Press Release

DBRS Morningstar Confirms Rating of BBB (sf) with a Negative Trend on Buonconsiglio 4 S.r.l.

Nonperforming Loans

April 06, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A notes issued by Buonconsiglio 4 S.r.l. (the Issuer) at BBB (sf) with a Negative trend.

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

As of the 30 July 2021 cut-off date, the Notes were backed by a EUR 578.7 million portfolio by gross book value (GBV) of Italian secured and unsecured nonperforming loans originated by 29 co-operative banks belonging to the Cassa Centrale Banca group and nine other Italian private banks.

The majority of the loans in the portfolio defaulted between 2012 and 2020 and are in various stages of resolution. As of the cut-off date, approximately 60.3% of the pool by GBV was secured. According to the latest information provided by the servicer in December 2022, 60% of the pool by GBV was secured. At closing, the loan pool mainly comprised corporate borrowers (approximately 73% by GBV).

The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios or the Servicer) while Banca Finanziaria Internazionale S.p.A. (Banca Finint) has been appointed to carry out the backup servicing activities.

RATING RATIONALE
The rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An 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.
-- Updated business plan: The Servicer’s updated business plan as of December 2022, received in March 2023, and a 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 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 net collection ratio or the net present value cumulative profitability ratio are lower than 90%. These triggers were not breached on the January 2023 interest payment date, with actual figures at 284.1% and 157.0%, respectively, according to the Servicer.
-- Liquidity support: The transaction benefits from an amortising cash reserve and a recovery expenses cash reserve providing liquidity to the structure and covering a 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 the recovery expenses cash reserve target amounts to EUR 400,000, both fully funded.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

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 99.1 million, EUR 16.5 million, and EUR 5.9 million, respectively. As of the January 2023 payment date, the balance of the Class A notes had amortised by 15.8% since issuance and the current aggregated transaction balance was EUR 121.5 million.

As of December 2022, the transaction was performing above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 26.7 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 10.7 million for the same period. Therefore, as of December 2022, the transaction was overperforming by EUR 15.9 million (148.7%) compared with the initial business plan expectations. The actual cumulative net collections equalled EUR 23.5 million whereas the Servicer’s initial business plan estimated cumulative net collections of EUR 8.3 million for the same period. Therefore, the transaction was overperforming by EUR 15.2 million (184.1%) compared with the initial business plan expectations as of December 2022.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 5.1 million at the BBB (sf) stressed scenario. Therefore, as of December 2022, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in March 2023, the Servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 26.7 million as of December 2022, results in a total of EUR 189.6 million, which is 0.7% lower than the total gross disposition proceeds of EUR 191.0 million estimated in the initial business plan. Excluding actual collections, the Servicer’s expected future collections from January 2023 amount to EUR 162.9 million. The updated DBRS Morningstar BBB (sf) rating stresses assume a haircut of 16.8% to the Servicer’s updated business plan, considering future expected collections.

The final maturity date of the transaction is 31 January 2042.

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” (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.

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/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 investor report as of January 2023; the updated business plan as of December 2022; the quarterly 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.

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

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 with the parameters used to determine the rating (the base case):

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 135.6 million at the BBB (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 on the Class A notes to B (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade on the Class A notes below CCC (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Willian Taliento, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 14 December 2021

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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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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