrowers’ affordability conditions could impair servicers’ performance on collections.

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 lifetime gross recovery rate of 41.6% over a weighted average life of 4.5 years (from its closing value of 40.1% over 6.3 years). By portfolio segment, Scope assumed a lifetime gross recovery rate of 62.3% and 15.3% for the secured and unsecured portfolios, respectively, over a weighted average life of 4.7 and 3.3 years (from their closing values of 60.7% and 14.0% over 6.7 and 3.8 years).

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 would 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 would 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 Structured Finance Expected Loss 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 Structured Finance Expected Loss 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. The external due diligence assessment 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 23 December 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory 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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