DBRS Morningstar Confirms Ratings on POP NPLs 2020 S.r.l., Removes from Under Review with Positive Implications Status, and Assigns Positive Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Class A and Class B Notes issued by POP NPLs 2020 S.r.l. (the Issuer) at BBB (sf) and CCC (sf), respectively, and assigned Positive trends.

At the same time, DBRS Morningstar removed the Under Review with Positive Implications status from the notes, which was assigned on 15 March 2022.

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 the legal final maturity date. The rating on the Class B Notes addresses the ultimate payment of principal and interest. DBRS Morningstar does not rate the Class J Notes.

At issuance, the Notes were backed by a EUR 919.9 million portfolio by gross book value of Italian secured and unsecured nonperforming loans originated and sold to the Issuer by 15 Italian banks (the Sellers).

The receivables are serviced by Fire S.p.A. (Fire) and Special Gardant S.p.A. (Gardant; together with Fire, the Special Servicers), Master Gardant S.p.A. (Master Gardant) acts as the master servicer while Banca Finanziaria Internazionale S.p.A. (Banca Finint) has been appointed as backup servicer.

RATING RATIONALE
The confirmations follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 March 2022, focusing on: (1) a comparison between actual collections and the Servicers’ 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.
-- The Servicers’ updated business plan as of December 2021, which was received in April 2022, and the comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition as of March 2022 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 net collection ratio or the net present value cumulative profitability ratio are lower than 90%. These triggers were not breached on the May 2022 interest payment date, with the actual figures at 173.3% and 118.4%, respectively, according to the Servicers.
-- 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 fees. The cash reserve target amount is equal to 4% of the Class A Notes principal outstanding balance and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from May 2022, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 174.9 million, EUR 25.0 million, and EUR 10.0 million, respectively. As of the May 2022 payment date, the balance of the Class A Notes had amortised by approximately 27.6% since issuance and the current aggregated transaction balance was EUR 209.9 million.

As of March 2022, the transaction was performing above the Servicers’ business plan expectations. The actual cumulative gross collections equalled EUR 80.8 million whereas the Servicers’ initial business plan estimated cumulative gross collections of EUR 46.3 million for the same period. Therefore, as of March 2022, the transaction was overperforming by EUR 34.5 million (74.5%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 37.9 million at the BBB (sf) stressed scenario for the same period and EUR 41.2 million at the CCC (sf) stressed scenario. Therefore, as of March 2022, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in April 2022, the Servicers provided DBRS Morningstar with a revised portfolio business plan combined with the actual cumulative collections as of December 2021. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 67.7 million as of December 2021, results in a total of EUR 385.5 million, which is 2.8% lower than the total gross disposition proceeds of EUR 396.8 million estimated in the initial business plan. Excluding actual collections, the Servicers’ expected future collections from April 2022 account for EUR 309.0 million. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 24.8% to the Servicers’ updated business plan, considering future expected collections from April 2022. In DBRS Morningstar’s CCC (sf) scenario, DBRS Morningstar only adjusted the updated Servicers’ forecast in terms of actual collections to date and timing of future expected collections.

Considering the faster than expected collections and the high profitability ratio registered since issuance as well as the increased subordination, the rated bonds now pass higher rating stresses in the cash flow analysis. However, considering the early stage of the transaction DBRS Morningstar does not yet deem this performance trend to be sustainable in the medium to long term and confirmed the current rating assigned to the Class A Notes. However, considering the current overperformance and the profitability level of the transaction, a positive rating trend was assigned to the notes.

The final maturity date of the transaction is in November 2045.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in commercial real estate prices for certain property types.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. 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/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings..

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

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. 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, Master Gardant and Banca Finint, which comprise, in addition to the information received at issuance, the investor report as of May 2022; the semiannual servicer report as of March 2022; and the updated business plan received in April 2022.

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 15 March 2022, when DBRS Morningstar placed Under Review with Positive Implications its ratings on the Class A Notes and Class B Notes.

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 with 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 confirmation of the Class A Notes at BBB (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)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class B Notes at CCC (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 below CCC (sf).

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: 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: 23 December 2020

DBRS Ratings GmbH
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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: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Nonperforming Loans Securitisations (6 May 2022), https://www.dbrsmorningstar.com/research/396256/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 (19 May 2022),
https://www.dbrsmorningstar.com/research/397033/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 (28 March 2022), https://www.dbrsmorningstar.com/research/394309/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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].