Press Release

DBRS Morningstar Confirms BBB (low) (sf) Rating on Class A Notes Issued by Juno 2 S.r.l.; Maintains Stable Trend

Nonperforming Loans

March 22, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (low) (sf) rating on the Class A notes issued by Juno 2 S.r.l. (the Issuer). The trend on the rating remains Stable.

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 repayment of principal. DBRS Morningstar does not rate the Class B or the Class J notes.

At issuance, the notes were backed by a EUR 1.15 billion by gross book value portfolio consisting of unsecured and secured Italian nonperforming loans (NPLs) originated by Banca Nazionale del Lavoro S.p.A. (the originator).

The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios; the servicer) while Banca Finint S.p.A (Banca Finint; formerly, Securitisation Services S.p.A.) operates as the backup servicer.

RATING RATIONALE
The rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: Assessment of portfolio recoveries as of 31 December 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; and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- The servicer’s updated business plan as of December 2022, received in February 2023, and the comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of December 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 full 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 gross collection ratio or the net present value cumulative profitability ratio is lower than 85%. These triggers were not breached on the January 2023 interest payment date, with the actual figures at 103.1% and 112.1%, respectively, according to the servicer.
-- Liquidity support: The transaction benefits from an amortising cash reserve, which provides liquidity to the structure and covers 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 January 2023, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 78.7 million, EUR 48.0 million, and EUR 12.7 million, respectively. As of the January 2023 payment date, the balance of the Class A notes has amortised by approximately 61.4% since issuance and the current aggregated transaction balance is EUR 139.4 million.

As of December 2022, the transaction was performing above the servicer’s initial business plan expectations. The actual cumulative gross collections equalled EUR 182.7 million whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 177.2 million for the same period. Therefore, as of December 2022, the transaction was overperforming by EUR 5.5 million (3.1%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections as of December 2022 of EUR 117.0 million in the BBB (low) (sf) stressed scenario. Therefore, the transaction was performing above DBRS Morningstar’s initial stressed expectations by the end of December 2022.

Pursuant to the requirements set out in the receivable servicing agreement, in February 2023, the servicer delivered an updated portfolio business plan as of December 2022.

The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 182.7 million as of December 2022, results in a total of EUR 327.3 million, which is 5.8% lower than the total gross disposition proceeds of EUR 347.5 million estimated in the initial business plan. Considering that the actual collections have been performing above the servicer’s initial expectations by the end of 2022, expectations of collections starting from January 2023 have reduced by 15.1% compared with the initial business plan expectations.

Excluding the actual collections, the servicer’s expected future collections January 2023 onwards are estimated at EUR 144.6 million. The updated DBRS Morningstar BBB (low) (sf) rating stress assumes a haircut of 25.7% to the servicer’s updated business plan, considering the future expected collections.

The final maturity date of the transaction is in July 2039.

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 21 December 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/407678/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-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/402357 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” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/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: 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 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, Prelios, and Banca Finint, which comprise, in addition to the information received at issuance, the updated business plan from the servicer received in February 2023, the investor report as of January 2023, the semiannual servicer report as of December 2022, and the quarterly loan-by-loan report as of December 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 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 24 February 2022, when DBRS Morningstar confirmed its BBB (low) (sf) rating on the Class A notes and changed the trend on the rating to Stable from Negative.

The lead analyst responsibilities for this transaction have been transferred to William Taliento.

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 to the parameters used to confirm the rating (the base case):

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 290.2 million at the BBB (low) (sf) stress 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 downgrade of the Class A notes to BB (low) (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 CCC (sf)

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: William Taliento, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 February 2019

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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