Rating action

Scope Ratings GmbH (Scope) has taken the following rating action on the notes issued by Buonconsiglio 3 S.r.l.:

Class A (ISIN IT0005428138): EUR 74.0m: downgraded to BB-_SF from BB+_SF

Class B (ISIN IT0005428146): EUR 21.0m: not rated

Class J (ISIN IT0005428153): EUR 4.5m: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian non-performing loan (NPL) portfolio with a gross book value of around EUR 679m at closing. The securitised pool consisted of secured loans representing 65.5% of the portfolio’s gross book value, while unsecured and junior secured loans accounted for 30.5% and 4.0%, respectively. The transaction closed on 14 December 2020 and the legal maturity is January 2041.

The transaction structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B and junior class J. Class A pays a floating rate indexed to six-month Euribor, plus a margin of 0.5%, while class B pays a floating rate indexed to six-month Euribor, plus a margin of 9.5%. Class J pays a floating rate indexed to six-month Euribor, plus a margin of 9.5% and a variable return.

The transaction is serviced by Guber Banca S.p.A. as special servicer, with Zenith Service S.p.A. acting as the master servicer. BNP Paribas Securities Services, Milan Branch serves as the account bank, Banco Santander S.A. as interest rate cap counterparty, while the 38 Italian originator banks act also as limited recourse loan providers.

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 downgrade has been primarily driven by underperformance in the of timing of collections relative to Scope’s initial assumptions. This is reflected in the slower-than-expected amortisation of the class A notes, persistent low profitability, and higher-than-expected discounts observed on sold assets.

The class A notes’ current rating is four notches below the rating assigned at closing.

Key rating drivers

The key rating drivers have evolved since the rating action release dated 29 September 2022. Scope has made the changes listed below to its assessment of the key rating drivers. Other drivers remain unchanged.

Secured closed debtors’ profitability (negative)¹. Secured closed debtors’ profitability remains below Scope’s B case assumptions. Additionally, the actual discount observed on auctioned properties have exceeded those modelled at closing, indicating weaker portfolio quality than initially anticipated.

Scope no longer considers the pace of collections to be a positive rating driver, given that actual collections have fallen short of the servicer’s expectations set at closing. None of the key rating drivers are ESG related.

Key analytical assumptions:

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

The analytical assumptions incorporate the transaction’s historical performance and peer transaction benchmarks. They may also reflect qualitative judgments based on various factors, including (a) the servicer’s recovery strategies, (b) Scope’s macroeconomic expectations, and (c) the credit committee’s outlook for the asset class over the transaction’s remaining lifetime.

Details on these assumptions and other parameters are provided under the section ‘Quantitative analysis’ below.

Key performance metrics

As of the January 2025 payment date, aggregate gross collections totaled EUR 114.1 million, representing 96% of the original business plan expectations. The breakdown of collections is as follows: judicial proceeds (86%), credit sales proceeds (9%), discounted pay-off proceeds (4%), and other sources (1%). The servicer has revised downwards (14.4%) its original expected lifetime gross collections.

The reported cumulative collection ratio and net present value profitability ratio stand at 94% and 102%, respectively, both above the 90% subordination threshold for mezzanine note interest payments.

The senior notes have deleveraged by approximately 52%, performing ahead of initial timing expectations at closing. Nevertheless, overall profitability continues to underperform. Average observed property sale discounts are currently around 66%. In addition, the profitability on secured closed positions is at approximately 87% of original assumptions, reflecting weaker-than-expected asset performance.

Actual legal expenses represent 12% of gross proceeds to date. However, according to servicer’s latest business plan update, remaining legal costs are expected to represent only 4% of future gross proceeds.

Key data sources

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

Relevant changes to key transaction features

Class A coverage has deteriorated over time. The gross coverage ratio reduced to 134% from 162% at B case for Class A notes.

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

Rating-change drivers

A change to the levels or parameters of the transaction’s key analytical 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 ratings.

The sensitivity analysis below provides an indication of the resilience of the credit rating against deviations in key analytical assumptions.

Sensitivity analysis

This analysis is solely intended to illustrate the sensitivity of the credit rating to the assumed parameters and, all else being equal, is not reflect expected or likely scenarios.

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

Quantitative analysis

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

• Lifetime recovery rate at B case is 31.4% (36.8% at closing) over a weighted average life of 4.4 years (6.6 years at closing).
   
• Recovery expenses: 6% of expected gross recoveries (9% at closing).
   
• Rating conditional interest rate vectors: as disclosed in Scope´s General Structured Finance Methodology.

Key rating drivers 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 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, 13 February 2025), 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: Stefano Bracchi, Specialist
Person responsible for approval of the Credit Rating: Paula Lichtensztein, Senior Representative
The Credit Rating was first released by Scope Ratings on 14 December 2020. The Credit Rating was last updated on 29 September 2022.

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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