Press Release

DBRS Morningstar Confirms Rating on Buonconsiglio 3 S.r.l., Maintains Negative Trend

Nonperforming Loans

December 13, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A notes issued by Buonconsiglio 3 S.r.l. (the Issuer) at BBB (sf) and maintained a Negative trend.

In this transaction Class A, Class B, and Class J notes (collectively, the Notes) were issued. The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before its final maturity date of January 2041. DBRS Morningstar does not rate the Class B or the Class J notes.

At issuance, the Notes were backed by a EUR 679.05 million portfolio by gross book value consisting of a mixed portfolio 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).

The receivables are serviced by Guber Banca S.p.A. (Guber or the Servicer) while Zenith Service S.p.A (Zenith or the Master Servicer) was appointed to carry out the master servicing activities.

RATING RATIONALE
The rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 June 2021, focusing on: (1) a comparison between actual collections and the Servicer’s initial business plan forecast; (2) the collection performance observed over recent 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 June 2021 and the 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). Additionally, interest payments on the Class B notes become subordinated to principal payments on the Class A notes if the cumulative gross collection ratio or present value cumulative profitability ratio are lower than 90%. These triggers were not breached on the July 2021 interest payment date, with the actual figures being 116.6% and 119.0%, respectively, according to the Servicer.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfall on the Class A notes and senior costs. The cash reserve target amount is equal to 4% of the Class A Notes principal outstanding and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from July 2021, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 151.8 million, EUR 21.0 million, and EUR 4.5 million, respectively. In October 2021, EUR 6.7 million reimbursement of the Limited Recourse Loan not due during the preceding interest payment date, were used to amortise the Class A notes. As of October 2021 extraodinary payment date, the balance of the Class A notes has amortised by approximately 5.7% since issuance. The current aggregated transaction balance is EUR 170.7 million.

As of June 2021, the transaction was performing above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 14.6 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 11.4 million for the same period. Therefore, as of June 2021, the transaction was overperforming by EUR 3.1 million (+27.1%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 8.7 million at the BBB (sf) stressed scenario. Therefore, as of June 2021, the transaction was performing above DBRS Morningstar’s stressed initial expectations.

Excluding actual collections, the Servicer’s expected future collections from July 2021 account for EUR 233.3 million. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 20.5% to the Servicer’s executed business plans, considering future expected collections. Pursuant to the requirements set out in the servicing agreement, the first updated business plan for the transaction is expected to be released in January 2022.

The final maturity date of the transaction is in January 2041.

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. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in residential property prices, but gave partial credit to house price increases from 2023 onward in non-investment-grade scenarios.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update 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 rating 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: http://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. 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 this rating include the Issuer, Guber, and Zenith Service S.p.a. which comprise, in addition to the information received at issuance, the investor report as of July 2021 and the 28 October 2021 extraordinary payment date; the semiannual servicer report as of June 2021; and the monthly servicer report 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 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 14 December 2020, when DBRS Morningstar assigned a BBB (sf) rating with a Negative trend to the Class A notes.

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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the rating (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 (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 CCC (high) (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. 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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Clarice Baiocchi, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 14 December 2020

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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