Press Release

DBRS Morningstar Confirms Credit Rating on Buonconsiglio 3 S.r.l. at BBB (sf), Trend Remains Negative

Nonperforming Loans

October 24, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit rating on the Class A notes issued by Buonconsiglio 3 S.r.l. (the Issuer) at BBB (sf) and maintained the Negative trend.

In this transaction, Class A, Class B, and Class J notes (collectively, the Notes) were issued. The credit rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before its final maturity date of January 2041. DBRS Morningstar does not rate the Class B or the Class J notes.

At issuance, the Notes were backed by a EUR 679.1 million portfolio by gross book value consisting of a mixed portfolio of Italian secured and unsecured nonperforming loans originated by Cassa Centrale Banca Credito Cooperativo Italiano S.p.A., 31 co-operative banks belonging to the Cassa Centrale group, and six other Italian private banks.

The receivables are serviced by Guber Banca S.p.A. (Guber or the Servicer) while Zenith Service S.p.A. (the Master Servicer) was appointed to carry out the master servicing activities. Guber will also act as backup master servicer in case of Zenith’s termination as Master Servicer.

CREDIT RATING RATIONALE
The confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 30 June 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.
-- Portfolio characteristics: The 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 begin to amortise following the repayment of the Class B notes).
-- Performance ratios and underperformance events: As per the most recent June 2023 semiannual servicer report, the cumulative collection ratio is 141.9% and the net present value cumulative profitability ratio is 113.1%. The 90% trigger has not been breached for either the cumulative collection ratio or the net present value cumulative profitability ratio.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure and covering potential interest shortfall on the Class A notes. The cash reserve target amount is equal to 4.0% of the Class A notes’ principal outstanding and is currently fully funded.
-- Interest rate impact: The transaction benefits from over hedging in a rising interest rate environment due to a low strike rate in the interest rate cap agreement as well as a higher cap notional amount compared with the outstanding balance of the Class A notes, which increases the cash inflow received from the hedging counterparty.

TRANSACTION AND PERFORMANCE
According to the latest investor report from July 2023, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 103.9 million, EUR 21.0 million, and EUR 4.5 million, respectively. As of the July 2023 payment date, the balance of the Class A notes had amortised by 32.5% since issuance and the aggregated transaction balance was EUR 129.5 million.

As of June 2023, the transaction was performing above the Servicer’s initial business plan expectations. The actual cumulative gross collections equalled EUR 73.7 million whereas the Servicer’s business plan estimated cumulative gross collections of EUR 52.0 million for the same period. Therefore, as of June 2023, the transaction was overperforming by EUR 21.7 million (41.6%).

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 43.2 million in the BBB (sf) stressed scenario. Therefore, as of June 2023, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

In September 2023, the Servicer delivered an updated portfolio business plan (the updated business plan) as of December 2022. The updated business plan, combined with the actual cumulative gross collections of EUR 53.4 million as of 31 December 2022, resulted in a total of EUR 232.3 million expected gross collections, which is 5.1% lower than the total gross collections of EUR 244.7 million estimated in the initial business plan. Without including actual collections, the Servicer’s expected future collections from July 2023 are now accounting for EUR 173.1 million. Hence, the Servicer revised its expectation for collections on the remaining portfolio downward and the timing of collections is now expected later than initially envisaged.

The updated DBRS Morningstar BBB (sf) credit rating stress assumes a haircut of 23.7% to the Servicer’s updated business plan, considering total future expected collections from July 2023 onwards. In DBRS Morningstar’s CCC (sf) scenario, the Servicer’s updated forecast was only adjusted in terms of actual collections to date and timing of future expected collections.

The final maturity date of the transaction is in January 2041.

DBRS Morningstar’s credit rating on the Class A notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Class Balance.

DBRS Morningstar’s credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit rating provides 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 www.dbrsmorningstar.com/research/416784.

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 rating is: “Master European Structured Finance Surveillance Methodology” (6 October 2023), https://www.dbrsmorningstar.com/research/421598/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/421590/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 credit rating include the Issuer, the Servicer, and the Master Servicer which comprise, in addition to the information received at issuance, the updated business plan as of December 2022 delivered in September 2023; the investor report as of July 2023; the semiannual servicer report as of June 2023; and the loan-by-loan data as of June 2023.

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

At the time of the initial credit rating, 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 this credit rating 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 2 November 2022, when DBRS Morningstar confirmed its credit rating on the Class A notes at BBB (sf) with a Negative trend.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):
-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 132.1 million at the BBB (sf) rating 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 of the Class A notes to BB (high) (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 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 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.

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

Lead Analyst: William Taliento, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 14 December 2020

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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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