DBRS Morningstar Downgrades and Confirms Ratings on 2Worlds S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) took the following credit rating actions on the notes issued by 2Worlds S.r.l. (the Issuer):

-- Class A Notes downgraded to CCC (sf) from CCC (high) (sf)
-- Class B Notes confirmed at CC (sf)

The trend on Class A remains Negative and Class B no longer carries a trend.

The transaction represents the issuance of the Class A, Class B, and Class J Notes (collectively, the Notes) backed by a EUR 1.0 billion gross book value (GBV) mixed pool of Italian nonperforming secured and unsecured loans originated by Banco di Desio e della Brianza S.p.A. (Banco Desio; the Originator) and Banca Popolare di Spoleto S.p.A., which merged by incorporation into Banco Desio in May 2019. The credit rating assigned to the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the transaction’s final maturity date, while the credit rating assigned to the Class B Notes addresses the ultimate payment of both interest and principal on or before final maturity. DBRS Morningstar does not rate the Class J Notes.

The receivables are serviced by Cerved Credit Management S.p.A. (Cerved or the Special Servicer). Cerved Master Services S.p.A. acts as the master servicer, while Banca Finanziaria Internazionale S.p.A. (formerly Securitisation Services S.p.A.) operates as the backup servicer. As of December 2022, the portfolio’s GBV totalled EUR 711.0 million.

CREDIT RATING RATIONALE
The credit rating actions follow a review of the transaction and are 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 Special 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 Special Servicer’s latest updated business plan as of December 2021, received in June 2022, and the comparison with the initial collection expectations. Cerved provided the required updated business plan as of December 2022 to the monitoring agent, which has not been released yet, pending the monitoring agent’s approval and the authorisation for its release.
-- 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 net cumulative collection ratio or the present value cumulative profitability ratio is lower than 85%. These triggers were breached since the July 2022 interest payment date (IPD). Per the January 2023 investor report, the cumulative net collection ratio is 79.0% and the net present value cumulative profitability ratio is 110.6%.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure by covering potential interest shortfalls on the Class A Notes and senior fees. The cash reserve target amount is equal to 4.05% of the Class A and Class B 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 because of an increasing strike rate of the interest rate cap agreement that will expire on the July 2027 IPD.

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 131.7 million, EUR 30.2 million, and EUR 9.0 million, respectively. As of the January 2023 payment date, the balance of the Class A Notes has amortised by 54.3% since issuance and the current aggregated transaction balance was EUR 170.9 million.

As of December 2022, the transaction was performing below the Special Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 219.1 million at the end of December, whereas the Special Servicer’s initial business plan estimated cumulative gross collections of EUR 307.6 million for the same period. Therefore, as of December 2022, the transaction was underperforming by EUR 88.5 million (-28.8%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 146.4 million at the BBB (low) (sf) stressed scenario and EUR 168.5 million at the B (low) (sf) stressed scenario. Therefore, as of December 2022, the transaction was performing above DBRS Morningstar’s initial stressed expectations in both the BBB (low) (sf) and B (low) (sf) scenarios.

The latest updated portfolio business plan, combined with the actual cumulative gross collections of EUR 180.9 million as of December 2021, results in a total of EUR 361.6 million, which is 19.0% lower than the total gross disposition proceeds of EUR 446.6 million estimated in the initial business plan. DBRS Morningstar notes that during 2022 the Special Services has also underperformed the latest updated business plan by approximately EUR 23.2 million.

Excluding actual collections, the Special Servicer’s expected future collections from January 2023 now amount to EUR 119.2 million. In DBRS Morningstar’s CCC (sf) scenario, the Special Servicer’s updated forecast was only adjusted in terms of the actual collections to date and the timing of future expected collections. Considering senior costs and interest due on the notes, DBRS Morningstar believes the full repayment of the Class A and Class B principal is increasingly unlikely, but considering the transaction structure, a payment default on the bonds would likely only occur in a few years from now.

Moreover, as a consequence of the breach of certain representations and warranties given by the Originator pursuant to the Receivables Transfer Agreement, the Issuer is entering into a settlement agreement (the Settlement Agreement) with the Originator. In accordance with the Settlement Agreement, the Originator has agreed to (1) pay the Issuer EUR 3.0 million as indemnity for such breach, regardless of the expiration of the warranty period, and (2) repurchase certain receivables from the Issuer by entering into a repurchase agreement (the Repurchase Agreement and, together with the Settlement Agreement, the Agreements), with a total GBV as of March 2023 of EUR 22.4 million, for a consideration of EUR 8.0 million. DBRS Morningstar reviewed the impact of such Agreements and concluded that entering into the Agreements in the form submitted to DBRS Morningstar, will not, in and of itself, result in a downgrade or withdrawal of the CCC (sf) rating with a Negative trend on the Class A Notes and the CC (sf) rating on the Class B Notes.

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

DBRS Morningstar’s credit ratings on the Class A and Class B Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this press release.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784/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 credit 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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit ratings include the Issuer, Cerved, and Banca Finanziaria Internazionale S.p.A., which comprise, in addition to the information received at issuance, the investor report as of January 2023; the semiannual Special Servicer report as of December 2022; the quarterly Special Servicer report as of March 2023; and the latest updated business plan received in June 2022.

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

At the time of the initial credit ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 18 July 2022, when DBRS Morningstar downgraded its BB (sf) and CCC (sf) credit ratings on the Class A and Class B Notes to CCC (high) (sf) and CC (sf), respectively, resolved the Under Review with Negative Implications status of the credit ratings, and assigned Negative trends.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):
-- 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 below CCC (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 below CCC (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 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 B Notes at CC (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 credit 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://registers.esma.europa.eu/cerep-publication/. 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 credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Clarice Baiocchi, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 June 2018

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Nonperforming Loans Securitisations (5 June 2023), https://www.dbrsmorningstar.com/research/415383/rating-european-nonperforming-loans-securitisations.
-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- European RMBS Insight Methodology (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (29 September 2022), https://www.dbrsmorningstar.com/research/403237/european-rmbs-insight-italian-addendum.
-- 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.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023), https://www.dbrsmorningstar.com/research/415976/derivative-criteria-for-european-structured-finance-transactions.
-- 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 (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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].