Morningstar DBRS Downgrades Credit Rating on ISEO SPV S.r.l., Maintains Negative Trend

DBRS Ratings GmbH (Morningstar DBRS) downgraded its credit rating on the Class A notes issued by ISEO SPV S.r.l. (the Issuer) to BB (sf) from BBB (low) (sf) and maintained the Negative trend on the credit rating.

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

As of the 31 March 2019 economic effective date, the notes were backed by a EUR 858 million portfolio by gross book value consisting of secured and unsecured nonperforming loans originated by Unione di Banche Italiane S.p.A.

Since the 4 December 2019 transfer date, doValue S.p.A. (the servicer) has serviced the receivables and doNext S.p.A. (formerly Italfondiario S.p.A.) has acted as master servicer. A backup servicer, Banca Finanziaria Internazionale S.p.A. (Banca Finint; formerly Securitisation Services S.p.A.), was also appointed.

CREDIT RATING RATIONALE
The credit rating downgrade 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 December 2023, received in January 2024, 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 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 is lower than 90%. These triggers were activated since the first interest payment date and cured in January 2023. As of the January 2024 interest payment date, the actual figures are at 100.9% and 107.2%, respectively, according to the servicer. The unpaid interests on the Class B notes in previous periods were all distributed in July 2023.
-- 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% of the Class A notes' principal outstanding balance and the recovery expenses cash reserve target amounts to EUR 250,000, both fully funded.

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 146.2 million, EUR 25 million, and EUR 13.5 million, respectively. As of the January 2024 payment date, the balance of the Class A notes had amortised by 56.3% since issuance and the current aggregated transaction balance is EUR 184.7 million.

As of December 2023, the transaction was performing slightly above the servicer's business plan expectations. The actual cumulative gross collections equalled EUR 238.4 million whereas the servicer's initial business plan estimated cumulative gross collections of EUR 228.9 million for the same period. Therefore, as of December 2023, the transaction was overperforming by EUR 9.4 million (4.1%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 168.9 million at the BBB (sf) stressed scenario. Therefore, as of December 2023, the transaction is performing above Morningstar DBRS' initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in January 2024, the servicer delivered an updated portfolio business plan as of December 2023.

The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 238.4 million as of December 2023, results in a total of EUR 444.4 million, which is 14.1% lower than the total gross disposition proceeds of EUR 517.2 million estimated in the initial business plan.

Excluding actual collections, the servicer's expected future collections from January 2024 amount to EUR 206.0 million. The updated Morningstar DBRS BB (sf) credit rating stress assumes a haircut of 9.7% to the servicer's updated business plan, considering future expected collections.

While Morningstar DBRS observed an improved performance trend in terms of cumulative collection ratio, the updated business plan delivered in January 2024 provides for reduced lifelong gross collections compared with the last business plan. Furthermore, the collateralisation level of the Class A notes, in terms of the Class A notes outstanding balance over expected future collections, worsened due to the slowdown of early redemption, the collection reduction in the updated business plan, and the distribution of accrued and unpaid interests on the Class B notes. In addition, the actual collections from closed borrowers were at a 15.9% discount to the initial business plan.

In light of the above, Morningstar DBRS does not deem the performance trend to be sustainable and considering the servicer's lower expectations on future gross collections, Morningstar DBRS downgraded the credit rating on the Class A notes to BB (sf) and maintained the Negative trend on the credit rating.

The final maturity date of the transaction is 29 July 2039.

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 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 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, doValue S.p.A. and Banca Finint, which comprise, in addition to the information received at issuance, the updated business plan from the servicer received in January 2024, the investor report as of January 2024, the semiannual servicer report as of December 2023, and the loan-by-loan data 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 5 May 2023, when Morningstar DBRS confirmed its BBB (low) (sf) credit rating on the Class A notes and changed the trend on the credit rating to Negative from Stable.

The lead analyst responsibilities for this transaction have been transferred to Sijia Aulenbacher.

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 186.1 million at the BB (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 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 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.

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

Lead Analyst: Sijia Aulenbacher, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 16 December 2019

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 (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
-- European CMBS Rating and Surveillance Methodology (17 January 2024), https://dbrs.morningstar.com/research/426818
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- 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].