DBRS Morningstar Downgrades Class A Notes of Siena NPL 2018 S.r.l. to BB (high) (sf), Assigns Negative Trend, and Removes from Under Review with Negative Implications

DBRS Ratings Limited (DBRS Morningstar) downgraded its rating of the Class A notes issued by Siena NPL 2018 S.r.l. (the Issuer) to BB (high) (sf) from BBB (sf) and assigned a Negative trend. At the same time, DBRS Morningstar removed the Under Review with Negative Implications status from the notes, which was assigned on 8 May 2020 and maintained on 6 August 2020.

The transaction represents the issuance of Class A, Class B, and Class J notes and a Class X detachable coupon (collectively, the Notes). The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal on or before its final maturity date of January 2047. DBRS Morningstar does not rate the Class B notes, the Class J notes, or the Class X detachable coupon.

At issuance, the Notes were backed by a EUR 24.1 billion portfolio by gross book value (GBV) consisting of a mixed pool of Italian nonperforming residential, commercial, and unsecured loans originated by Banca Monte dei Paschi di Siena S.p.A., MPS Capital Services Banca per le Imprese S.p.A., and Monte dei Paschi di Siena Leasing.

The receivables are serviced by Credito Fondiario S.p.A. (Credito Fondiario), Italfondiario S.p.A., Juliet S.p.A. (Juliet), and Prelios S.p.A. (collectively, the special servicers). Credito Fondiario S.p.A. also operates as the master servicer in the transaction.

RATING RATIONALE
The rating downgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 June 2020, focusing on: (1) a comparison between actual collections and the special servicers’ initial business plan forecasts; (2) the collection performance observed over the past six months, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Special servicers’ updated business plan, which has new projections starting from 30 June 2019, received in August 2020, and its comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition as of June 2020 and evolution of its core features since issuance.
-- Transaction liquidating structure: the order of priority entails a fully sequential amortisation of the notes (i.e., the Class B notes will begin to amortise following the full repayment of the Class A notes, and the Class J notes will amortise following the repayment of the Class B notes).
-- Performance ratios and underperformance events: as per the most recent July 2020 payment report, all servicers, with the exception of Prelios, have breached their Special Servicer Subordination Fee Event and 10% of their fees above the base fee are subordinated in the priority of payments whereas the Mezzanine Notes Trigger has not occurred.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure and covering against potential interest shortfall on the Class A notes. The cash reserve target amount is equal to 3.5% of the Class A notes principal outstanding and is currently fully funded.

According to the latest July 2020 investor report, the principal amounts outstanding of the Class A, Class B, and Class J notes were equal to EUR 1,969.5 million, EUR 865.6 million, and EUR 565.0 million, respectively. The balance of the Class A notes has amortised by approximately 32.5% since issuance. The current aggregated transaction balance is EUR 3,400.2 million.

As of June 2020, the transaction was underperforming by 38.8% compared with the special servicers’ initial expectations. The actual cumulative gross collections equalled EUR 1,596.0 million in June 2020, whereas special servicers’ initial business plans estimated cumulative gross collections of EUR 2,608.3 million for the same period. However, at issuance, DBRS Morningstar estimated cumulative gross collections of EUR 805.7 million for the same period at the BBB (sf) stressed scenario. Therefore, as of June 2020, the transaction is performing above DBRS Morningstar’s initial stressed expectations.

In August 2020, DBRS Morningstar received a revised business plan prepared by the Special Servicers, as provided by the original documentation of the transaction. In this updated business plan, the special servicers assumed lower recoveries compared with initial expectations. The total cumulative gross collections from the updated business plan account for EUR 6,247.5 million, which is 11.8% lower compared with the EUR 7,086.6 million expected in the initial business plan.

Without including actual collections, the special servicers’ expected future collections from July 2020 are now accounting for EUR 4,528.8 million. The updated DBRS Morningstar BB (high) (sf) rating stress assumes a haircut of 25.0% to the special servicers’ latest business plans, considering future expected collections.

The final maturity date of the transaction is in January 2047.

The coronavirus and the resulting isolation measures have resulted in a sharp economic contraction, increases in unemployment rates, and reduced investment activities. DBRS Morningstar anticipates that collections in European nonperforming loan (NPL) securitisations will be disrupted in the coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in property prices, but gave partial credit to house price increases from 2023 onwards in non-investment-grade rating stress scenarios. DBRS Morningstar updated its estimated gross cash flow (from July 2020 onwards) at the BB (high) (sf) scenario to EUR 3,395 million (a discount of 25.0% from the updated servicer business plan of EUR 4,529 million).

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include Issuer and/or its agents, which comprise the updated business plan from the special servicers received in September 2020, detailed servicer reports as of June 2020, and the investor report as of July 2020.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 6 August 2020, when DBRS Morningstar maintained the Under Review with Negative Implications status on the Class A notes.

The lead analyst responsibilities for this transaction have been transferred to Sinem Erol-Aziz.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 3,395.0 million at the BB (high) (sf) stress level, a 2.5%, 5% and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 2.5%, ceteris paribus, would lead to a downgrade of the Class A notes to BB (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A notes to BB (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to B (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.

Lead Analyst: Sinem Erol-Aziz, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 May 2018

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Non-Performing Loans Securitisations (13 May 2020)
https://www.dbrsmorningstar.com/research/360970/rating-european-non-performing-loans-securitisations
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology --- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020)
https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (21 September 2020)
https://www.dbrsmorningstar.com/research/366958/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda
-- European CMBS Rating and Surveillance Methodology (13 December 2019)
https://www.dbrsmorningstar.com/research/354637/european-cmbs-rating-and-surveillance-methodology
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020)
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].