Rating action

Scope Ratings GmbH (Scope) has performed the following rating actions after completing a monitoring review on the notes issued by 4Mori Sardegna S.r.l.:

Class A (ISIN IT0005337446), EUR 232.0m original balance, EUR 99.4m current balance: Downgraded to BB-_SF from BB_SF

Class B (ISIN IT0005337479), EUR 13.0m original balance, EUR 13.0m current balance: Downgraded to CC_SF from CCC_SF

Class J (ISIN IT0005337487), EUR 8.0m original balance, EUR 8.0m current balance: not rated

Scope’s review was based on servicer, investor and payment reporting as of January 2024 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 1,045m. The portfolio was sold by Banco di Sardegna S.p.A. and is currently serviced by Prelios Credit Servicing S.p.A. (, as special and master servicer.

The initial securitised composed of 56.1% secured and 43.9% unsecured loans by gross-book-value, respectively. Loans were granted mainly to corporate debtors (75.6% of the portfolio’s gross-book-value). Properties are highly concentrated in the metropolitan cities of Sardinia (24.4% of indexed property valuations) and other Sardinian regions (62.9% of indexed property valuations) and are residential assets (51.3% of indexed property valuations).

As of January 2024, payment date, aggregate gross collections were EUR 191.3m. Around 48.7% of gross collections (EUR 93.2m) stems from open debtors (i.e., debtors for which the recovery process is still ongoing), while closed debtors account for 51.3% of gross collections (EUR 98.1m). Gross collections linked to closed debtors are split across discounted payoff proceeds (55.6%), credit sale proceeds (24.5.0%), judicial proceeds (10% indemnities (7%) and other types of collections (3%). According to Scope’s analysis, closed debtors account for around 19.4% of the transaction’s initial gross book value (GBV).

The last business plan (updated in 2023) reports a lifetime expected gross recoveries 10.2% lower to the original business plan forecast with significantly longer weighted average life (5.6 years last update vs 4.6 years initial). The net present value cumulative profitability ratio, computed for closed positions, stands at 109.3%, while the cumulative net collection ratio stands at 59.7%, which is below the 90% threshold for a class B interest subordination event.

Rating rationale

The review addressed i) the collateral’s observed performance as of the January 2024 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

Following we summarize our main analytical conclusions:

Interest rate risk¹: The current interest environment is negatively impacting the notes and the cap agreement only provides limited protection. The difference between the cap notional schedule and the outstanding amount of class A has further widened. On the next payment date the Class A note will be underhedged by 75.5%.

Collection ratio¹: Observed cumulative collections are below the initial and last updated business plan expectations as well as Scope’s expectation under the B case assumptions at closing. The servicer’s net cumulative collection ratio is currently 59.7%.

Profitability¹: Profitability on secured closed positions is 26.2% below Scope’s expectation under the B case assumptions at closing. Uncertainty around lifetime profitability is high. So far, Scope believes that low profitability has been partly driven by a significant share of collections coming from discounted payoff and credit sale proceeds.

Sales data¹: The observed average property sale discount, considering both open and closed borrowers, is 56.7% based on Scope calculations. This is above Scope’s B case assumptions at closing.

Indemnities¹: The indemnification process is fully closed and the outcome is completely reflected in the last updated business plan.

Key rating drivers

The key rating drivers continue to be aligned with those disclosed on our previous rating action release dated 20 July 2023 with the following exceptions:

• Cumulative recovery expenses sustained for positions’ workout reached levels close to Scope’s expectation, constituting no longer a positive driver.
   
• The pace of collections falls below Scope’s expected B case at closing and is no longer mitigating concerns around weak profitability.

Rating-change drivers

Positive. Strong servicer performance in terms of pace of collections and improved profitability on secured closed positions could positively impact the rating.

Negative. A further deterioration in transaction’s profitability, or persistent slowdown in the pace of collections could negatively impact the rating of the notes.

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 811m GBV), Scope assumed a recovery rate of 18.9% over a weighted average life of 2.2 years under a B rating scenario (from its closing value of 43.3% over 5.8 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, one notch;
   
• a one-year recovery lag increase, one 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 these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 3 August 2023; Counterparty Risk Methodology, 13 July 2023; General Structured Finance Rating Methodology, 6 March 2024), 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 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 are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Martin Hartmann, Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Managing Director
The Credit Ratings were first released by Scope Ratings on 22 June 2018. The Credit Ratings were last updated on 20 July 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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