Morningstar DBRS Upgrades Credit Rating on Class A Notes Issued by Grogu SPV S.r.l., Trend Remains Positive

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit rating on the Class A notes issued by Grogu SPV S.r.l. (the Issuer) to A (sf) from BBB (high) (sf) and maintained the Positive trend.

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 on or before its final maturity date in January 2042. Morningstar DBRS does not rate the Class B or Class J notes.

As of the 31 May 2021 cutoff date, the Notes were backed by a EUR 3.1 billion portfolio by gross book value of Italian secured and unsecured nonperforming loans (NPLs) mostly originated by Unione di Banche Italiane S.p.A. (UBI) and currently owned by Intesa Sanpaolo SpA (ISP) and BPER Banca S.p.A. as a result of UBI’s absorption into ISP.

Intrum Italy S.p.A. (Intrum) and Prelios Credit Solutions S.p.A. (PRECSO) (together, the Servicers) service the receivables. PRECSO has been appointed as the backup servicer and will also act as the master servicer if the agreement with the master servicer, Banca Finanziaria Internazionale S.p.A. (Banca Finint), is terminated.

CREDIT RATING RATIONALE
The credit rating upgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of March 2024, focusing on (1) a comparison between actual collections and the Servicers’ 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 plans: The Servicers’ updated business plans as of December 2023, received in February 2024 and April 2024, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of March 2024 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% and 85% respectively. These triggers had not been breached on the April 2024 interest payment date, with actual figures at 250.8% and 173.4%, respectively, according to the Servicers.
-- 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 4% 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 April 2024, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 158.1 million, EUR 37.0 million, and EUR 3.0 million, respectively. As of the April 2024 payment date, the balance of the Class A notes had amortised by 65.6% since issuance and the current aggregated transaction balance was EUR 198.1 million.

As of March 2024, the transaction was performing materially above the Servicers’ initial business plan expectations. The actual cumulative gross collections equalled EUR 386.7 million whereas the Servicers’ initial business plan estimated cumulative gross collections of EUR 159.1 million for the same period. Therefore, as of March 2024, the transaction was overperforming by EUR 227.6 million (143.0%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 99.8 million at the BBB (high) (sf) stressed scenario. Therefore, as of March 2024, the transaction was performing above Morningstar DBRS’ initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, PRECSO and Intrum delivered the second updated portfolio business plans, in February 2024 and April 2024, respectively.

The updated portfolio business plans, combined with the actual cumulative gross collections of EUR 356.5 million as of December 2023, results in a total of EUR 798.4 million, which is 1.1% higher than the total gross collections of EUR 789.7 million estimated in the initial business plan. As evidenced by the positive profitability, accounts were closed earlier and with higher cash flow compared to initial expectations. Conversely, expectations for still-open accounts have overall decreased.

Excluding actual collections, the Servicers’ expected future collections from April 2024 account for EUR 414.9 million. The updated Morningstar DBRS A (sf) credit rating stress assumes a haircut of 24.5% to the Servicers’ updated business plan, considering future expected collections.

Considering the outperformance registered since issuance and the increased subordination, the rated bonds now pass higher credit rating stresses in the cash flow analysis. 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, considering the downgrade provisions outlined in the transaction documents.

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

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.

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, the Servicers, and Banca Finint, which comprise, in addition to the information received at issuance, the updated business plan from the Servicers as of December 2023, the investor report as of April 2024, as well as the quarterly servicer reports and quarterly loan data tapes, both as of March 2024.

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 12 June 2023, when Morningstar DBRS confirmed its credit rating on the Class A notes at BBB (high) (sf) and changed the trend to Positive from Stable.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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 313.3 million at the A (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 A (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 A (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
Credit Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Credit Rating Date: 15 December 2021

DBRS Ratings GmbH
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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
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- 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].