“Higher judicial volumes will emerge once the Italian courts clear their backlog, while we expect better profitability on extra-judicial strategies for borrowers enjoying better affordability on the back of an improving macroeconomic scenario,” said Rossella Ghidoni, a director in Scope’s structured finance team.

“But even as the market improves, transactions exhibiting weak underlying portfolio quality or those that, with hindsight, had overly optimistic business plans at closing will continue to under-perform against initial servicers projections,” Ghidoni added.

For 2022, Scope estimates that collection volumes in 60% of the transactions will lag servicers’ forecasts by an average of 30%, while the remainder will over-perform by an average of 50%. Last year saw similarly high degrees of performance volatility. In H2 2021, collection volumes on half of the transactions fell 30% below servicers’ business plan expectations while the other half over-performed by an average of 35%.

Scope’s proprietary NPL indices reflect current weakness in the underlying market. The NPL Performance Index (NPI), which tracks cumulative collections against servicers’ original projections, stands at 85 (against a baseline of 100). Scope has downgraded the senior notes of 17 out of 36 transactions by an average of two notches.

“Poor 2021 performance was not just a function of poor overall market conditions; it was also a question of seasoning: transactions with fewer interest payment dates over-performed because of frontloaded cash-in-court proceeds or because of a material amount of interim collections, neither is a sustainable performance driver” said Paula Lichtensztein, a senior representative in Scope’s structured finance team.

The average seasoning of transactions that under-performed is twice that of over-performing transactions (six vs. three interest-payment dates). The oldest business plans are less conservative than recent ones; the latter reflecting longer timings and lower recoveries because of the pandemic.

Servicers follow a number of recovery strategies (discounted-pay-offs, judicial claims, note sales and wage garnishments) tailored to portfolio characteristics and economic considerations. Servicers that adapted more nimbly to the conditions brought about by the pandemic and selected the best-suited workout strategies counteracted some Covid-19 impacts and improved transaction performance.

The core recovery strategy has been the judicial route (an average of 46% of collections) followed by DPOs (25.8%) and note sales (7.6%). Other sources of recovery, such as proceeds generated through Real Estate Owned Companies (ReoCo) structures and execution of guarantees (such as Confidi) have occasionally been adopted.

“On most transactions, servicers closed positions with lower profitability than we expected (87%). We expect profitability to remain about 90% by 2022,” Ghidoni said. Profitability on closed positions is the ratio between net collections allocated to a borrower whose position has been closed by the servicer and the net recovery proceeds expected in servicers’ business plans at closing.

In terms of new securitisations, Scope is optimistic. “We expect activity to be intense in the first half of this year compared to the first half of 2021 due to the impending expiry of the GACS scheme on 14 June 2022. If GACS is renewed, the second half of the year will also see a material number of securitisations, prompted by the deleveraging needs of banks,” Lichtensztein said.

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