Morningstar DBRS Confirms BBB (high) (sf) Credit Rating on Class A Notes Issued by Capella Financing S.à r.l., Changes Trend to Positive from Negative

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit rating on the Class A notes issued by Capella Financing S.à r.l. (the Issuer) at BBB (high) (sf) and changed the trend on the credit rating to Positive from Negative.

The transaction entails the issuance of Class A, Class B, and Class Z notes (collectively, the notes). The credit rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal. Morningstar DBRS does not rate the Class B or Class Z notes.

At issuance, the notes were backed by a EUR 786.7 million by gross book value portfolio, mostly consisting of secured Cypriot nonperforming loans originated by Hellenic Bank Public Company Limited (Hellenic Bank; the seller), Cooperative Asset Management Company Ltd. (formerly Cooperative Central Bank Ltd. and later Cyprus Cooperative Bank Ltd.), and Barclays Bank PLC. (together, the Originators).

The receivables are serviced by Themis Portfolio Management Limited (Themis; the Servicer), following the merge with APS Debt Servicing Cyprus Ltd. in November 2023.

CREDIT RATING RATIONALE
The credit rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of December 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 December 2023, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of December 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 Z notes will amortise following the repayment of the Class B notes). Additionally, interest payments on the Class B notes will become subordinated to principal payments on the Class A notes if, starting from the March 2025 Interest Payment Date (the end of the Class B interest Waiver Period), the cumulative net collections will be 15% less than the cumulative net collections projected in the initial business plan.
-- Liquidity support: 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 6% of the Class A notes’ principal outstanding and is currently fully funded.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

TRANSACTION AND PERFORMANCE
According to the latest investor report from January 2024, the outstanding principal amounts of the Class A, Class B, and Class Z notes were EUR 123.8 million, EUR 114.5 million, and EUR 442.7 million, respectively. As of the January 2024 payment date, the balance of the Class A notes has amortised by 46.1% since issuance and the current aggregated transaction balance is EUR 680.9 million.

As of December 2023, the transaction was performing below the servicer’s business plan expectations. The actual cumulative collections net of leakages equalled EUR 121.9 million, whereas the servicer’s initial business plan estimated cumulative collections of EUR 186.4 million for the same period. Therefore, as of December 2023, the transaction was underperforming by EUR 64.5 million (34.6%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative collections net of leakages for the same period of EUR 83.4 million at the BBB (high) (sf) stressed scenario. Therefore, as of December 2023, the transaction was performing above Morningstar DBRS’ initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in December 2023, the servicer delivered an updated portfolio business plan as of June 2023.

The updated portfolio business plan, combined with the actual cumulative collections of EUR 76.1 million as of June 2023, results in a total of EUR 471.0 million, which is 8.4% lower than the total net collections of EUR 514.4 million estimated in the initial business plan.

Excluding actual collections, the servicer’s expected future collections from January 2024 account for EUR 360.7 million. The updated Morningstar DBRS BBB (high) (sf) credit rating stress assumes a haircut of 47.9% to the servicer’s updated business plan, considering future expected collections.

Considering the faster-than-expected Class A notes’ amoritsation registered since issuance as well as the increased subordination, the rated bonds may now pass higher credit rating stresses in the cash flow analysis. However, considering the underperformance and the still relatively early stage of the transaction, Morningstar DBRS does not yet deem this performance trend to be sustainable in the medium to long term and confirmed the current credit rating assigned to the Class A notes. However, considering the increased credit enhancement and the reduction in the expected senior costs, DBRS Morningstar changed the trend to Positive.

The final maturity date of the transaction is in January 2054.

Morningstar DBRS’ 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.

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, AND 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 Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.

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 and the Servicer, which comprise, in addition to the information received at issuance, the updated business plan received from the servicer as of June 2023, the investor report as of January 2024, the semiannual servicer report as of December 2023, and the loan data tape as of December 2023.

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 30 March 2023, when Morningstar DBRS assigned a credit rating of BBB (high) (sf) with Negative trend on the Class A notes.

The lead analyst responsibilities for this transaction have been transferred to William Taliento.

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 187.9 million at the BBB (high) (sf) stress level, 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 confirmation of the Class A notes at BBB (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A notes at BBB (high) (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.

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

Lead Analyst: William Taliento, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 March 2023

DBRS Ratings GmbH
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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 (7 March 2024), https://dbrs.morningstar.com/research/429051
-- 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
-- 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].