Press Release

DBRS Morningstar Downgrades Ratings on 2Worlds S.r.l., Removes Under Review with Negative Implication status, and Assigns Negative trends

Nonperforming Loans

July 18, 2022

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings of the bonds issued by 2Worlds S.r.l (the Issuer) as follows:

-- Class A notes to CCC (high) (sf) from BB (sf)
-- Class B notes to CC (sf) from CCC (sf)

In addition, DBRS Morningstar also resolved the Under Review with Negative Implications status of the ratings and assigned Negative trends to the Class A and Class B notes.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the notes). The rating of 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 of the Class B notes addresses the ultimate payment of interest and principal. 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 S.p.A. 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. was appointed as the backup servicer for the transaction. As of March 2022, the portfolio’s GBV totalled EUR 757 million.

RATING RATIONALE
The downgrades follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 May 2022, 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.
-- The Servicer’s updated business plan as of December 2021, which was received in June 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).
-- Performance ratios and underperformance events: as per the January 2022 payment report, the cumulative net collection ratio is 88.0% and the NPV 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, and covering against 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 balance and was 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. As of the January 2022 payment date, the balance of the Class A notes had amortised by approximately 44.4% since issuance and the current aggregated transaction balance is EUR 199.5 million.

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.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 67.8 million at the BBB (low) (sf) scenario and EUR 85.5 million at the B (low) (sf) scenario for the same period.

Pursuant to the requirements set out in the receivable servicing agreement, in June 2022, the Servicer provided DBRS Morningstar with a revised portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 180.9 million as of December 2021, results in a total of EUR 361.6 million, which is 19.0% lower compared with the EUR 446.6 million estimated in the initial business plan. Excluding actual collections, the Servicer’s expected future collections from January 2022 account for EUR 180.7 million. The updated DBRS Morningstar CCC (high) (sf) rating stress assumes a haircut of 2.7% to the Servicer’s updated business plan, considering future expected collections from January 2022. Considering senior costs and interest due on the notes, the full repayment of the Class A principal is increasingly unlikely.

The final maturity of the transaction is in January 2037.

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 29 June 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/399022/baseline-macroeconomic-scenarios-for-rated-sovereigns-june-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..

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

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, Cerved, and Banca Finint, which comprise, in addition to the information received at issuance, the investor report as of January 2022; the semiannual Servicer report as of December 2021; the quarterly Servicer report as of March 2022; the monthly Servicer reports as of April and May 2022; the monthly loan-by-loan report as of March 2022; and the updated business plan received in June 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 20 May 2022, when DBRS Morningstar maintained the Under Review with Negative Implications status on the BB (sf) and CCC (sf) ratings of the Class A and Class B notes, respectively.

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 downgrade of the Class A notes below 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 A notes below CCC (sf)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class B notes below CC (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 CC (sf)

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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: 25 June 2018

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: https://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: 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].

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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