DBRS Morningstar Confirms Rating on Class A Notes, Changes Trend to Positive from Stable, and Upgrades Ratings on Class B Notes Issued by Marathon SPV S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Marathon SPV S.r.l. (the Issuer):

-- Class A Notes confirmed at BBB (sf)
-- Class B Notes upgraded to BB (low) (sf) from B (high) (sf)

DBRS Morningstar also changed the trend on the Class A Notes to Positive from Stable and maintained its Stable trend on the Class B Notes.

The transaction included the issuance of Class A Notes, Class B Notes, and Class J Notes (collectively, the Notes). The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal at final maturity, while the rating on the Class B Notes addresses the ultimate payment of both interest and principal at final maturity. DBRS Morningstar does not rate the Class J Notes.

As of the 30 September 2019 cut-off date, the Notes were backed by a EUR 5.03 billion by gross book value (GBV) portfolio consisting of Italian unsecured nonperforming loans (NPLs). According to the latest information provided by the special servicer in October 2021, the current GBV of the portfolio is EUR 4.8 billion and about 18,4% of the loans by GBV are linked to promissory notes (cambiali).

Hoist Italia S.r.l. (Hoist, or the Special Servicer) services the receivables. Banca Finanziaria Internazionale S.p.A. (Finint, or the Master Servicer) acts as the master servicer. A backup servicer, Centotrenta Servicing S.p.A., was appointed.

RATING RATIONALE
The confirmation and upgrade follow an annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 September 2021, focusing on: (1) a comparison between actual collections and the Special Servicer’s initial business plan forecast; (2) the collection performance observed over the past 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.
-- Portfolio characteristics: loan pool composition as of October 2021 and the evolution of its core features since issuance.
-- Transaction liquidating structure: until a first-level subordination event occurs, the Class A amortisation percentage is set at 90% of the issuer available funds, allowing some leakage of collections to junior items in the pre-acceleration order of priority of payments. The first-level subordination event occurs when the cumulative collection ratio is less than 95%, at which point, the amortisation of the notes is fully sequential, and the Class B Notes begin to amortise following the full repayment of the Class A Notes. Additionally, interest payments on the Class B Notes, which represent mezzanine debt, are made prior to the principal of the Class A Notes until the second-level subordination event occurs, which is triggered when the cumulative collection ratio is less than 80%. These triggers were not breached on the October 2021 interest payment date, when the actual ratio was 103.18%.
-- Liquidity: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A Notes and senior fees. The cash reserve target amount is equal to 3.0% of the Class A Notes' outstanding principal and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest payments report from October 2021, the outstanding principal amounts of the Class A Notes, Class B Notes, and Class J Notes were EUR 136.5 million, EUR 16.5 million, and EUR 16.9 million, respectively. Since issuance, the balance of the Class A Notes and Class B Notes has amortised by 52.4% and 51.1%, respectively. The current aggregated transaction balance is EUR 169.8 million.

As of September 2021, the transaction was performing above the Special Servicer’s initial business plan expectations. The actual cumulative gross collections equalled EUR 216.3 million whereas the Special Servicer’s initial business plan estimated cumulative gross collections of EUR 210.2 million for the same period. Therefore, as of September 2021, the transaction was overperforming by EUR 6.1 million (+2.9%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 155.7 million in the BBB (sf) stressed scenario, and EUR 174.9 million in the B (high) (sf) stressed scenario. Therefore, as of September 2021, the transaction was performing above DBRS Morningstar’s stressed expectations.

In November 2021, the Special Servicer delivered an updated portfolio business plan. The updated portfolio business plan provides for total gross disposition proceeds (GDP) of EUR 573.3 million, which is 2.2% higher than the total GDP of EUR 560.9 million estimated in the initial business plan. The updated DBRS Morningstar rating stress assumes a haircut of 48.8% at BBB (sf) and 41.0% at BB (low) (sf) stress scenarios to the Special Servicer’s updated business plan, considering future expected collections from October 2021.

Considering the current performance and the improved credit enhancement of the transaction, DBRS Morningstar changed the trend assigned to the Class A Notes to Positive from Stable and upgraded the rating on the Class B Notes to BB (low) (sf) from B (high) (sf). DBRS Morningstar will continue to monitor whether the current positive performance is sustainable in the medium to long term.

The final maturity of the transaction is in October 2034.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that negative effects may continue in the coming months for many nonperforming loan (NPL) transactions. In particular, the deterioration of macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collaterals. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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/384146 and https://www.dbrsmorningstar.com/research/360393.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. The DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include the Issuer, Hoist, and Banca Finint S.p.A, which comprise, in addition to the information received at issuance, the updated business plan delivered in November 2021; the payment and investor report as of October 2021; the quarterly servicer report as of September 2021; and the loan level data as of October 2021.

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

At the time of the initial ratings, 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 4 December 2020 when DBRS Morningstar confirmed the ratings on the Class A Notes and Class B Notes at BBB (sf) and B (high) (sf), respectively, and changed the trends to Stable from Negative.

The lead analyst responsibilities for this transaction have been transferred to Clarice Baiocchi.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the ratings (the base case):

-- 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 (high) (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 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 B Notes at B (high) (sf)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class B 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 December 2019

DBRS Ratings GmbH
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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 Nonperforming Loans Securitisations (19 May 2021), https://www.dbrsmorningstar.com/research/378681/rating-european-nonperforming-loans-securitisations.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (29 October 2021), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].