DBRS Morningstar Confirms Rating on Penelope SPV S.r.l., Changes Trend to Negative from Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (low) (sf) rating on the Class A notes issued by Penelope SPV S.r.l. (the Issuer) and changed the trend on the rating to Negative from Stable.

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 and did not rate the Class B or the Class J notes. The rating on the Class A notes addresses the timely payment of interest and the ultimately repayment of principal on or before the legal final maturity date in March 2041.

At issuance, the Class A notes were backed by a portfolio of Italian secured and unsecured nonperforming loans (the portfolio) originated by Intesa Sanpaolo (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 was 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).

RATING RATIONALE
The confirmation follows a review of the transaction and is based on the following analytical considerations:
--Transaction performance: An assessment of the portfolio recoveries as of November 2022, with a focus on: (1) a comparison between actual gross collections and the servicer’s initial business plan forecast, (2) recovery performance observed over the past months; (3) a comparison between current performance and DBRS Morningstar’s expectations.
-- Updated business plan: The updated business plan submitted by the special servicer on 30 June 2022 has not been approved yet by the steering committee, therefore DBRS Morningstar continues to base its analysis on the initial business plan.
-- Portfolio characteristics: The loan pool composition as of 30 November 2022 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority, which 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 begin to amortise following the full repayment of the Class B notes). A portion of the interests on the Class B notes, which represent mezzanine debt, are paid ahead of the principal on the Class A notes unless certain performance-related triggers are breached (i.e., a present value cumulative profitability ratio of less than 85%, or a cumulative collection ratio of less 90%, or interest shortfall on the Class A notes). The reported CCR of 86.6% as at 30 December 2022 is below the trigger therefore interests on the Class B notes are now subordinated to Class A principal.
-- 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.

According to the latest investor report from December 2022, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 687.5 million, EUR 143.6 million, and EUR 599.6 million, respectively. As of the December 2022 interest payment date, the balance of the Class A notes had amortised by approximately 30.1% since the restructuring and the current aggregated transaction balance was EUR 1,430.7 million.

As of the November 2022 collection date, the transaction was performing below the special servicer’s initial expectations. The actual cumulative gross collections were EUR 399.4 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 469.6 million for the same period. Therefore, as of November 2022, the transaction was underperforming by 14.9% compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative collections of EUR 64.3 million at the A (low) (sf) stressed scenario for the same period. Therefore, as of November 2022, the transaction is performing ahead of DBRS Morningstar’s initial A (low) (sf) stressed expectations.

Pursuant to the requirements set out in the servicing agreement, in June 2022, the special servicer submitted to the monitoring agent an updated business plan, which has not been approved yet by the steering committee. The special servicer’s expected future collections from December 2022 account for EUR 1,935.0 million. The updated DBRS Morningstar A (low) (sf) rating stress assumes a haircut of 31.0% to the special servicers’ initial business plan expectations.

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 in 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” (21 December 2022); https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.

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 surveillance section of 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/401817/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, the special servicer, and Banca Finanziaria Internazionale S.p.A. which comprise, in addition to the information received at issuance, the investor and payments reports as of December 2022; the monthly special servicer report as of November 2022; and the updated data tape as of November 2022.

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

At the time of the initial rating, DBRS Morningstar was supplied with one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its 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.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Jorge del Pino.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: 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 rating (the Base Case):
-- Recovery Rates Used: Cumulative Base Case Recovery amount of approximately EUR 1,426.0 million at the A (low) (sf) 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 at 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 at A (low) (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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jorge del Pino, Assistant Vice President, Credit Ratings
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 29 December 2021

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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 (6 May 2022),
https://www.dbrsmorningstar.com/research/396256/rating-european-nonperforming-loans-securitisations.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (21 December 2022)
https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (28 November 2022),
https://www.dbrsmorningstar.com/research/405779/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- European CMBS Rating and Surveillance Methodology (14 December 2022), https://www.dbrsmorningstar.com/research/407379/european-cmbs-rating-and-surveillance-methodology
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/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 (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/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].