DBRS Morningstar Downgrades Class A Notes of BCC NPLs 2018-2 S.r.l., Confirms Class B Notes, Assigns Negative Trends, and Removes from Under Review with Negative Implications

DBRS Ratings Limited (DBRS Morningstar) downgraded its rating of the Class A Notes issued by BCC NPLs 2018-2 S.r.l. (the Issuer) to BB (high) (sf) from BBB (low) (sf), confirmed the CCC (sf) rating of the Class B Notes, and assigned a Negative trend to the ratings. This concludes the review initiated on 8 May 2020 and maintained on 6 August 2020 where DBRS Morningstar placed the ratings Under Review with Negative Implications.

The transaction involved the issuance of Class A, Class B, and Class J notes (collectively, the Notes). The rating assigned to the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before its final maturity date in July 2042. The rating assigned to the Class B Notes addresses the ultimate payment of both interest and principal. DBRS Morningstar does not rate the Class J Notes.

At issuance, the Notes were backed by a EUR 2 billion portfolio by gross book value consisting of a mixed pool of Italian nonperforming residential mortgage loans, commercial mortgage loans and unsecured loans originated by a pool of 73 Italian banks. The receivables are serviced by Italfondiario S.p.A. (Italfondiario or the servicer).

RATING RATIONALE
The rating actions follow a review of the transaction and are based on the following analytical considerations:
-- The transaction’s performance: assessment of portfolio recoveries as of 30 September 2020, focusing on: (1) a comparison between actual collections and the servicers’ initial business plan forecasts; (2) the collection performance observed over the past nine 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.
-- DBRS Morningstar has not received an updated business plan since issuance.
-- Portfolio characteristics: loan pool composition as of 30 September 2020 and evolution of its core features since issuance.
-- The transaction’s 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, the cumulative collection ratio is 75.2% and the net present value cumulative profitability ratio is 154.1%. The 80% trigger has been breached for the cumulative collection ratio, but not for the net present value cumulative profitability ratio.
-- 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, which has a target amount equal to 3% of the Class A Notes principal outstanding balance, 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 443.6 million, EUR 60.1 million, and EUR 20.0 million, respectively. The balance of the Class A Notes has amortised by approximately 7.2% since issuance.

As of 30 June 2020, the transaction was underperforming by 23% compared with the servicers’ initial expectations. The actual cumulative gross collections equaled EUR 71.3 million in June 2020, whereas the servicers’ initial business plans estimated cumulative gross collections of EUR 93.1 million for the same period. At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 74.8 million for the same period in the BBB (low) (sf) stressed scenario. Therefore, as of June 2020, the transaction is performing below DBRS Morningstar’s initial stressed expectations by 4.7%.

DBRS Morningstar has not received a revised business plan since issuance.

Without including actual prior collections, the servicer’s expected future collections from July 2020 now account for EUR 737.5 million. The updated DBRS Morningstar BB (high) (sf) rating stress assumes a haircut of 17.2% to the servicers’ initial business plans adjusted for actual collections, considering future expected collections.

In its rating review, DBRS Morningstar used the Italian residential market value decline (MVD) rates outlined in the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” methodology published on 21 September 2020. DBRS Morningstar notes that, if finalised, the currently proposed Italian residential MVDs in the “European RMBS Insight: Italian Addendum - Request for Comment” methodology published on 2 November 2020 are not likely to lead to further rating actions. For details, see the following proposed methodology: https://www.dbrsmorningstar.com/research/369177/european-rmbs-insight-italian-addendum-request-for-comment.

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 continue to 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 636.6 million (a discount of 17.2% from the initial servicer business plan adjusted for actual collections of EUR 768.9 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 ratings 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 these ratings include reports from Italfondiario and Securitisation Services, including the detailed quarterly servicer report as of 30 September 2020; and the investor report as at 31 July 2020 (i.e., the latest IPD).

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 these ratings 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 ratings Under Review with Negative Implications.

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 636.6 million at the BB (high) (sf) stress level for the remaining transaction term; 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 B (high) (sf) and confirmation of the Class B Notes at CCC (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 B(sf) and confirmation of the Class B Notes at CCC (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 CCC (sf) and confirmation of the Class B Notes at CCC (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: Manon Naegels, Senior Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 22 January 2019

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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].