Morningstar DBRS Confirms Credit Ratings on Popolare Bari NPLS 2016 S.r.l.

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the notes issued by Popolare Bari NPLS 2016 S.r.l. (the Issuer) as follows:

-- Class A Asset Backed Floating Rate Notes due 2036 (the Class A Notes) at CC (sf)
-- Class B Asset Backed Floating Rate Notes due 2036 (the Class B Notes) at C (sf)

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. The credit rating on the Class B Notes addresses the ultimate payment of principal and interest. Morningstar DBRS does not rate the Class J Notes.

At issuance, the notes were backed by a EUR 480.0 million portfolio by gross book value consisting of a mixed pool of Italian nonperforming residential, commercial, and unsecured loans originated by Banca Popolare di Bari S.c.p.A., Banca Tercas, and Banca Caripe S.p.A. All entities were subsequently merged into Banca Popolare di Bari S.c.p.A. (the Originator).

Prelios Credit Servicing S.p.A. (Prelios or the servicer) services the receivables while Banca Finint S.p.A. (Banca Finint; formerly Securitisation Services S.p.A.) operates as backup servicer.

CREDIT RATING RATIONALE
The credit rating confirmations follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of May 2024, 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 November 2023, received in March 2024, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of May 2024 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The fully sequential amortisation of the notes according to the order of priority (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 (NPV) cumulative profitability ratio are lower than 90%. Since the June 2020 interest payment date (IPD), the cumulative net collection ratio has breached the 90% limit, so that interest payments on the Class B Notes are subordinated to the repayment of principal on the Class A Notes. As per the May 2024 servicer report, the cumulative net collection ratio is 57.6% and the NPV cumulative profitability ratio is 84.2%.
-- 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 costs. The cash reserve target amount is equal to 3% of the Class A and Class B Notes' principal outstanding and is currently fully funded. There is an additional cash reserve funded at EUR 2.5 million from the first IPD through collections. It is fully funded as of the June 2024 IPD.
-- Interest rate risk: The transaction is exposed to high interest rate risk in a rising-interest-rate environment because of the material underhedging of the Class A and Class B Notes, which is a result of the underperformance in terms of collections. In addition, the interest cap agreement will expire on the December 2024 IPD, meaning no interest risk protection thereafter.

TRANSACTION AND PERFORMANCE
According to the latest investor report from June 2024, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 63.2 million, EUR 14.0 million, and EUR 10.0 million, respectively. As of the June 2024 payment date, the balance of the Class A Notes had amortised by 50.1% since issuance, and the current aggregated transaction balance was EUR 87.2 million.

As of May 2024, the transaction was performing below the servicer's business plan expectations. The actual cumulative gross collections equalled EUR 102.0 million, whereas the servicer's initial business plan estimated cumulative gross collections of EUR 176.5 million for the same period. Therefore, as of May 2024, the transaction was underperforming by EUR 74.6 million (42.2%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 130.9 million at the BBB (high) (sf) stressed scenario and EUR 149.4 million at the B (high) (sf) stressed scenario. Therefore, as of May 2024, the transaction was performing below Morningstar DBRS' initial stressed expectations.

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

The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 95.7 million as of November 2023, results in a total of EUR 136.3 million, which is 30.9% lower than the total gross disposition proceeds of EUR 197.2 million estimated in the initial business plan.

Excluding actual collections as of May 2024, the servicer's expected future collections from June 2024 amount to EUR 33.2 million, which is less than the current balance of the Class A Notes. In Morningstar DBRS' CCC (sf) scenario, the servicer's updated forecast was adjusted only in terms of actual collections to date and the timing of future expected collections, resulting in EUR 34.2 million in recoveries.

Considering the material gap between the future expected collections and the current balance of Class A Notes, the full repayment of the Class A principal is unlikely, but considering the transaction structure, a payment default on the notes would likely occur only in a few years.

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 in December 2036.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at:
https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include the Issuer, Prelios, and Banca Finint which comprise, in addition to the information received at issuance, the investor report as of June 2024; the semiannual servicer report as of May 2024; a loan-by-loan report as of May 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 11 August 2023, when Morningstar DBRS downgraded its credit rating on the Class A Notes to CC (sf) from CCC (sf) and confirmed its credit rating on the Class B Notes at C (sf).

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 34.2 million at the 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 confirmation of the Class A 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 A Notes at CC (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 C (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 C (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.

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

Lead Analyst: Sijia Aulenbacher, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Associate Managing Director
Initial Rating Date: 12 August 2016

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating European Nonperforming and Reperforming Loans Securitisations (6 August 2024), https://dbrs.morningstar.com/research/437550
-- 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 (6 August 2024), https://dbrs.morningstar.com/research/437543
-- 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 info-DBRS@morningstar.com.