DBRS Morningstar Assigns A (low) (sf) Rating with a Stable Trend to Penelope SPV S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned an A (low) (sf) rating with a Stable trend to the Class A Notes restructured by Penelope SPV S.r.l. (the Issuer) with a current balance of EUR 983,554,764.88.

DBRS Morningstar does not rate the Class B Notes or Class J Notes (together with Class A Notes, the Notes) also restructured in the context of this transaction.

The Notes were initially issued by the Issuer on 3 December 2018 and were restructured on 29 December 2021 (the Closing Date). DBRS Morningstar assigned a rating to the Class A Notes in the context of the restructuring of the Notes. The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in March 2041.

The Class A Notes are backed by a portfolio of Italian secured and unsecured nonperforming loans (the Portfolio) originated by Intesa Sanpaolo SpA (Intesa). As of 31 August 2020, the Portfolio represented EUR 9.72 billion by gross book value (GBV).

Intrum Italy S.p.A. (Intrum or the Servicer) services the Portfolio while Banca Finanziaria Internazionale S.p.A. acts as the master servicer. No back-up servicer has been appointed for the transaction.

As of 31 August 2020, the Portfolio mainly comprised secured borrowers representing 75.1% of the GBV, 99.2% by GBV of which benefitted from at least a first-ranking lien mortgage, with unsecured borrowers representing the remaining 24.9% of the GBV. In terms of GBV, the Portfolio mainly included corporate borrowers (75.1% by GBV); however, in terms of the number of borrowers, the majority were individuals (78.3%), and the properties securing the loans in the Portfolio were mainly residential (56.4% by updated real estate value).

At the Closing Date, the transaction included a cash reserve equal to EUR 39.3 million with the target amount on each interest payment date (IPD) sized at 4.0% of the principal outstanding on the Class A Notes. The transaction also included a recovery expenses reserve sized at EUR 2.0 million and a general expenses account sized at EUR 0.2 million at the Closing Date. All the reserves were fully funded with rollover from the existing reserves prior to the restructuring (for an amount equal to EUR 8.0 million), plus additional proceeds from a limited recourse loan that Intesa granted to the Issuer (for an amount equal to EUR 33.6 million). On each IPD, the reserves will be part of the available funds and replenished according to the priority of payments.

Interest on the Class B Notes, which represents mezzanine debt, will be paid ahead of the principal on the Class A Notes unless certain performance-related triggers (i.e., a present value cumulative profitability ratio of less than 90%, or a cumulative collection ratio of less 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 Servicer, the availability of liquidity to fund interest shortfalls and special-purpose vehicle expenses, and the transaction’s legal and structural features. DBRS Morningstar’s A (low) (sf) rating stress scenario assumes a haircut of approximately 34.5% to the Servicer’s latest business plan for the Portfolio with a cut-off date of 31 October 2021.

The final maturity date of the transaction is the IPD falling in March 2041.

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 Servicer to perform collections and resolution activities. DBRS Morningstar estimated the expected collections from the loans based on the proposed business plan 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 currently rates BBB (high) and 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”.
-- The consistency of the hedging documents with DBRS Morningstar’s “Derivative 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. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in residential property prices and extended foreclosure timings, 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. 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 on 2 November 2020 (repossession data for secured loans sold between 2010 and 2020) and unsecured historical performance data (historical yearly recovery curves from static pool of unsecured loans over a period of 16 years), a loan tape provided on 21 October 2020 with a reference date of 31 August 2020, and a business plan provided on 3 December 2021 with a cut-off date of 31 October 2021, all provided by Intrum.

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

DBRS Morningstar was supplied with third-party assessments. DBRS Morningstar applied an additional haircut to the collections’ vectors following the results of the third-party assessments.

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 financial instrument issued on 3 December 2018 and restructured on 29 December 2021. 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 1,639.5 million at the A (low) (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 confirmation of the Class A Notes to A (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes to A (low) (sf).

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: Alberto Cruces de la Rosa, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 29 December 2021

DBRS Ratings GmbH
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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 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 (17 December 2021),
https://www.dbrsmorningstar.com/research/389947/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].