DBRS Ratings GmbH (DBRS Morningstar) placed its BB (sf) and CCC (sf) ratings on the Class A and Class B notes, respectively, issued by 2Worlds S.r.l. (the Issuer) Under Review with Negative Implications.
The transaction represents the issuance of Class A, Class B, 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 on or before its final maturity date of January 2037. The rating on the Class B notes addresses the ultimate payment of interest and principal on or before the legal final maturity date. DBRS Morningstar does not rate the Class J notes.
At issuance, the Notes were backed by a EUR 1.0 billion portfolio by gross book value (GBV) consisting of secured and unsecured nonperforming loans (NPLs) originated by Banco di Desio e della Brianza SpA and Banca Popolare di Spoleto S.p.A. The majority of loans in the portfolio defaulted between 2014 and 2017 and are in various stages of resolution.
The receivables are serviced by Cerved Credit Management S.p.A. (Cerved or the special servicer) while Cerved Master Services S.p.A. operates as the master servicer and Banca Finanziaria Internazionale S.p.A. (Banca Finint) was appointed as the backup servicer for the transaction. As of December 2021, the portfolio’s GBV totalled EUR 771.6 million.
The Under Review with Negative Implications follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 December 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 December 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).
-- Performance ratios and underperformance events: as per the January 2022 payment report, the cumulative net collection ratio is 88.0% and the net present value cumulative profitability ratio is 114.6%. The 85% subordination event trigger is set at a lower threshold compared with other Italian NPL transactions.
-- 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 4.05% of the Class A and Class B notes´ principal outstanding and is fully funded as of the January 2022 payment date.
TRANSACTION AND PERFORMANCE
According to the latest investor report from January 2022, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 160.3 million, EUR 30.2 million, and EUR 9.0 million, respectively. The balance of the Class A notes has amortised 44.4% since issuance.
As of December 2021, the transaction was performing below the servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 180.9 million whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 217.3 million for the same period. Therefore, as of December 2021, the transaction was underperforming by EUR 36.4 million (-16.7%) compared with the initial business plan expectations.
In the February 2021 annual review, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 163.1 million in the BB (sf) stress scenario and EUR 167.9 million in the CCC (sf) stress scenario. Therefore, as of December 2021, the transaction was performing above DBRS Morningstar’s BB (sf) and CCC (sf) stressed expectations at the February 2021 annual review.
In April 2021, DBRS Morningstar received a revised business plan prepared by the special servicer as of December 2020 (the December 2020 business plan). The December 2020 updated business plan displays a 16.9% decrease in gross collections compared with the servicer’s initial expectations and an additional 10.0% decrease compared with the updated business plan delivered in April 2020. Pursuant to the requirements set out in the servicing agreement, the fourth updated business plan for the transaction is expected to be released in February 2022. The servicer has been underperforming its December 2020 updated business plan over the past two semesters.
The placement of the ratings Under Review with Negative Implications status is based on (1) the worsening servicer forecast considering the December 2020 updated business plan and (2) the current underperformance of the transaction compared with the December 2020 updated business plan. During the Under Review period, DBRS Morningstar will assess the expected updated business plan due in February 2022 and the changes from previous expectations in detail, which may result in changes to its stressed assumptions.
The final maturity date of the transaction is in January 2037.
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 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.
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.
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, Cerved, and Banca Finint which comprise, in addition to the information received at issuance, the payment report as of January 2022; the semiannual servicer report as of December 2021; and the monthly loan-by-loan report as of December 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 4 February 2021, when DBRS Morningstar downgraded the ratings on the Class A and Class B notes to BB (sf) and CCC (sf) from BBB (low) (sf) and B (low) (sf), respectively, with Negative trends and resolved the Under Review with Negative Implications status.
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.
These ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. Sensitivity analysis is not applicable.
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, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 June 2018
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: http://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/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/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: http://www.dbrsmorningstar.com/research/278375
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.