Rating action

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

Class A (ISIN IT0005336943), EUR 396.3m: downgraded to CCC_SF from B_SF

Class B (ISIN IT0005336950), EUR 152.9m: not rated

Class J (ISIN IT0005336968), EUR 51.0m: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian non-performing loan (NPL) portfolio worth around EUR 5.1bn by gross book value at closing. The loans were originated by Banco BPM S.p.A. and are serviced by Prelios Credit Servicing S.p.A. The transaction closed on 15 June 2018 and the class A legal maturity is in October 2038.

The capital 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 0.6%, while class B pays a floating rate indexed to six-month Euribor, plus a margin of 6.0%. Class J pays a variable return interest.

The transaction is currently serviced by Prelios Credit Servicing S.p.A. acting as master and special servicer. Banco BPM S.p.A. and Bank of New York Mellon SA/NV (Milan Branch) serve as the account banks, Banco Santander S.A. and Mediobanca S.p.A. act as interest rate cap counterparties, while Banco BPM act as limited recourse loan provider.

Relevant changes to the key transaction features

Relative to closing, the structure has materially weakened, as reflected in the deterioration of the gross coverage ratio (calculated as expected recoveries over the senior notes’ outstanding principal). As of the October payment date, the ratio has declined to 80.2% (from 149.3% at closing) based on our calculations using the latest updated business plan.

There have been no changes to the transaction’s counterparties, and there have been no material changes to Scope’s assessment of counterparty risk.

Rating rationale

The rating action follows: i) the periodic re-assessment of the transaction´s key rating drivers, ii) a review of its key 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 downgrade is primarily driven by the low gross coverage ratio under both the updated business plan and our B-case scenario. Based on both Scope’s projections and those of the servicer, the remaining funds are insufficient to fully repay the senior notes. In addition, slower-than-expected collection timing relative to our original assumptions, together with higher-than-anticipated discounts on sold assets, have contributed to the slow amortisation of the Class A notes and the persistently low profitability of the transaction.

Key rating drivers

The key rating drivers remain aligned with those disclosed on the rating action release dated 23 December 2024.

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.

Updates to these assumptions and other parameters are provided under the section ‘Quantitative analysis’.

Key performance metrics¹

As of the October 2025 payment date, the senior notes have deleveraged by approximately 76.1%, with aggregate gross collections amounting to EUR 1,701 million, representing 73.5% of the original business plan expectations. The composition of collections reflects a heavy reliance on judicial proceeds (71.1%), followed by discounted pay-off proceeds (20.9%), credit sales proceeds (2.8%), and other sources (5.2%).

The reported cumulative net collection ratio currently stands at 72.7%. Despite continued underperformance, mezzanine note subordination has not been triggered, as the threshold for mezzanine note interest payments is set at 70%.

Profitability continues to lag initial expectations. Based on Scope’s calculations, the average observed discount on property sales is around 52.7%, and profitability on secured, closed positions currently stands at 82.7% of Scope’s original assumptions, reflecting weaker-than-expected asset performance.

Actual recovery expenses represent 7.6% of gross proceeds to date.

 Key data sources

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

Rating-change drivers

A change to the key quantitative assumptions based on observed performance or new data sources, significant changes to the key transaction´s features, and a change in Scope’s credit views regarding the key rating drivers could impact the ratings.

The Class A rating will likely be negatively impacted if the B-case gross coverage ratio falls below 50% or if the cash reserve is drawn down.

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.

Class A:

• 10% haircut to gross recoveries: zero notches
   
• One-year increase of recovery lag: two notches

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 41% (57% at closing) over a weighted average life of 4.9 years (5.4 years at closing).
   
• Recovery expenses: 9% of expected gross recoveries (8.2% at closing).
   
• Rating conditional interest rate vectors: as disclosed in Scope´s General Structured Finance Methodology.

 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 2.2 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, 1 August 2025; Counterparty Risk Methodology, 30 June 2025; General Structured Finance Rating Methodology, 13 February 2025), are available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Cash Flow Model Version 2.2), available in Scope Ratings’ list of models, published under 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 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 scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at 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 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 is 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 December 2024.

Potential conflicts
See 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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