Rating action

Scope Ratings GmbH (Scope) has taken the following rating actions on the notes issued by POP NPLs 2018 S.r.l.:

Class A (ISIN IT0005351884), EUR 225.8m outstanding: downgraded to CCC_SF from B-_SF

Class B (ISIN IT0005351892), EUR 50.0m outstanding: affirmed at C_SF

Class J (ISIN IT0005351900), EUR 15.8m outstanding: not rated

Transaction overview

The transaction was closed on 16 November 2018 and the legal maturity is in December 2033. It is a static cash securitisation of an NPL portfolio worth EUR 1,578m by gross book value at closing. The portfolio was originated by 17 Italian banks and was comprised of both secured (53.9%) and unsecured (46.1%) loans extended to Italian companies (77.1%) and individuals (22.9%). Secured loans were backed by residential (41.7%) and non-residential properties (58.3%).

The capital structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J. A portion of class B interest capped at 6% may rank senior to class A principal as long as the cumulative amount of collections and the cumulative profitability ratio are above 90% of the level indicated in the servicer’s business. Class J principal and interest are fully subordinated.

The transaction is serviced by Cerved Credit Management S.p.A.. BNP Paribas SA acts as account bank and paying agent, while JP Morgan AG is the interest rate cap provider.

Rating rationale

The rating action follows: i) the periodic re-assessment of the transaction´s initial key rating drivers, ii) a review of its key model assumptions, considering the observed performance of the collateral and Scope’s economic outlook, and iii) any material changes to the key transaction features (portfolio composition, structural features, counterparties).

The rating downgrades have been primarily driven by significant underperformance in terms of profitability and timing relative to Scope’s initial assumptions, reflected in a continued deterioration of remaining gross collections to notes outstanding balance coverage ratios.

The Class A and B current ratings are eight and four notches below the ratings assigned at closing on 16 November 2018, respectively.

Key rating drivers

Scope has changed its assessment of some of the key rating drivers disclosed in our initial rating action release dated 16 November 2018. We do no longer consider borrower types (i.e. relative high share of individual borrowers relative to transaction peers) and hedging structure as positive rating drivers, as these have not been supported by strong transaction performance and as the slow amortization of the notes has exacerbated the mismatch between the hedge notional schedule and the outstanding class A notes balance. The rest of the rating drivers disclosed at closing are still applicable. None of the key rating drivers are ESG related.

Key model assumptions

• Rating-conditional lifetime gross recovery rates
   
• Rating-conditional recovery timing vectors

Updates to the key assumption levels and to other relevant CFM parameters are provided under the section ‘Quantitative analysis’.

Key performance metrics

As of the October 2024 collection date, aggregate gross collections were EUR 306.4m, which represents 56% of the original business plan expectations. The breakdown of collections is as follows: judicial proceeds (51%), discounted pay-off proceeds (27%), credit sales proceeds (7%) and other (15%).

As per the October 2024 payment date, the profitability on secured closed borrowers is at 73% of Scope initial B case assumptions; moreover, the observed discount applied to assets sold in auctions is 66%. The servicer revised its original lifetime gross collections downward by 32% in its updated business plan.

Key data sources

Scope’s review was based on servicer, investor and payment reporting as of October 2024 payment date. We also considered the macro-economic and NPL sector context reflected in our 2025 structured finance outlook.

Relevant changes to key transaction features

Relative to closing, the structured has weakened significantly, reflected in a deterioration of gross coverage ratio (computed as the quotient of expected recoveries and senior notes outstanding principal amount) to 98% from 164% at B case. The servicer’s cumulative collection ratio is currently 56%, below the 90% subordination threshold of mezzanine notes interest payment.

There have not been changes to the transaction’s counterparties, and no significant changes to our assessment of counterparty risk.

Rating-change drivers

A sharp and sustained improvement of collateral performance metrics could positively impact the ratings. A further deterioration of expected collections to outstanding note balance coverage ratios, or a drawdown under the liquidity reserve, or the occurrence of an interest payment shortfall, could negatively impact the ratings.

Sensitivity analysis

The following analysis has the sole purpose of illustrating the sensitivity of the credit ratings to CFM parameters, all else equal, and is not indicative of expected or likely scenarios.

Class A notes:

• 10% haircut to recoveries: minus two notches
   
• Extending the recovery by one year: minus one notch

Class B notes:

• 10% haircut to recoveries: zero notches
   
• Extending the recovery by one year: zero notches

Quantitative analysis

This section provides non-exhaustive list of relevant CFM parameters, and how they compare to those applied at the initial/previous rating assignment:

• Lifetime recovery rate at B case is 33% (at closing it was 44%) over a weighted average life of 5.3 years (at closing it was 5.8 years).
   
• Recovery expenses: 9% of expected gross recoveries (aligned to the modelled amount at closing).
   
• Rating conditional interest rate vectors: as disclosed in Scope´s General Structured Finance Rating Methodology.

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 these Credit Ratings, (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 these Credit Ratings 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 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 at closing. 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: Stefano Bracchi, Specialist
Person responsible for approval of the Credit Ratings: Antonio Casado, Managing Director
The Credit Ratings were first released by Scope Ratings on 16 November 2018. The Credit Ratings were last updated on 4 March 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
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