Scope downgrades Class A and Class B notes issued by BCC NPLs 2018-2 S.r.l. - Italian NPL ABS
Scope has completed a monitoring review of the following notes issued by BCC NPLs 2018-2 S.r.l.:
Class A (ISIN IT0005356925): EUR 310.9m: downgraded to CCCSF from B+SF
Class B (ISIN IT0005356933): EUR 60.1m: downgraded to CSF from CCSF
Class J (ISIN IT0005356941): EUR 20.0m: not rated
Scope’s review was based on servicer, investor and payment reporting as of July 2023 payment date.
BCC NPLs 2018-2 S.r.l. is a static cash securitisation of secured and unsecured NPLs, accounting for 58.4% and 41.6% in terms of original gross book value (“GBV”). The loans were mostly extended to companies (79.1%). The portfolio is serviced by doValue S.p.A. The transaction closed on 20 December 2018 and the legal maturity is July 2042.
As of the July 2023 payment date, aggregate gross collections were EUR 282.6m, which represents 96.7% of the updated business plan expectations and 71.7% of the original business plan expectations.
Around 77.0% of gross collections (EUR 217.6m) stems from open debtors (i.e., debtors for which the recovery process is still ongoing), while closed debtors account for 23.0% of gross collections (EUR 65.0m). Gross collections linked to closed debtors are split across discounted payoff proceeds (52.1%), credit sale proceeds (36.8%), judicial proceeds (9.2%), and other types of collections (1.9%). According to Scope’s analysis, closed debtors account for around 10.0% of the transaction’s initial GBV.
The last business plan (updated in 2023) reports a lifetime expected gross recoveries which are 10.4% lower than the original business plan forecast with a weighted average life of 6.1 years. The net present value cumulative profitability ratio, computed for closed positions, stands at 107.4%, while the cumulative collection ratio stands at 70.2%, which is below the 80% threshold resulting in a class B interest subordination to class A principal repayment.
The review addressed i) the collateral’s observed performance as of the 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.
Key rating drivers
Key rating drivers continue to be aligned with those disclosed on our previous rating action release dated February 21, 2023. However, particular concerns which have mainly driven the further downgrades are the persistence of very weak profitability and of slow collections. These remain well below Scope’s initial expectations.
Slow collections1. Aggregate collections to date are 22% behind Scope’s expectations under the B case scenario. This makes this transaction an outlier among Scope´s NPL rated universe, as the timing of collections is usually ahead of Scope´s initial expectations.
Profitability1. Based on Scope calculations, profitability on secured closed positions is 32.2% below Scope’s expectation under the B case assumptions at closing. Observed profitability on secured closed positions is also significantly below average compared with other Italian NPL transactions. Scope acknowledges that there is significant uncertainty around profitability going forward, particularly because the share of reported secured closed positions is quite small relative to GBV (10.0%). Therefore, lifetime profitability may change over time. Scope has not been able to analyse collateral sales data due to data limitations.
Positive. Consistent servicer improvement in terms of pace of collections and secured profitability could positively impact the rating.
Negative. A further and very significant deterioration in profitability metrics and in the pace of collections could negatively impact the class A 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 31.7% over a weighted average life of 5.2 years (from its closing value of 46.5% over 5.9 years). By portfolio segment, Scope assumed a secured recovery rate of 44.9% from its closing value of 66.4% and an unsecured recovery rate of 13.3% from 18.5% assumed at closing.
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, minus one notch.
The following shows how the results for class B notes 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)
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 1.2 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.
The methodologies used for these Credit Ratings, (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 these Credit Ratings 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 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/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 Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings was not amended before being issued.
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: Elom Kwamin, Analyst
Person responsible for approval of the Credit Ratings: Antonio Casado, Managing Director
The Credit Ratings were first released by Scope Ratings on 20 December 2018. The Credit Ratings were last updated on 21 February 2023.
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
© 2024 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.