Rating action

Scope Ratings GmbH (Scope) has reviewed the performance of the notes issued by Palatino SPV S.r.l.. The rating action is as follows:

Class A (ISIN IT0005446528), EUR 135.0m original balance, EUR 74.4m current balance: Upgraded to BBB+_SF from BBB_SF

Class B1 (ISIN IT0005446536), EUR 11.0m original balance, EUR 11.0m current balance: not rated

Class B2 (ISIN IT0005446551), EUR 12.4m original balance, EUR 12.4m current balance: not rated

Class J (ISIN IT0005446569), EUR 6.3m original balance, EUR 6.3m current balance: not rated

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

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio with an initial gross book value of around EUR 865m. The portfolio was sold by Credito Fondiario S.p.A. and serviced by Master Gardant S.p.A.

The initial securitised pool mainly composed of senior secured loans (81% of the portfolio’s gross-book-value), while unsecured and junior secured loans are in a smaller share (13.2% and 5.8%, respectively). Loans were granted mainly to corporate debtors (72.7% of the portfolio’s gross-book-value). Properties are mainly concentrated in the north of Italy (54.6%) and are residential assets (59.1%), commercial real estate assets (16.9%), industrial properties (8.0%), land (10.8%) and other type of assets (5.2%).

As of December 2023, payment date, aggregate gross collections were EUR 86.6m. Around 70.9% of gross collections (EUR 61.4m) stems from open debtors (i.e., debtors for which the recovery process is still ongoing), while closed debtors account for 29.1% of gross collections (EUR 25.2m). Gross collections linked to closed debtors are split across discounted payoff proceeds (52.8%), judicial proceeds (28.8%), credit sale proceeds (14.9%), and other types of collections (3.5%). According to Scope’s analysis, closed debtors account for around 12.4% of the transaction’s initial gross book value (GBV).

The last business plan (updated in 2023) reports a lifetime expected gross recoveries which is only 0.2% lower to the original business plan forecast with same weighted average life of 4.6 years. The net present value cumulative profitability ratio, computed for closed positions, stands at 166.3%, while the cumulative net collection ratio stands at 131.3%, which is above the 100% threshold of a class B interest subordination event.

Rating rationale

The review addressed i) the collateral’s observed performance as of the December 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.¹

Key rating drivers

Key rating drivers continue to be aligned with those disclosed on our previous monitoring note dated 3 April 2023.²

The transaction continues to exhibit a good collateral performance reflected in the fast pace of the collections as well as the profitability of the closed borrowers over the initial expectations.

Rating-change drivers

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

Negative. 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.³

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. For the outstanding portfolio (EUR 707.3m GBV), Scope assumed a recovery rate of 23.4% over a weighted average life of 3.3 years under a B rating scenario (from its closing value of 22.6% over 7.0 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.

Rating driver references
1. Transaction documents and reporting (Confidential)
2. Monitoring Note
3. 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 1.2 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: Shashank Thakur, Senior Analyst
Person responsible for approval of the Credit Rating: Antonio Casado, Managing Director
The Credit Rating was first released by Scope Ratings on 25 June 2021.

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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