Morningstar DBRS Confirms Credit Rating of BBB (sf), Changes Trend to Stable from Negative on Buonconsiglio 4 S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit rating on the Class A notes issued by Buonconsiglio 4 S.r.l. (the Issuer) at BBB (sf) and changed the trend to Stable from Negative.

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. Morningstar DBRS does not rate the Class B or Class J notes.

As of the 30 July 2021 cut-off date, the Notes were backed by a EUR 578.7 million portfolio by gross book value (GBV) of Italian secured and unsecured nonperforming loans originated by 29 co-operative banks belonging to the Cassa Centrale Banca group and nine other Italian private banks.

The majority of the loans in the portfolio defaulted between 2012 and 2020 and are in various stages of resolution. As of the cut-off date, approximately 60.3% of the pool by GBV was secured. According to the latest information provided by the servicer in December 2023, 57.1% of the pool by GBV was secured. At closing, the loan pool mainly comprised corporate borrowers (approximately 73% by GBV).

The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios or the Servicer) while Banca Finanziaria Internazionale S.p.A. (Banca Finint) has been appointed to carry out the backup servicing activities.

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 31 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 December 2023, received in March 2024, and a 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: 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 net collection ratio or the net present value cumulative profitability ratio are lower than 90%. These triggers were not breached on the January 2024 interest payment date, with actual figures at 256.4% and 126.1%, respectively, according to the Servicer.
-- Liquidity support: The transaction benefits from an amortising cash reserve and a recovery expenses cash reserve providing liquidity to the structure and covering a potential interest shortfall on the Class A notes and senior fees. The cash reserve target amount is equal to 4% of the Class A notes’ principal outstanding balance and the recovery expenses cash reserve target amounts to EUR 400,000, both 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 J notes were EUR 78.7 million, EUR 16.5 million, and EUR 5.9 million, respectively. As of the January 2024 payment date, the balance of the Class A notes had amortised by 33.2% since issuance and the current aggregated transaction balance was EUR 101.0 million.

As of December 2023, the transaction was performing above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 57.2 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 24.5 million for the same period. Therefore, as of December 2023, the transaction was overperforming by EUR 32.7 million (133.3%) compared with the initial business plan expectations. The actual cumulative net collections equalled EUR 48.6 million whereas the Servicer’s initial business plan estimated cumulative net collections of EUR 19.0 million for the same period. Therefore, the transaction was overperforming by EUR 29.7 million (156.4%) compared with the initial business plan expectations as of December 2023.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 16.0 million at the BBB (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 March 2024, the Servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 57.2 million as of December 2023, results in a total of EUR 192.1 million, which is 0.6% higher than the total gross disposition proceeds of EUR 191.0 million estimated in the initial business plan. Given the outperformance and profitability to date, the servicer has revised its expectations for future collections downwards. The Servicer’s expected future collections from January 2024 amount to EUR 134.9 million. The updated Morningstar DBRS BBB (sf) rating stress assumes a haircut of 16.4% to the Servicer’s updated business plan, considering future expected collections.

The final maturity date of the transaction is 31 January 2042.

Morningstar DBRS’ credit rating on the rated 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 documents 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, 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 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 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, Prelios, and Banca Finint which comprise, in addition to the information received at issuance, the investor report as of January 2024; the updated business plan as of December 2023; the semi-annual servicer report as of December 2023; and the loan-by-loan report as of December 2024.

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 6 April 2023, when Morningstar DBRS confirmed the credit rating on the Class A notes and maintained the Negative trend.

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 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 112.8 million at the BBB (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 downgrade on the Class A notes to BB (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade on the Class A notes to CCC (high) (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: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 14 December 2021

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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 RMBS Insight Methodology (25 March 2024),
https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Italian Addendum (2 October 2023),
https://dbrs.morningstar.com/research/421317
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219
-- 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 (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 https://dbrs.morningstar.com/ or contact us at [email protected].