DBRS Morningstar Assigns Credit Rating of BBB (high) (sf), Stable Trend, to Andor SPV S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned a BBB (high) (sf) credit rating with a Stable trend to the EUR 208,000,000 Class A Notes issued by Andor SPV S.r.l. (the Issuer).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in April 2043.

As of the 31 March 2023 economic effective date, the Class A Notes were backed by a EUR 1.32 billion portfolio by gross book value (GBV or the total due amount) of Italian unsecured and secured nonperforming loans (NPLs) originated by Intesa Sanpaolo SpA (the Seller or the Originator). Intrum Italy S.p.A. (Intrum or the Special Servicer) services the receivables, while Banca Finanziaria Internazionale S.p.A. acts as the Master Servicer for the transaction. Intrum will also act as backup servicer facilitator in case of the Master Servicer’s termination.

At the economic effective date, the securitised portfolio is composed of (1) unsecured exposures, representing approximately 50.7% of the GBV, and (2) secured loans, representing 49.3% of the GBV, approximately 89.7% by GBV of which benefits from first-ranking mortgage. At the economic effective date, the portfolio mainly consisted of corporate borrowers (71.8% by GBV) and the properties securing the loans in the portfolio were mainly residential (51.8% by updated real estate value). The secured collateral was mainly concentrated in the northern regions of Italy (44.3% by updated real estate value) with Lombardy as the most represented region (15.2% by updated real estate value).

The transaction benefits from approximately EUR 32.9 million of collections recovered between the 31 March 2023 economic effective date and 31 July 2023, which will be used as of the closing date to pay certain upfront costs and fees, while the exceeding amount will be distributed in accordance with the priority of payments on the first interest payment date (IPD).

The transaction includes a limited-recourse loan that the Seller granted to the Issuer for an amount equal to EUR 10.52 million. The limited-recourse loan will be used at closing to fund the EUR 200,000 retention amount, the EUR 2.0 million recovery expenses cash reserve, and the EUR 8.32 million initial cash reserve amount. The target amount of the cash reserve on each IPD is sized at 4.0% of the principal outstanding on the Class A Notes. On each IPD, the cash reserve amount and the recovery expenses cash reserve will be part of the available funds for the waterfall and will be replenished in the waterfall up to the respective target amount.

The transaction includes flexibility to implement a real estate owned company (ReoCo) structure. ReoCos are real estate companies that are usually set up and held by junior and mezzanine investors of a transaction to maximise recoveries by (1) participating at auction to increase competitive tension between the parties interested in purchasing the real estate properties and (2) acquiring and actively managing the assets to enhance their value. In connection with the ReoCo structure, the transaction will include a ReoCo cash reserve equal to EUR 250,000, which will provide the ReoCo with the liquidity required to perform its activities. The implementation of the ReoCo structure will be subject to the execution of the ReoCo transaction documents no later than the final activation date, which is 30 June 2026. The credit rating assigned to the Class A Notes at closing reflects DBRS Morningstar's analysis of the features of the proposed ReoCo structure and a review of the framework agreement and relevant legal documents. The potential nonimplementation of the ReoCo structure is currently not expected to have impact on the Class A Notes.

Interest on the Class B Notes, which represent mezzanine debt, will be paid ahead of the principal on the Class A Notes unless certain performance-related triggers (i.e., a present value cumulative profitability ratio of less than 90%, or a cumulative collection ratio of less than 90%, or interest shortfall on the Class A Notes) are breached.

DBRS Morningstar based its credit rating on an analysis of the projected recoveries of the underlying collateral, the historical performance and expertise of the Special Servicer, the availability of liquidity to fund interest shortfalls and special-purpose vehicle expenses, and the transaction’s legal and structural features. DBRS Morningstar’s BBB (high) (sf) credit rating stress scenario assumes a haircut of approximately 19.5% to the Special Servicer’s initial business plan for the portfolio, including the EUR 32.9 million of interim collections.

The final maturity date of the transaction is 30 April 2043.

CREDIT RATING RATIONALE
DBRS Morningstar based its credit rating on a review of the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- The credit quality of the loan portfolio and the ability of the Special Servicer to perform collections and resolution activities.
-- DBRS Morningstar estimated the expected collections from the loans based on the proposed business plan and used them as an input into its cash flow analysis.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents.
-- The sovereign credit rating on the Republic of Italy, which DBRS Morningstar currently rates BBB (high) with Stable trend as of the date of this press release.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal and tax opinions to address, amongst others, the true sale of the assets to the Issuer.

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 Amounts and the Initial Principal Amount Outstanding.

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 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.

ESG CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: Rating European Nonperforming Loan Securitisations (5 June 2023); https://www.dbrsmorningstar.com/research/415383/rating-european-nonperforming-loans-securitisations).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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/421590.

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 this credit rating include secured historical performance data provided by Intrum on 20 July 2023 (repossession data for secured loans sold between 2005 and 2022) and unsecured historical performance data (historical yearly recovery curves from static pool of unsecured loans over a period of 19 years) as well as a business plan and loan tape shared on 31 October 2023 by the Special Servicer and the Seller, respectively.

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

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.

This credit rating concerns a newly issued financial instrument. This is the first DBRS Morningstar credit rating on this financial instrument.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the credit rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the rating (the base case):

-- Recovery Rates Used: Cumulative Base Case recovery amount of approximately EUR 302.5 million at the BBB (high) (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 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 B (low) (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://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: Lorenzo Simonte, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 18 December 2023

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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.

-- “Rating European Nonperforming Loans Securitisations” (5 June 2023);
https://www.dbrsmorningstar.com/research/415383/rating-european-nonperforming-loans-securitisations).
-- “Rating European Consumer and Commercial Asset-Backed Securitisations” (22 October 2023);
https://www.dbrsmorningstar.com/research/422276/rating-european-consumer-and-commercial-asset-backed-securitisations).
-- “European RMBS Insight Methodology” (27 March 2023);
https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology).
-- “European RMBS Insight: Italian Addendum” (2 October 2023);
https://www.dbrsmorningstar.com/research/421317/european-rmbs-insight-italian-addendum).
-- “European CMBS Rating and Surveillance Methodology” (19 October 2023);
https://www.dbrsmorningstar.com/research/422173/european-cmbs-rating-and-surveillance-methodology).
-- “Operational Risk Assessment for European Structured Finance Servicers” (15 September 2023);
https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers).
-- “Legal Criteria for European Structured Finance Transactions” (30 June 2023);
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions).
-- “Derivative Criteria for European Structured Finance Transactions” (18 September 2023);
https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions).
-- “Interest Rate Stresses for European Structured Finance Transactions” (15 September 2023);
https://www.dbrsmorningstar.com/research/420602/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].