DBRS Morningstar Assigns Rating of BBB (sf) with a Negative Trend to Buonconsiglio 3 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned a BBB (sf) rating with a Negative trend to the EUR 154,000,000 Class A notes issued by Buonconsiglio 3 S.r.l. (the Issuer).

As of the 31 July 2020 cut-off date, the notes were backed by a EUR 679.05 million portfolio (the Portfolio) by gross book value (GBV) of Italian secured and unsecured nonperforming loans originated by Cassa Centrale Banca Credito Cooperativo Italiano S.p.A., 31 cooperative banks belonging to Cassa Centrale group and six other Italian private banks (collectively the 38 of them, the Originators or the Sellers). Guber Banca S.p.A. (Guber or the Special Servicer) has been appointed as the servicer of the receivables and Zenith Service S.p.A (Zenith or the Master Servicer) has been appointed to carry out the master servicing activities.

The Portfolio mostly comprises secured borrowers, representing approximately 76.0% of the GBV, of which approximately 94.9% benefit from a first-ranking lien mortgage, and unsecured borrowers represent the remaining 24.0% of the GBV. The nonperforming loans within the Portfolio are mainly held by corporate borrowers (73.5% by GBV), and the properties backing the secured loans are mainly residential properties (33.8% by property value). The properties are mainly concentrated in the Central and Northern regions of Italy with Veneto, at 24.3% of the total property value, being the main region.

The transaction benefits from approximately EUR 1.9 million of collections recovered between 31 July 2020 and October, which will be distributed in accordance with the priority of payments on the first interest payment date in July 2021.

The transaction includes a cash reserve, sized at 4.0% of the principal outstanding balance of the Class A notes, and a recovery expenses cash reserve of EUR 400,000, both fully funded with part of the proceeds of a limited recourse loan granted to the Issuer by the Sellers for an amount equal to EUR 6.65 million. The limited recourse loan also funds the EUR 90,000 retention amount. On each interest payment date, the cash reserve amount and the recovery expenses cash reserve will be part of the available funds and will be replenished according to the priority of payments up to their respective target amounts.

Interest on the Class B notes, which represent the mezzanine debt, will be mostly paid ahead of the principal repayment of the Class A notes unless certain performance-related triggers are breached.

The rating addresses the timely payment of interest and the ultimate repayment of principal on the Class A notes.

DBRS Morningstar based its rating on an analysis of the projected recoveries of the underlying collateral, the historical performance and expertise of the Special Servicer, the availability of liquidity to fund interest shortfalls and expenses, and the transaction’s legal and structural features. DBRS Morningstar’s BBB (sf) rating stress assumes a haircut of approximately 21.3% to the Servicer’s recovery expectations.

The final maturity date of the transaction is January 2041.

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

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The Coronavirus Disease (COVID-19) 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 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 residential property prices.

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020-22 period in selected economies. These scenarios were last updated on 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Non-Performing Loans Securitisations” (13 May 2020).

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

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://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 historical performance data provided by the Special Servicer on 12 October 2020 (repossession data for secured loans sold between 2001 and 2020, and historical yearly recovery curves from static pool of unsecured loans over a period of 15 years), and business plan and loan tape first shared on 24 September 2020 (with last update shared on 25 November 2020), by the Special Servicer and the Sellers, respectively.

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

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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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 confirm the rating (the Base Case):

-- Recovery Rates Used: Cumulative Base Case recovery amount of approximately EUR 192.5 million at the BBB (sf) stress level, a 5% and 10% decrease in the base case recovery rate.
-- 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 (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 (low) (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Alberto Cruces de la Rosa, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 14 December 2020

DBRS Ratings GmbH, Sucursal en España
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Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of this transaction can be found at: https://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.
-- 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 (19 November 2020), https://www.dbrsmorningstar.com/research/370270/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: https://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].