Morningstar DBRS Confirms Credit Rating on Palatino SPV S.r.l., Maintains Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit rating on the Class A notes issued by Palatino SPV S.r.l. (the Issuer) at BBB (sf) and maintained the Stable trend.

The transaction represents the issuance of Class A, Class B1, Class B2, 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 December 2045. Morningstar DBRS does not rate the Class B1, Class B2 and Class J notes.

As of the 31 July 2020 cut-off date, the gross book value (GBV) of the portfolio was EUR 865.3 million and comprised non-performing loans that were acquired by Credito Fondiario and originated by different Italian banks, including Banca Carige S.p.A. (58.3% of total GBV) and Credito Valtellinese SpA (17.1% of total GBV).

This transaction represents the restructuring of the Notes originally issued to finance the aforementioned acquisition in the context of a securitisation transaction following the standard provisions under Italian securitisation law (Law n. 130/1999).

Special Gardant S.p.A. acts as the special servicer and services the receivables. Master Gardant S.p.A. acts as the master servicer while Banca Finanziaria Internazionale S.p.A. operates as the backup servicer.

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 April 2024, 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 as of January 2024, received in May 2024, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of April 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 B1 Notes will begin to amortise following the full repayment of the Class A Notes, the Class B2 Notes will begin to amortise following the full repayment of the Class B1 Notes and the Class J Notes will amortise following the repayment of the Class B2 Notes). Additionally, interest payments on the Class B1 notes and Class B2 notes become subordinated to principal payments on the Class A notes if either the cumulative net collection ratio or the net present value cumulative profitability ratio are lower than 100%. These triggers had not been breached on the June 2024 interest payment date, with actual figures at 135.6% and 132.3%, respectively, according to the special servicer.
-- 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 4.5% of the Class A notes' principal outstanding and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest payment report from June 2024, the outstanding principal amounts of the Class A, Class B1, Class B2, and Class J notes were EUR 61.7 million, EUR 11.0 million, EUR 12.4 million, and EUR 6.3 million, respectively. As of the June 2024 payment date, the balance of the Class A notes had amortised by 54.3% since issuance and the current aggregated transaction balance was EUR 91.4 million.

As of April 2024, the transaction was performing above the special servicer's initial business plan expectations. The actual cumulative gross collections equalled EUR 103.0 million whereas the special servicer's initial business plan estimated cumulative gross collections of EUR 77.5 million for the same period. Therefore, as of April 2024, the transaction was overperforming by EUR 25.5 million (32.8%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections of EUR 58.5 million for the same period at the BBB (sf) stressed scenario . Therefore, as of April 2024, the transaction was performing above Morningstar DBRS' initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, the special servicer delivered the third updated portfolio business plan in May 2024.

The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 98.9 million as of January 2024, results in a total of EUR 223.5 million, which is 3.4% lower than the total gross collections of EUR 231.5 million estimated in the initial business plan. Considering the performance to date, the special servicer now expects considerably lower collections for the remaining exposures than in the initial business plan.

Excluding actual collections, the Servicers' expected future collections from May 2024 account for EUR 120.2 million. The updated Morningstar DBRS BBB (sf) credit rating stress assumes a haircut of 20.6% to the special servicer's updated business plan, considering future expected collections.

The final maturity date of the transaction is in December 2045.

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 and the special servicer, which comprise, in addition to the information received at issuance, the updated business plan as of January 2024, the payment report as of June 2024, as well as the semiannual servicer report as of April 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 15 June 2023, when Morningstar DBRS confirmed its credit rating on the Class A notes at BBB (sf) and changed the trend to Stable from Positive.

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 95.4 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 of the Class A notes to BB (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 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: William Taliento, Senior Analyst
Credit Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Credit Rating Date: 25 June 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].