Rating action

Scope Ratings GmbH (Scope) has performed the following rating action after completing a monitoring review on the notes issued by Juno 2 S.r.l.:

Class A (ISIN IT0005363731), EUR 65.4m: downgraded to BBB-_SF from BBB+_SF

Class B (ISIN IT0005363749), EUR 48m: not rated

Class J (ISIN IT0005363756), EUR 12.7m: not rated

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

Transaction overview

Juno 2 S.r.l. is a static cash securitization involving an Italian non-performing loan (NPL) portfolio valued at approximately EUR 968 million at its gross book value. The original lender is Banca Nazionale del Lavoro S.p.A. (BNL) and the servicer of the transaction is Prelios Credit Servicing S.p.A. The transaction closed on February 2019 and the legal maturity of the notes is in July 2039.

Aggregate gross collections amount to EUR 193.4mln as of June 2023. The main sources of total gross collections are judicial proceeds (66.7%), discounted payoff proceeds (24.6%) and other proceeds (8.7%).

The class A note pool factor is currently 32.1% while the reported net cumulative collection ratio and NPV profitability ratios are 98.2% and 110.6%, respectively.

Rating rationale

The review addressed i) the collateral’s observed performance as of July 2023 payment date; ii) Scope’s forward-looking assumptions, which incorporate expected macroeconomic changes over the transaction’s remaining life; iii) updates to the transaction’s liability structure, liquidity and interest rate hedging; and iv) the issuer’s exposure to key transaction counterparties.

Beyond the key rating drivers addressed further below, the main analytical considerations on the transaction’s performance are:

High property sale discounts (negative): The current average property sale discount from judicial proceedings, according to Scope calculation, is considerably higher compared to the average Scope fires sale discount applied at closing, 54.1% and 27.3% respectively. Residential properties are showing a lower discount (45.2%) compared to commercial (56.1%), industrial (60.7%) and land (70.9%)¹.

Increased Borrower concentration (negative). The borrower concentration increased respect to the initial rating assignment and remain among the highest compared to peer transactions Scope has rated. The top 10 and 100 largest borrowers account for 25.2% and 73.8% of the remaining collections under Scope analysis, while they were representing 13.8% and 54.2%, respectively, at closing¹.

Low recovery expenses (positive). The current recovery expenses are 4.3% of cumulative gross collections so far, which is higher than the total legal expenses envisaged by the servicer in the last updated business (3.8%) but lower than Scope’s assumption (9.0%)¹.

Class A amortisation (positive). Class A has materially amortised since closing, which reduces liability costs over the life of the transaction (interests and GACS fees). The current class A pool factor is 32.1%, four and a half years after closing¹.

Key rating drivers

The transaction’s key rating drivers are aligned with those on Scope’s initial rating action release dated February 8, 2019. In addition, we have considered a new key rating driver related to the future payments of Class B interests.

Class B interest leakage (negative): If the pace and the amount of collections deteriorates in line with the higher property sale discounts registered so far, the subordination triggers, which are relatively high (98.2% for the cumulative collection ratio and 110.7% for the NPV cumulative profitability ratio) compared to the threshold (for both 85.0%), may potentially be breached only later in the life of the transaction, diverting a relevant amount of proceeds to the payment of Class B interests¹.

Rating-change drivers

Positive. Improving performance on property sale prices could positively impact the ratings.

Negative. Servicer performance falling short of Scope’s collection amounts and timing assumptions could negatively impact 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 31.4% over a residual weighted average life of 4.5 years (from its closing value of 37.0% over 5.6 years). By portfolio segment, Scope assumed a lifetime gross recovery rate of 38.0% and 13.1% for the secured and unsecured portfolios, respectively, over a residual weighted average life of 5.2 and 2.8 years (from its closing value of 45.1% and 13.7% for respectively secured and unsecured, over 4.1 years and 4.9 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
   
• Longer recovery by one year, 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 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 rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating, (Non-Performing Loan ABS Rating Methodology, 3 August 2023; Counterparty Risk Methodology, 13 July 2023; General Structured Finance Rating Methodology, 25 January 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Cash Flow Structured Finance Expected Loss Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/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 Rating: 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 this Credit Rating 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 Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Davide Nesa, Director
Person responsible for approval of the Credit Rating: Antonio Casado, Executive Director
The Credit Rating was first released by Scope Ratings on 8 February 2019.

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 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.