Morningstar DBRS Confirms Credit Ratings on Aragorn NPL 2018 S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the notes issued by Aragorn NPL 2018 S.r.l. (the Issuer) as follows:

-- Class A notes at CCC (sf)
-- Class B notes at CC (sf)

Morningstar DBRS also maintained the Negative trend on the Class A notes.

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 Credito Valtellinese S.p.A. and Credito Siciliano S.p.A. (collectively, the originators). The credit rating assigned to the Class A notes addresses the timely payment of interest and the ultimate repayment of principal. The credit rating assigned to the Class B notes addresses the ultimate payment of both interest and principal. Morningstar DBRS does not rate the Class J notes.

The gross book value (GBV) of the loan pool was approximately EUR 1.671 billion as of the 31 December 2017 cut-off date. The nonperforming loan portfolio consists of secured commercial and residential borrowers (82.0% of total GBV) and unsecured borrowers (18.0% of total GBV), mostly Italian small and medium-size enterprises (90.2% of the total GBV). Of the GBV, 68% comprised 364 borrowers (of the 4,161 total), each with a GBV of more than EUR 1 million. The top 50 borrowers made up 26.8% of the pool GBV at the cut-off date.

The receivables are now serviced by Fire S.p.A. (the special servicer) after the replacement of each of the previous special servicers (Special Gardant S.p.A. and Cerved Credit Management S.p.A.) in the context of an amendment that involved the execution of a termination letter, master amendment agreement, and a new servicing agreement, all of which were signed and came into effect in July 2024. Master Gardant S.p.A. acts as the master servicer while Cerved Master Services S.p.A. operates as the 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 31 December 2023, focusing on: (1) a comparison between actual collections and the initial business plan forecast; (2) the collection performance observed over recent months; and (3) a comparison between the current performance and Morningstar DBRS' expectations.
-- Revised business plan: The special servicer's revised business plan as of March 2023, 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 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 collection ratio (CCR) or the present value cumulative profitability ratio (NPV CPR) is lower than 90%. The reported CCR of 71.2% as at 31 December 2023 is below the trigger while the reported NPV CPR is 102.4%. The updated collections as per the special servicer's revised business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the aggregate outstanding balance of the Class A and Class B notes.
-- 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 5% of the Class A notes' principal outstanding balance 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 280.1 million, EUR 66.8 million, and EUR 10.0 million, respectively. As of the January 2024 interest payment date, the balance of the Class A notes had amortised by approximately 45.0% since issuance and the current aggregated transaction balance was EUR 357.0 million.

As of March 2024, the transaction was underperforming the initial business plan expectations. The actual cumulative gross collections equalled EUR 340.8 million whereas the initial business plan estimated cumulative gross collections of EUR 535.5 million for the same period. Therefore, as of March 2024, the transaction was underperforming by EUR 194.7 million (-36.4%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 413.8 million at the BBB (sf) stressed scenario and EUR 515.5 million at the CCC (sf) stressed scenario. Therefore, as of March 2024, the transaction was performing below Morningstar DBRS' initial BBB (sf) stressed expectations.

Morningstar DBRS was not provided with an updated portfolio business plan from the previous special servicers. Instead, the new special servicer provided Morningstar DBRS with a revised portfolio business plan combined with the actual cumulative collections as of March 2023. The revised portfolio business plan, combined with the actual cumulative gross collections of EUR 275.0 million as of March 2023, resulted in a total of EUR 621.7 million, which is 19.6% lower than the total gross disposition proceeds of EUR 773.0 million estimated in the initial business plan. Excluding actual collections, the special servicer expected future collections from April 2023 to amount to EUR 346.7 million. The updated Morningstar DBRS BBB (sf) rating stress assumes a haircut of 33.2% to the special servicer's revised business plan, considering collections from January 2023. In Morningstar DBRS' CCC (sf) scenario, the special servicer's revised forecast was adjusted in terms of the actual collections to date, the timing of future expected collections, and additionally, given that the availability of the data at the time the special servicer provided the revised portfolio business plan was limited because it was not appointed as special servicer yet, Morningstar DBRS did not give credit to the full amount of estimated collections in some positions where total amounts were substantially higher than in previous business plan reviews.

The estimated collections as per the special servicer's revised business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the total of the Class A and Class B notes, but considering the transaction structure, a payment default on the bond would likely only occur in a few years from now.

The final maturity date of the transaction is in July 2038.

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.

Morningstar DBRS reviewed the impact of the aforementioned amendment (special servicers replacement) that involved the execution of a termination letter, master amendment agreement, and a new servicing agreement, all of which were signed and came into effect in July 2024, and concluded that the amendment did not, in and of itself, result in a downgrade or discontinuation and withdrawal of the CCC (sf) credit rating with a negative trend on the Class A notes or CC (sf) credit rating on the Class B notes.

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 special servicer, Banca Finanziaria Internazionale S.p.A., and Citibank N.A., which comprise, in addition to the information received at issuance, the investor report as of January 2024; the monthly special servicer report as of May 2024; the updated data tape as of May 2024; and the revised business plan.

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 3 August 2023, when Morningstar DBRS confirmed its CCC (sf) and CC (sf) credit ratings on the Class A and Class B notes, respectively. Morningstar DBRS also maintained its Negative trend on the Class A notes and removed the trend from the Class B notes.

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 ratings (the base case):
-- 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 below 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 below CCC (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class B notes at CC (sf)
-- Morningstar DBRS concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class B notes at CC (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: Clarice Baiocchi, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 14 June 2018

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 (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].