Rating action

Scope Ratings GmbH (Scope) has completed a monitoring review of the following notes issued by 4Mori Sardegna S.r.l.:

Class A (ISIN IT0005337446), EUR 123.4m: downgraded to BB_SF from BBB-_SF

Class B (ISIN IT0005337479), EUR 13m: affirmed at CCC_SF

Class J (ISIN IT0005337487), EUR 8m: not rated

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

Transaction overview

4Mori Sardegna 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 1.0 billion by gross book value at closing. Prelios Credit Servicing S.p.A. is the special servicer. The loans were originated by Banco di Sardegna S.p.A. The transaction closed on 22 June 2018 and the legal maturity is in January 2037.

Aggregate gross collections amount to EUR 153.6m as of January 2023. The main sources of total gross collections are discounted-payoff proceeds (42.6%), judicial proceeds (32.0%) and note sales (15.6%).

The class A note pool factor is currently 53.2% while the reported net cumulative collection ratio and NPV profitability ratios are 59.0% and 109.1%, respectively.

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 arrangements, and d) the issuer´s exposure to key transaction parties.

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

Underhedging of Class A notes (negative)¹: the difference between the cap notional schedule and the outstanding amount of class A has further widened. Therefore, in the next payment date the Class A note will be underhedged by 42.0%.

Low pace of collections (negative)¹: Observed cumulative collections are below the initial and last updated business plan expectations. The servicer’s net cumulative collection ratio is currently 59.0%.

Indemnities (negative)¹: The process related to the indemnities requested by the Issuer to the seller has concluded and the amount requested has not been indemnified in full (equivalent to app. 2.3mln in terms of total gross cash flow from last servicer business plan available). The servicer is expecting to revise the business plan cash flow in the next release also for the positions where an indemnity was requested at inception and, following further investigations, the request has been withdrawn (equivalent to app. 7.5mln of future gross cash flow from last servicer business plan available).

Key rating drivers

The transaction's key rating drivers continue to be aligned with those disclosed on the last rating action release, dated September, 26, 2022. 

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 case, Scope assumed a lifetime gross recovery rate of 34.3% over a residual weighted average life of 2.5 years (from its closing value of 38.8% over 7.4 years). By portfolio segment, Scope assumed a lifetime gross recovery rate of 53.5% and 9.2% for the secured and unsecured portfolios, respectively, over a residual weighted average life of 2.5 and 2.7 years (from their closing values of 61.4% and 9.2% over 7.8 and 4.3 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, minus one notch;
   
• 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;

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 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, 13 July 2023; 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 were 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: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 22 June 2018. The Credit Ratings were last updated on 26 September 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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