Morningstar DBRS Upgrades Credit Rating on Class B Notes Issued by Marathon SPV S.r.l.; Confirms Credit Rating on Class A

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit rating on the Class B Notes issued by Marathon SPV S.r.l. (the Issuer) as follows:

-- Class B Notes upgraded to A (low) (sf) from BBB (high) (sf)

In addition, Morningstar DBRS confirmed its credit rating on the following notes:

-- Class A Notes at A (sf)

All trends remain 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.

As of the 30 September 2019 cut-off date, the Notes were backed by a EUR 5.03 billion portfolio by gross book value (GBV) consisting of Italian unsecured nonperforming loans (NPLs). According to the latest information provided by the special servicer in December 2023, the current GBV of the portfolio is EUR 4.7 billion and approximately 18% of the loans by GBV are linked to promissory notes (cambiali).

Hoist Italia S.r.l. (Hoist or the special servicer) services the receivables. Banca Finint S.p.A. (Banca Finint) acts as the master servicer. A backup servicer, Centotrenta Servicing S.p.A., was appointed.

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 2023, 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 Morningstar DBRS’ expectations.
-- Updated business plan: The special servicer’s updated business plan received in February 2024 and the comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of December 2023 and the evolution of its core features since issuance.
-- Transaction liquidating structure: Until a first-level subordination event occurs, the Class A amortisation percentage is set at 90% of the issuer available funds, allowing some leakage of collections to junior items in the preacceleration order of priority of payments. The first-level subordination event occurs when the cumulative collection ratio is less than 95%, at which point the amortisation of the Notes is fully sequential and the Class B Notes begin to amortise following the full repayment of the Class A Notes. Additionally, interest payments on the Class B Notes are made prior to the principal on the Class A Notes until the second-level subordination event occurs, which is triggered when the cumulative collection ratio is less than 80%. These triggers were not breached on the January 2024 interest payment date, when the actual ratio was 106.8%.
-- Liquidity: The transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A Notes and senior fees. The cash reserve target amount is equal to 3.0% of the Class A Notes' outstanding principal and is currently fully funded.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

According to the latest investor report from January 2024, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 15.2 million, EUR 2.6 million, and EUR 16.9 million, respectively. Since issuance, the balances of the Class A Notes and Class B Notes have amortised by 94.7% and 92.4%, respectively. The current aggregated transaction balance is EUR 34.6 million.

As of December 2023, the transaction was performing above the special servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 387.7 million whereas the special servicer’s initial business plan estimated cumulative gross collections of EUR 362.2 million for the same period. Therefore, as of December 2023, the transaction was overperforming by EUR 25.5 million (7.0%) compared with the special servicer’s initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 244.3 million at the BBB (sf) stressed scenario and EUR 277.3 million at the B (high) (sf) stressed scenario. Therefore, as of December 2023, the transaction was performing above Morningstar DBRS´ initial stressed expectations.

In February 2024, the special servicer delivered an updated portfolio business plan in line with the 2023 release. The updated portfolio business plan combined with the actual cumulative gross collections as of December 2023 resulted in a total of EUR 591 million, which is 5.4% higher than the total gross disposition proceeds of EUR 560.9 million estimated in the initial business plan. Excluding actual collections, the special servicer’s expected future collections from January 2024 were EUR 203.2 million. The updated Morningstar DBRS credit rating stress assumes a haircut of 51.9% at the A (sf) and 50.9% at the A (low) (sf) stress scenarios to the special servicer’s updated business plan, considering future expected collections from January 2024. The Notes may pass higher credit rating stress scenarios; however, Morningstar DBRS believes that higher credit ratings would not be commensurate with the risk of the transaction considering the potential higher variability of NPLs’ cash flows and the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

The final maturity date of the transaction is in October 2034.

Morningstar DBRS’ credit ratings on Class A and Class B 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 Notes’ 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 ratings provide 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 rating is the 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 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include the Issuer, Hoist, and Banca Finint which comprise, in addition to the information received at issuance, the payment report as of January 2024; the quarterly servicer report as of December 2023; the loan-level data report as of December 2023; and the updated business plan.

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

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

Morningstar DBRS considers the data and information available to it for the purposes of providing this credit rating 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 28 February 2023, when Morningstar DBRS took the following rating actions: (1) upgraded Class A Notes to A (sf) from BBB (sf), (2) upgraded Class B Notes to BBB (high) (sf) from BB (low) (sf), (3) changed the trend on Class A Notes to Stable from Positive, and (4) maintained the Stable trend on the Class B Notes.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on 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 97.7 million and EUR 99.7 million at the A (sf) and A (low) (sf) stress levels, respectively, 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 confirmation of the Class A Notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes at A (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 A (low) (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 A (low) (sf).

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.

This credit rating is 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: 5 December 2019

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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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
-- 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 (23 January 2024), 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].