Press Release

DBRS Morningstar Downgrades Rating on Aragorn NPL 2018 S.r.l. Class A Notes; Confirms Rating on Class B Notes and Changes Trend to Negative from Stable

Nonperforming Loans

August 04, 2022

DBRS Ratings GmbH (DBRS Morningstar) downgraded its rating on the Class A notes issued by Aragorn NPL 2018 S.r.l. to CCC (sf) from CCC (high) (sf) with a Negative trend as well as confirmed its rating on the Class B notes at CC (sf) and changed the trend to Negative from Stable.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the Notes) backed by a mixed pool of Italian nonperforming secured and unsecured loans originated by Credito Valtellinese S.p.A. and Credito Siciliano S.p.A. (collectively, the Originators). The rating assigned to the Class A notes addresses the timely payment of interest and the ultimate repayment of principal while the rating assigned to the Class B notes addresses the ultimate payment of both interest and principal. DBRS Morningstar does not rate the Class J notes.

The gross book value (GBV) of the loan pool was approximately EUR 1.671 billion as of the 31 December 2017 cut-off date. The nonperforming loan portfolio is composed of secured commercial and residential borrowers (82.0% of total GBV) and unsecured borrowers (18.0% of total GBV), mostly Italian small and medium-sized enterprises (90.2% of total GBV). Of the GBV, 68% comprised 364 borrowers (of 4,161 total), each with a GBV of more than EUR 1 million. The top 50 borrowers made up 26.8% of the pool GBV at the cut-off date.

The receivables are serviced by Special Gardant S.p.A. and Cerved Credit Management S.p.A. (Cerved) (together, the Special Servicers). Master Gardant S.p.A. acts as the master servicer while Cerved operates as the backup servicer.

RATING RATIONALE
The rating downgrade follows an annual 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 Special 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.
-- Updated business plan: The Special Servicers’ updated business plan as of December 2021, which DBRS Morningstar received in July 2022, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of June 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 collection ratio (CCR) or the present value cumulative profitability ratio (NPV CPR) is lower than 90%. In previous years, there was leakage to the Class B notes interest, despite the poor performance, due to an overstatement of ratios caused by a definition mismatch between the servicing agreement and the terms & conditions of the notes. The reported CCR of 63.35% as at 30 June 2022 is below the trigger and this leakage has stopped. The reported NPV CPR is 105.61%. The updated collections as per the Special Servicers’ updated business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the aggregate outstanding balance of the Class A and Class B notes.
-- 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 5% of the Class A notes’ principal outstanding balance and is currently fully funded.

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 374.9 million, EUR 66.8 million, and EUR 10.0 million, respectively. As of the January 2022 interest payment date, the balance of the Class A notes had amortised by approximately 26.4% since issuance and the current aggregated transaction balance was EUR 451.7 million.

As of June 2022, the transaction was underperforming the Special Servicers’ initial business plan expectations. The actual cumulative gross collections equalled EUR 223.1 million whereas the Special Servicers’ initial business plan estimated cumulative gross collections of EUR 391.7 million for the same period. Therefore, as of June 2022, the transaction was underperforming by EUR 168.5 million (-43.0%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 255.8 million at the BBB (sf) stressed scenario and EUR 334.9 million at the CCC (sf) stressed scenario. Therefore, as of June 2022, the transaction was performing below DBRS Morningstar’s initial BBB (sf) stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in July 2022, the Special 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 194.9 million as of December 2021, resulted in a total of EUR 593.6 million, which is 23.2% lower than the total gross disposition proceeds of EUR 773.0 million estimated in the initial business plan. Excluding actual collections, the Special Servicers’ expected future collections from January 2022 account for EUR 398.7 million. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 14.3% to the Special Servicers’ updated business plan, considering future expected collections from January 2022. In DBRS Morningstar’s CCC (sf) scenario, the Special Servicers’ updated forecast was only adjusted in terms of the actual collections to date and the timing of future expected collections.

The updated collections as per the Special Servicers’ updated business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the total of the Class A and Class B notes. DBRS Morningstar downgraded the Class A notes by one notch to CCC (sf), maintained the Negative trend on the Class A notes and changed the trend to Negative from Stable on the Class B notes as it continues to closely monitor the underperformance observed thus far compared with the Special Servicers’ initial business plan as well as the development of the macroeconomic and real estate scenarios within the current market environment.

The final maturity date of the transaction is in July 2038.

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 Special Servicers, Banca Finanziaria Internazionale S.p.A., and Citibank N.A. which comprise, in addition to the information received at issuance, the investor report as of January 2022; the monthly Special Servicer report as of June 2022; the updated data tape as of June 2022; and the updated business plan received in July 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 5 August 2021, when DBRS Morningstar downgraded its rating on the Class A notes and changed the trend to Negative from Stable as well as confirmed its rating on the 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 rating, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine 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 confirmation 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)

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: David Lautier, Senior Vice President, Global Esoteric Finance
Initial Rating Date: 14 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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