Rating action

Scope has completed a monitoring review of the following notes issued by Red Sea SPV S.r.l.:

Class A (ISIN IT0005336943), EUR 588.7m outstanding: downgraded to BB-_SF from BB+_SF

Class B (ISIN IT0005336950), EUR 152.9m outstanding: not rated

Class J (ISIN IT0005336968), EUR 51.0m outstanding: not rated

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

Transaction overview

Red Sea SPV S.r.l. is a static cash securitisation of a EUR 5,097m portfolio (as of closing) of Italian non-performing loans. The portfolio was originated by Banco BPM and Banca Popolare di Milano, both part of the Banco BPM Group and is serviced by Prelios Credit Servicing S.p.A. The transaction closed on 15 June 2018 and has a final maturity in October 2038.

As of the September 2023 collection date, aggregate gross collections were EUR 1,396m, which represents 64% of the updated business plan expectations and 57% of the original business plan expectations.

Around 60% of gross collections (EUR 841m) stems from open debtors (i.e., debtors for which the recovery process is still ongoing), while closed debtors account for 40% of gross collections (EUR 555m). Gross collections linked to closed debtors are split between discounted payoff proceeds (44%), judicial proceeds (41%), credit sale proceeds (8%) and other types of collections (7%). According to Scope’s analysis, closed debtors account for around 23% of the transaction’s initial GBV.

The servicer reviews the business plan on an annual basis. The last business plan (updated in 2023) reports lifetime expected gross recoveries which are 15.5% lower than the original business plan forecast, while the business plan weighted average life stays at 4.5 years. The net present value cumulative profitability ratio, computed for closed positions, stands at 102.5%, while the cumulative collection ratio stands at 76.5%, both above the 70% threshold that will defer class B interest below class A principal repayment.

Rating rationale

The review addressed i) the collateral’s observed performance as of the October 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.

Key rating drivers

Key rating drivers have evolved since our previous rating action release dated February 21, 2023. Particularly, as detailed below, collections timing and profitability are new negative drivers. All other rating drivers remain broadly aligned with those previously disclosed.

Collections timing (negative)¹. Aggregate collections to date are 20% behind Scope’s expectations under the B case scenario.

Profitability (negative)¹. Based on Scope calculations, profitability on assets sold in auction and on secured closed positions is significantly below Scope’s expectation under the B case assumptions at closing.

Rating-change drivers

Positive. Consistent servicer improvement in terms of secured profitability could positively impact the rating.

Negative. Recovery expenses show an increasing trend. If they will increase above Scope expectations, this 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 recovery rate of 45% over a weighted average life of 4.7 years (from its closing value of 57% over 5.6 years). By portfolio segment, Scope assumed a secured recovery rate of 57% from its closing value of 73%, while the unsecured recovery rate is unchanged from the 18% assumed at closing.

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 change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus 2 notches;
   
• a one-year recovery lag increase, minus 1 notch.

Rating driver 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 1.2 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 1.2), 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 the 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/asset audit. The external due diligence assessment/asset audit 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
The 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: Leonardo Scavo, Senior Specialist
Person responsible for approval of the Credit Rating: Antonio Casado, Managing Director
The Credit Rating was first released by Scope Ratings on 15 June 2018. The Credit Rating was last updated on 21 February 2023.

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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