Morningstar DBRS Downgrades Credit Ratings on BCC NPLs 2019 S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) downgraded its credit ratings on the notes issued by BCC NPLs 2019 S.r.l. (the Issuer) as follows:

-- Class A Notes to B (low) (sf) from BBB (low) (sf) with a Negative trend
-- Class B Notes to CC (sf) from CCC (sf)

Morningstar DBRS also removed the Negative trend from the Class B Notes’ credit rating.

The transaction represents the issuance of Class A, Class B, and Class J Notes (collectively, the notes) backed by a mixed pool of Italian nonperforming secured and unsecured loans originated by 68 Italian banks (collectively, the originators). The credit rating assigned to the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date of the transaction, while the credit rating assigned to the Class B Notes addresses the ultimate payment of both interest and principal on or before the final maturity date. Morningstar DBRS does not rate the Class J Notes also issued under this transaction.

The gross book value (GBV) of the loan pool was approximately EUR 1.32 billion as of the 31 December 2018 selection date. The securitised portfolio is composed of secured loans representing approximately 73.8% of the GBV and unsecured loans representing the remaining 26.2%. Residential and industrial real estate properties represent 44.2% and 16.2% of the pool by first-lien real estate value, respectively.

DoValue S.p.A. (doValue or the special servicer) services the receivables. DoNext S.p.A. acts as the master servicer while Banca Finanziaria Internazionale S.p.A. (Banca Finint) has been appointed as backup servicer.

CREDIT RATING RATIONALE
The credit rating actions follow a review of the transaction and are 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 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 December 2023, received in March 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’s 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%. As of the January 2024 interest payment date, these triggers had not been breached, with actual figures at 92.1% and 102.3%, respectively, according to the special servicer.
-- Liquidity support: The transaction’s 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 3.0% of the Class A principal outstanding and is currently 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 226.5 million, EUR 53.0 million, and EUR 13.2 million, respectively. As of the January 2024 payment date, the balance of the Class A Notes had amortised by 36.2% since issuance, and the current aggregated transaction balance is EUR 292.7 million.

As of December 2023, the transaction was performing below the special servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 200.9 million, whereas the special servicer’s initial business plan estimated cumulative gross collections of EUR 205.1 million for the same period. Therefore, as of December 2023, the transaction was underperforming by EUR 4.2 million (2.1%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 138.9 million at the BBB (sf) stressed scenario and EUR 201.5 million at the CCC (sf) stressed scenario. Therefore, as of December 2023, the transaction was performing above Morningstar DBRS’ initial stressed expectations in the BBB (sf) scenario, but below its expectations in the CCC (sf) scenario.

In March 2024, pursuant to the requirements set out in the receivable servicing agreement, the special 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 200.9 million as of December 2023, results in a total of EUR 514.0 million, which is 20.5% lower than the total gross disposition proceeds of EUR 646.8 million estimated in the initial business plan.

Excluding actual collections as of December 2023, the special servicer’s expected future collections from January 2024 amount to EUR 313.1 million. Morningstar DBRS’ updated B (low) (sf) credit rating stresses assume a haircut of 8.4% to the special servicer’s updated business plan, considering the future expected collections. In Morningstar DBRS’ CCC (sf) scenario, the special servicer’s updated forecast was adjusted only in terms of actual collections to the date and timing of future expected collections, resulting in a EUR 313.4 million recovery expectation.

While the performance triggers are not breached yet, Morningstar DBRS does not deem the performance trend to be sustainable, as evidenced by the special servicer’s underperformance compared with the initial business plan, the updated business plan received last year, and the special servicer’s materially downward revision of future collection expectations according to the most recent business plan. Furthermore, the amortization speed of the Class A Notes is slower than other transactions issued in the same year, which increases uncertainty regarding full repayment of the Class A Notes. In addition, as the updated business plan has a longer weighted-average life, the repayment of the Class A Notes will slow further, leading to higher interest payments and senior costs. Finally, the actual collections from closed borrowers were 37.1% lower than the projected collections in the initial business plan, and the borrowers with note sales were closed at a higher discount of 47.2%. Morningstar DBRS therefore downgraded the credit rating on the Class A Notes to B (low) (sf) and maintained the Negative trend.

Morningstar DBRS observes that it is increasingly unlikely that the Class B Notes' obligations will be fully met at maturity, as the reduction of the special servicer's expected future collections leaves no room for the full payment of principal and interest on the Class B Notes. Therefore, Morningstar DBRS downgraded the credit rating on the Class B Notes to CC (sf). Nevertheless, given the characteristics of the Class B Notes as defined in the transaction documents, Morningstar DBRS notes that a default would most likely be recognised only at the maturity or early termination of the transaction.

The final maturity date of the transaction is January 2044.

Morningstar DBRS' credit ratings on the Class A and Class B Notes address 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 ratings do 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 these credit ratings include the Issuer, doValue, and Banca Finint which comprise, in addition to the information received at issuance, the investor report as of January 2024; the semiannual servicer report as of December 2023; the quarterly servicer report as of March 2024; and the updated business plan received in 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 ratings, 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 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 actions on this transaction took place on 14 July 2023, when Morningstar DBRS downgraded its credit rating on the Class A Notes to BBB (low) (sf) from BBB (sf) with a Negative trend and confirmed its credit rating on the Class B Notes at CCC (sf) with a Negative trend.

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 https://dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, 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 286.7 million and EUR 313.4 million at the B (low) (sf) and CCC (sf) stress level, respectively, 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 CC (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 CC (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a downgrade of the Class B Notes to C (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class B Notes to C (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.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sijia Aulenbacher, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 19 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 (28 June 2024), https://dbrs.morningstar.com/research/435165
-- 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 (28 June 2024), https://dbrs.morningstar.com/research/435263
-- 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 (28 June 2024), https://dbrs.morningstar.com/research/435260
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278
-- 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].