Press Release

DBRS Morningstar Confirms Credit Ratings on Aragorn NPL 2018 S.r.l.

Nonperforming Loans

August 03, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit ratings on the notes issued by Aragorn NPL 2018 S.r.l. (the Issuer) as follows:

-- Class A notes at CCC (sf)
-- Class B notes at CC (sf)

DBRS Morningstar also kept the Negative trend unchanged on the Class A notes and the Class B notes no longer carries a trend.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the Notes) backed by a mixed pool of Italian nonperforming secured and unsecured loans originated by Credito Valtellinese S.p.A. and Credito Siciliano S.p.A. (collectively, the originators). The credit rating assigned to the Class A notes addresses the timely payment of interest and the ultimate repayment of principal while the credit rating assigned to the Class B notes addresses the ultimate payment of both interest and principal. DBRS Morningstar does not rate the Class J notes.

The gross book value (GBV) of the loan pool was approximately EUR 1.671 billion as of the 31 December 2017 cut-off date. The nonperforming loan portfolio consists of secured commercial and residential borrowers (82.0% of total GBV) and unsecured borrowers (18.0% of total GBV), mostly Italian small and medium-size enterprises (90.2% of the total GBV). Of the GBV, 68% comprised 364 borrowers (of the 4,161 total), each with a GBV of more than EUR 1 million. The top 50 borrowers made up 26.8% of the pool GBV at the cut-off date.

The receivables are serviced by Special Gardant S.p.A. and Cerved Credit Management S.p.A. (Cerved) (together, the Special Servicers). Master Gardant S.p.A. acts as the master servicer while Cerved operates as the backup servicer.

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 Servicers’ 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 plans: The Special Servicers’ updated business plan as of December 2022, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of June 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 cumulative collection ratio (CCR) or the present value cumulative profitability ratio (NPV CPR) is lower than 90%. The reported CCR of 66.5% as at 31 December 2022 is below the trigger while the reported NPV CPR is 103.6%. The updated collections as per the Special Servicers’ updated business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the aggregate outstanding balance of the Class A and Class B notes.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfall on the Class A notes and senior fees. The cash reserve target amount is equal to 5% of the Class A notes’ principal outstanding balance and is currently fully funded.

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 328.1 million, EUR 66.8 million, and EUR 10.0 million, respectively. As of the January 2023 interest payment date, the balance of the Class A notes had amortised by approximately 35.6% since issuance and the current aggregated transaction balance was EUR 405.0 million.

As of June 2023, the transaction was underperforming the special servicers’ initial business plan expectations. The actual cumulative gross collections equalled EUR 291.8 million whereas the special servicers’ initial business plan estimated cumulative gross collections of EUR 504.2 million for the same period. Therefore, as of June 2023, the transaction was underperforming by EUR 212.4 million (-42.1%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 334.0 million at the BBB (sf) stressed scenario and EUR 430.6 million at the CCC (sf) stressed scenario. Therefore, as of June 2023, the transaction was performing below DBRS Morningstar’s initial BBB (sf) stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, the special servicers provided DBRS Morningstar with a revised portfolio business plan combined with the actual cumulative collections as of December 2022. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 261.5 million as of December 2022, resulted in a total of EUR 567.4 million, which is 26.6% lower than the total gross disposition proceeds of EUR 773.0 million estimated in the initial business plan. Excluding actual collections, the special servicers’ expected future collections from January 2023 account for EUR 306.0 million. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 14.3% to the special servicers’ updated business plan, considering future expected collections from January 2023. In DBRS Morningstar’s CCC (sf) scenario, the special servicers’ updated forecast was only adjusted in terms of the actual collections to date and the timing of future expected collections.

The updated collections as per the special servicers’ updated business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the total of the Class A and Class B notes, 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 July 2038.

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.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) 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 relevant or significant 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.

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.

The sources of data and information used for these credit ratings include the special servicers, Banca Finanziaria Internazionale S.p.A., and Citibank N.A., which comprise, in addition to the information received at issuance, the investor report as of January 2023; the monthly special servicer report as of June 2023; the updated data tape as of June 2023; and the updated business plans.

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 4 August 2022, when DBRS Morningstar downgraded its rating on the Class A notes to CCC (sf) from CCC (high) (sf) and maintained the Negative trend; simultaneously, DBRS Morningstar confirmed its CC (sf) rating on the Class B notes and changed the trend to Negative from Stable.

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 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 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: Alfonso Candelas, Senior Vice President
Initial Rating Date: 14 June 2018

DBRS Ratings GmbH
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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.

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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