Morningstar DBRS Takes Credit Rating Actions on 4Mori Sardegna S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the notes issued by 4Mori Sardegna S.r.l. (the Issuer):

-- Class A downgraded to B (sf) from BB (sf)
-- Class B confirmed at CCC (sf)

Morningstar DBRS also maintained the Negative trend on the Class A notes and changed the trend on the Class B notes to Negative from Stable.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the Notes). The credit rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal. The credit rating on the Class B notes addresses the ultimate payment of interest and principal on or before the legal final maturity date. Morningstar DBRS does not rate the Class J notes.

At issuance, the Notes were backed by a EUR 1.04 billion portfolio by gross book value (GBV) consisting of secured and unsecured Italian nonperforming loans (NPLs) originated by Banco di Sardegna S.p.A.

The majority of loans in the portfolio defaulted between 2008 and 2017 and are in various stages of resolution. As of the cut-off date, 53% of the pool by GBV was secured. According to the latest information provided by the servicer in September 2023, 46.2% of the pool by GBV was secured. At closing, the loan pool mainly comprised corporate borrowers (77% by GBV), which accounted for approximately 74.7% of the GBV as of September 2023.

The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios or the servicer) while Banca Finint S.p.A. operates as 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 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 Morningstar DBRS’ expectations.
-- Updated business plan: The servicer’s updated business plan as of June 2023, received in November 2023, and the comparison with the initial collection 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 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 or present value cumulative profitability ratio is lower than 90%. These triggers have been breached since the January 2021 interest payment date (IPD), with the actual figures at 58.9% and 109.1% as of the June 2023 IPD, respectively, according to the servicer.
-- 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 4.9% of the sum of Class A and Class B notes’ principal outstanding and is currently fully funded.
--Interest rate risk: The transaction is exposed to interest rate risk in a rising interest rate environment due to underhedging of the rated notes, which have amortised at a slower pace than the cap notional schedule.

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 109.4 million, EUR 13.0 million, and EUR 8.0 million, respectively. As of the July 2023 payment date, the balance of the Class A notes had amortised by 52.8% since issuance and the current aggregated transaction balance was EUR 130.4 million.

As of June 2023, the transaction was performing below the servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 173.9 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 300.1 million for the same period. Therefore, as of June 2023, the transaction was underperforming by EUR 126.1 million (-42.0%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 223.2 million at the BBB (low) (sf) stressed scenario and EUR 247.7 million at the B (sf) stressed scenario. Therefore, as of June 2023, the transaction was performing below Morningstar DBRS’ initial stressed scenarios.

Pursuant to the requirements set out in the receivable servicing agreement, in November 2023, the servicer delivered an updated portfolio business plan. The updated portfolio business plan combined with the actual cumulative gross collections of EUR 173.9 million as of June 2023 resulted in a total of EUR 360.1 million, which is 10.2% lower than the total gross disposition proceeds of EUR 401.0 million estimated in the initial business plan and is expected to be realised over a longer period of time.

The negative trend on the Class A and Class B notes addresses the interest rate exposure due to underhedging, which, combined with persisting delays in collections, might result in further downgrades, should interest rates increase and/or recoveries be delayed more than expected in the respective credit rating stress scenario.

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

Morningstar DBRS’ credit rating on the Class A and B notes address 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.

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

Morningstar DBRS’ long-term credit rating provides opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS 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 (11 December 2023), https://dbrs.morningstar.com/research/425148/.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 Morningstar DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include the Issuer, Prelios, and Banca Finanziaria Internazionale S.p.A. which comprise, in addition to the information received at issuance, the investor report as of July 2023; the semiannual servicer report as of June 2023; and the quarterly loan-by-loan report as of September 2023.

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

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

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

Morningstar DBRS 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 16 February 2023, when Morningstar DBRS downgraded its ratings on the Class A and Class B notes to BB (sf) and CCC (sf) from BB (high) (sf) and B (low) (sf), respectively, and changed the trend on the Class A notes to Negative from Stable and maintained the Stable trend on the Class B notes.

The lead analyst responsibilities for this transaction have been transferred to Pablo Iturriaga.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on http://dbrs.morningstar.com/.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS 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 159.5 million and EUR 184.3 million at the B (sf) and CCC (sf) stressed levels, a 5% and 10% decrease in the base case recovery rate.
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a downgrade of the Class A notes to CCC (sf).
-- Morningstar DBRS 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).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a downgrade of the Class B notes to below CCC (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class B notes to below CCC (sf).

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 June 2018

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27 28046 Madrid, Spain
Tel. +34 (91) 903 6500

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://dbrs.morningstar.com/about/methodologies.

-- Rating European Nonperforming Loans Securitisations (5 June 2023),
https://dbrs.morningstar.com/research/415383
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148
-- European RMBS Insight Methodology (27 March 2023),
https://dbrs.morningstar.com/research/411634
-- European RMBS Insight: Italian Addendum (2 October 2023),
https://dbrs.morningstar.com/research/421317
-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].