Press Release

DBRS Morningstar Downgrades Rating on Leviticus SPV S.r.l., Maintains Negative Trend

Nonperforming Loans

April 21, 2023

DBRS Ratings GmbH (DBRS Morningstar) downgraded its rating on the Class A notes issued by Leviticus SPV S.r.l. (the Issuer) to BB (low) (sf) from BB (sf). The trend on the rating remains Negative.

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.

At issuance, the notes were backed by a EUR 7.4 billion portfolio by gross book value consisting of unsecured and secured nonperforming loans originated by Banco BPM SpA.

The receivables are serviced by Gardant Liberty Servicing S.p.A. (Gardant or the Servicer) while Zenith Service S.p.A. was appointed as backup servicer.

RATING RATIONALE
The rating downgrade 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 begin to 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 is lower than 70%. As of the January 2023 interest payment date, these triggers had not been breached with actual figures at 71.4% and 97.1%, 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 sum of Class A and Class B notes’ principal outstanding balance and the recovery expenses cash reserve target amounts to EUR 400,000, both fully funded.

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 609.7 million, EUR 221.5 million, and EUR 248.8 million, respectively. As of the January 2023 payment date, the balance of the Class A notes had amortised by 57.7% since issuance and the aggregated transaction balance was EUR 1,080.1 million.

As of December 2022, the transaction was performing below the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 1,134.5 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 1,627.0 million for the same period. Therefore, as of December 2022, the transaction was underperforming by EUR 492.5 million (-30.3%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period at EUR 915.5 million in 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 1,134.2 million as of December 2022, results in a total of EUR 2,034.7 million, which is 16.8% lower than the total gross disposition proceeds of EUR 2,446.4 million estimated in the initial business plan. Excluding actual collections, the Servicer’s expected future collections from January 2023 amount to EUR 900.5 million. The updated DBRS Morningstar BB (low) (sf) rating stresses assume a haircut of 9.6% to the Servicer’s updated business plan, considering future expected collections.

The final maturity date of the transaction is 31 July 2040.

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, Gardant, and Master Gardant S.p.A. 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; and the semiannual servicer 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 22 April 2022, when DBRS Morningstar confirmed its BB (sf) rating on the Class A notes with a Negative trend.

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 813.8 million at the BB (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 on the Class A notes to CCC (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: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 6 February 2019

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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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