DBRS Morningstar Assigns Rating of BBB (high) (sf) with Negative Trend to Capella Financing S.à r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of BBB (high) (sf) with a Negative trend to the Class A notes issued by Capella Financing S.à r.l. (the Issuer). DBRS Morningstar did not rate the Class B and Class Z notes also issued in the transaction.

The rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal by the final legal maturity date.

The transaction entails the issuance of Class A, Class B, and Class Z notes (collectively, the notes) backed by a pool of Cypriot nonperforming loans (NPLs) originated by Hellenic Bank Public Company Limited (Hellenic Bank; the seller), Cooperative Asset Management Company Ltd. (formerly Cooperative Central Bank Ltd. and later Cyprus Cooperative Bank Ltd.) and Barclays Bank PLC. The portfolio is serviced by APS Debt Servicing Cyprus Ltd. (now Hellenic Servicing Platform (Hellenic SP or the servicer)). The transaction involves a simultaneous sales process of (1) the disposal of 100% of Hellenic SP and (2) the securitisation of a NPL portfolio with disposal of 95% of mezzanine and junior notes to Oxalis Holdings S.à r.l. (the purchaser). The purchaser is ultimately a fund of Pacific Investment Management Company LLC.

The portfolio mostly consists of loans denominated in euros and secured over residential assets or other real estate properties located in Cyprus.

As of December 2020, the total gross book value of the portfolio was EUR 786.7 million. Most of the portfolio relates to NPLs secured over real estate collaterals located in Cyprus, with a total real estate market valuation (REV) of EUR 803.8 million. The majority of the assets have a first-lien ranking (89.8% by total REV).

By REV, the properties securing the loans in the portfolio are 43.5% residential, 19.7% land, 18.4% mixed-use, and 18.3% commercial. The properties are well spread across Cyprus.

RATING RATIONALE
The rating is based on the following analytical considerations:
-- The transaction’s capital structure and form and sufficiency of the available credit enhancement.
-- The credit quality of the receivables portfolio and the ability of the servicer to perform collections and resolution activities.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A notes according to the terms of the transaction documents.
-- Actual collections: at closing, net collections from the cut-off date amount to EUR 59.6 million and are used to repay Class A notes at closing.
-- Underperformance: On a cumulative basis over the last three quarters, the transaction has been underperforming in relation to the business plan projections. As of Q4 2022, actual collections amounted to EUR 58.3 million compared with the business plan expectations of EUR 100.5 million.
-- Liquidity support: The transaction benefits from liquidity support provided by the liquidity reserve equal to 3% of the Class A notes’ initial balance at closing, funded through the issuance of the notes. The liquidity reserve target balance will increase to 6% of the Class A notes’ outstanding balance on the first interest payment date (IPD). The reserve is available to cover any shortfall on interest payment due on the Class A notes and senior fees.
-- Class B subordination event: If on an IPD on which the Class A notes remain outstanding and occurring on and from the date falling 24 months after the closing date on which interest is due and payable on the Class B notes, the servicer has since the transfer date cumulatively recovered an amount of net collections that is 15% less than the cumulative net collections projected in the business plan as at the closing date, then all interest due and payable to the Class B noteholders (including any previously deferred interest) shall be subordinated to the principal payments on the Class A notes.
-- Potential leakages to Class B: If the servicer has since the transfer date cumulatively recovered an amount of net collections that is 15% less than the cumulative net collections projected in the business plan as at the closing date, there will still be a leakage to the Class B notes interest for the first 24 months after closing.
-- Interest rate risk: The coupons payable on the notes are fixed, which nullifies any risk linked to a floating rate and a potential rise affecting the Issuer’s ability to meet interest payments on the Class A notes.
-- The sovereign rating on the Republic of Cyprus, which DBRS Morningstar rates at BBB and R-2 (high) with Stable trends as of the date of this press release.
-- The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its rating on an analysis of the projected recoveries of the underlying collateral, the historical performance, the servicer’s expertise, the availability of liquidity to fund interest shortfalls and expenses, and the transaction’s legal and structural features. The servicer’s recovery expectations in terms of gross collections for the portfolio (business plan) is EUR 534.0 million. DBRS Morningstar’s BBB (high) (sf) rating stress assumes a haircut of 46.4% to the servicer’s business plan.

Citibank Europe Plc - Luxembourg Branch (Citibank Europe Luxembourg) has been appointed to act as the Issuer transaction account bank for the transaction. Based on DBRS Morningstar’s private rating on Citibank Europe - Luxembourg and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the Issuer transaction account bank to be consistent with the rating assigned to the Class A notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The final maturity date of the transaction is January 2054.

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 in 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 in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Nonperforming Loans Securitisations” (6 May 2022), https://www.dbrsmorningstar.com/research/396256/rating-european-nonperforming-loans-securitisations.

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.

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 seller, the servicer, and the arranger. DBRS Morningstar received a loan-by-loan data tape as of 31 December 2020, historical sales data from the servicer (including 623 properties sold), and a business plan. To be able to consider actual collections since the cut-off date, DBRS Morningstar received a lockbox reflecting collections from the cut-off date until 21 February 2022.

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

DBRS Morningstar was supplied with one or more 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar public rating on this financial instrument.

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 287.1 million at the BBB (high) (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 BBB (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 BBB (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: Alberto Cruces de la Rosa, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 30 March 2023

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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.
-- 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.
-- 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].