DBRS Morningstar Assigns Rating of BBB (sf) with Negative Trend to Ortles 21 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned a BBB (sf) rating with a Negative trend to the EUR 340,000,000 Class A Notes issued by Ortles 21 S.r.l. (the Issuer).

The rating addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date of the Class A Notes.

As of the 30 April 2021 and 31 August 2021 selection dates, the Class A Notes were backed by a EUR 1.83 billion portfolio by gross book value (GBV) of Italian secured and unsecured nonperforming loans originated by Crédit Agricole Italia S.p.A., Crédit Agricole FriulAdria S.p.A. and Credito Valtellinese S.p.A. (together the Sellers or the Originators). doValue S.p.A. (doValue) and Cerved Credit Management S.p.A. (Cerved and, jointly, the Special Servicers) service the receivables, while Italfondiario S.p.A (Italfondiario or the Master Servicer) acts as the master servicer for the transaction. Zenith Service S.p.A (Zenith or the Backup Servicer) has been appointed to carry out the servicing activities in case of termination of the Special Servicers.

The securitised portfolio is composed of secured loans, representing approximately 49.0% of the GBV, of which approximately 91.7% by GBV benefits from a first-ranking lien mortgage, with unsecured loans representing the remaining 51.0% of the GBV. At the selection dates, the portfolio was mainly represented by corporate borrowers (74.7% by GBV), and the properties securing the loans in the portfolio mainly comprised residential properties (44.0% by first-ranking lien updated real estate value). The secured collateral was highly concentrated in northern regions of Italy (66.9% by first-ranking lien updated real estate value) with Emilia Romagna and Lombardy being the most represented regions (26.0% and 23.4% by first-ranking lien updated real estate value, respectively).

The transaction benefits from approximately EUR 26.8 million of collections recovered between the selection dates and 24 November 2021, which will be distributed in accordance with the priority of payments on the first interest payment date (IPD).

The transaction benefits from a limited recourse loan granted to the Issuer by Crédit Agricole Italia S.p.A. for an amount equal to EUR 17.05 million. The limited recourse loan will be used at closing to fund the EUR 150,000 retention amount, the EUR 300,000 recovery expenses cash reserve and the initial cash reserve amount, equal to EUR 16.6 million. The target amount of the cash reserve on each IPD is sized at 4.0% of the principal outstanding of the Class A Notes. On each IPD, the cash reserve amount and the recovery expenses cash reserve will be part of the available funds for the waterfall and will be replenished in the waterfall up to the respective target amount.

The transaction includes flexibility to implement a Real Estate Owned Company (ReoCo) structure. ReoCos are real estate companies that are usually set up and held by junior and mezzanine investors of a transaction to maximise recoveries by (1) participating at auction to increase competitive tension between the parties interested in purchasing the real estate properties; and (2) acquiring and actively managing the assets to enhance their value. In connection with the ReoCo structure, the transaction includes a ReoCo cash reserve equal to EUR 3.0 million, established on the issue date using part of the initial collections accrued from the selection dates, and will provide the ReoCo with the liquidity required in order to perform its activities. The implementation of the ReoCo structure will be subject to the execution of the ReoCo transaction documents and no later than the activation final date, the day before the calculation date falling on April 2024. Should the ReoCo structure not be activated until such date, the ReoCo cash reserve will be part of the issuer available funds. The rating assigned to the Class A Notes at closing reflects DBRS Morningstar's analysis of the features of the proposed ReoCo structure and a review of the framework agreement and relevant legal documents. The potential non-implementation of the ReoCo structure has no impact on the Class A Notes at closing.

Interest on the Class B Notes, which represent mezzanine debt, will be paid ahead of the principal of the Class A Notes unless certain performance-related triggers (present value cumulative profitability ratio <90%; or cumulative collection ratio <90%; or interest shortfall on the Class A Notes) are breached.

DBRS Morningstar based its rating on an analysis of the projected recoveries of the underlying collateral, the historical performance and expertise of the Special Servicers, the availability of liquidity to fund interest shortfalls and special-purpose vehicle expenses, and the transaction’s legal and structural features. DBRS Morningstar’s BBB (sf) rating stress scenario assumes a haircut of approximately 22.5% to the Special Servicers’ initial business plan for the portfolio.

The final maturity date of the transaction is the 31 October 2045.

RATING RATIONALE
DBRS Morningstar based its rating on a review of the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- The credit quality of the loan portfolio and the ability of the Special Servicers to perform collections and resolution activities. DBRS Morningstar estimated the expected collections from the loans based on the proposed business plans and used them as an input into its cash flow analysis.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents.
-- The sovereign rating of the Republic of Italy, which DBRS Morningstar rates BBB (high), R-1 (low) with Stable trends as of the date of this press release.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s "Legal Criteria for European Structured Finance Transactions".

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 rating is 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 9 December 2021. The 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/381146 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: “Rating European Nonperforming Loans Securitisations” (19 May 2021).

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: 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/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 secured historical performance data provided by doValue S.p.A. on 12 October 2021 (repossession data for secured loans sold between 2000 and 2021) and Cerved Credit Management S.p.A. on 21 October 2021 (repossession data for secured loans sold between 2008 and 2021), unsecured historical performance data provided by doValue S.p.A. on 12 October 2021 (historical yearly recovery curves from static pool of unsecured loans over a period of 21 years) and Cerved Credit Management S.p.A. on 15 October 2021 (historical yearly recovery curves from static pool of unsecured loans over a period of 15 years), and a business plan and loan tape shared on 19 November 2021 by the Special Servicers 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 440.7 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 (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 B (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: Sebastiano Romano, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 17 December 2021

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.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (29 October 2021),
https://www.dbrsmorningstar.com/research/ 387042/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- European RMBS Insight Methodology (3 June 2021), https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (10 December 2021), https://www.dbrsmorningstar.com/research/389473/european-rmbs-insight-italian-addendum.
-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/ 384512/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: 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].