Press Release

DBRS Morningstar Takes Rating Actions on Popolare Bari NPLs 2017 S.r.l.

Nonperforming Loans

June 07, 2023

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Popolare Bari NPLs 2017 S.r.l. (the Issuer):

-- Class A notes downgraded to CC (sf) from CCC (low) (sf)
-- Class B notes confirmed at C (sf)

DBRS Morningstar also removed the Negative trend from the Class A notes’ rating and the Stable trend from the Class B notes’ rating.

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 on or before the legal final maturity date in October 2037. The rating on the Class B notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

Given the characteristics of the Class B notes, as defined in the transaction documents, DBRS Morningstar notes that a default would most likely only be recognised at the maturity or an early termination of the transaction.

At issuance, the notes were backed by an Italian nonperforming loan (NPL) portfolio originated by Banca Popolare di Bari S.c.p.A. and Cassa di Risparmio di Orvieto S.p.A. (the originators). The total gross book value (GBV) of the portfolio as of March 2017 (the cut-off date) was equal to EUR 319.8 million. The pool of receivables comprised secured and unsecured loans (approximately 56.1% and 43.9% of GBV, respectively) with exposures mostly towards corporate borrowers and small and medium-size enterprises (SMEs). The properties in the collateral mainly included residential and industrial properties, accounting for 41.2% and 15.9% of the total property value, respectively.

Prelios Credit Servicing S.p.A. services the portfolio, while Banca Finanziaria Internazionale S.p.A. (Banca Finint; formerly Securitisation Services S.p.A.) was appointed as backup servicer.

RATING RATIONALE
The rating actions follow a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 31 March 2023, 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.
-- Business plan: The servicer’s updated business plan as of December 2022, received in April 2023, and the comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of March 2023 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 net present value cumulative profitability ratio is lower than 90%. The interest subordination event occurred in October 2021 and has been cured since the October 2022 interest payment date. According to the servicer, the cumulative net collection ratio and the net present value cumulative profitability ratio were 38.6% and 93.3% respectively, in March 2023.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure by 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.
-- Interest rate risk: The transaction is exposed to interest rate risk in a rising interest rate environment due to the under-hedging of the Class A and Class B notes, which is a result of the underperformance in terms of collections.

TRANSACTION AND PERFORMANCE
According to the latest investor report from April 2023, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 62.6 million, EUR 10.1 million, and EUR 13.5 million, respectively. As of the April 2023 payment date, the balance of the Class A notes has amortised by 22.6% since issuance and the current aggregated transaction balance is EUR 86.2 million. There was no principal repayment of the Class A Notes since October 2022, due to the class B interest subordination event not having occurred currently.

As of March 2023, the transaction was performing below the servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 34.2 million at the end of March, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 87.4 million for the same period. Therefore, as of March 2023, the transaction was underperforming by EUR 53.1 million (-60.8%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 59.5 million at the BBB (low) (sf) stressed scenario and EUR 64.8 million at the B (low) (sf) stressed scenario. Therefore, as of March 2023, the transaction was performing below DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in April 2023, the servicer delivered an updated portfolio business plan.

The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 33.3 million as of December 2022, results in a total of EUR 84.2 million, which is 30.0% lower than the total gross disposition proceeds of EUR 120.4 million estimated in the initial business plan. DBRS Morningstar notes that also based on the updated business plan, the portfolio has underperformed in the first quarter of 2023.

Excluding actual collections, the servicer’s expected future collections from April 2023 now amount to EUR 49.8 million, which is less than the current balance of the Class A notes. In its CC (sf) rating scenario, DBRS Morningstar considers future collections in line with the servicer’s updated expectations. Considering the senior costs, interest due on the notes, and the non-occurrence of a subordination event, the full repayment of the Class A principal has become unlikely, but considering the transaction structure, a payment default on the bond would likely only occur in a few years from now.

The final maturity date of the transaction is in October 2037.

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 these ratings include the Issuer, Prelios, and Banca Finint, which comprise, in addition to the information received at issuance, the investor report as of April 2023; the semiannual servicer report as of March 2023; the loan-by-loan report as of March 2023; and the updated business plan received in April 2023.

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

At the time of the initial ratings, 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 these ratings 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 13 June 2022, when DBRS Morningstar confirmed its CCC (low) (sf) rating on the Class A notes, confirmed its C(sf) rating on the Class B notes, and maintained its Negative and Stable trends on the Class A and Class B notes, respectively.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):

-- 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 CC (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 CC (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class B notes at C (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class B notes at C (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. 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.

These ratings are 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: 5 December 2017

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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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