Rating action

Scope Ratings GmbH (Scope) has performed the following rating action on the notes issued by Red Sea SPV S.r.l.:

Class A (ISIN IT0005336943), EUR 463.6m outstanding: downgraded to B_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 and investor reporting as of the October 2024 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 S.p.A. and is serviced by Prelios Credit Servicing S.p.A. The transaction closed on 15 June 2018 and its final maturity is in October 2038. A detailed description of the transaction features and analytical assumptions, at closing, can be found in the transaction´s rating report, available on Scope´s website.

As of the September 2024 collection date, aggregate gross collections were EUR 1,581m, which represents 73% of the original business plan expectations. The breakdown of collections is as follows: judicial proceeds (71%), discounted pay-off proceeds (21%), credit sales proceeds (3%) and other (5%).

Class A notes have amortised 72% since closing. The servicer’s cumulative collection ratio and NPV profitability ratio are, respectively, 72.7% and 100.5%. The collection ratio remains above the 70% threshold, which would trigger the deferral of interest on the mezzanine notes.

Rating rationale

The review addressed i) the collateral’s observed performance as of September 2024; 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 include a significant shortfall in cumulative collections compared to the business plan and Scope’s initial expectations, along with weaker than expected profitability on secured closed positions relative to Scope’s initial expectations and peer transactions. While these drivers aligned with those disclosed in Scope’s previous rating action release dated 23 January 2024, the magnitude of the shortfalls has widened.

The current rating action specifically considers the following factors:

Collections timing (negative)¹. Aggregate collections to date are 23% behind Scope’s expectations under the B case scenario.

Profitability (negative)¹. Scope's calculations show that profitability on secured closed positions is 19% below the expectations set under the B case assumptions at closing. Furthermore, analysis of asset sales data supports this outcome, revealing higher discounts than initially anticipated by Scope.

Business plan review (negative)¹. The servicer’s updated 2024 business plan projects lifetime collections to be 17% lower than initially anticipated, while the weighted average life remains virtually unchanged at 4.4 years.

Rating-change drivers

A change to the transaction’s modelling assumptions based on observed performance or new data sources, significant changes to the transaction’s collateral and structural features, and a change in Scope’s credit views regarding the transaction’s key rating drivers could 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 defaulted loans.

Scope has updated its modelling assumptions to reflect the transaction’s current performance. At the B case, Scope assumed a lifetime gross recovery rate of 43% over a weighted average life of 4.6 years, down from the initial assumption of 57% over 5.6 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 the class A note would change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus two notches.
   
• Longer recovery by one year, minus one notch.

Rating driver references
1. Transaction 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 Model Version 2.0 incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ 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, 2 August 2024; Counterparty Risk Methodology, 10 July 2024; General Structured Finance Rating Methodology, 6 March 2024), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Cash Flow Model Version 2.0), 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 at closing. 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, Associate Director
Person responsible for approval of the Credit Rating: Paula Lichtensztein, Senior Representative
The Credit Rating was first released by Scope Ratings on 15 June 2018. The Credit Rating was last updated on 23 January 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

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, Scope Innovation Lab 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.