Morningstar DBRS Downgrades Credit Rating on Luzzatti POP NPLs 2021 S.r.l. to BB (high) (sf) from BBB (sf) and Maintains Negative Trend

DBRS Ratings GmbH (Morningstar DBRS) downgraded its credit rating on the Class A Notes issued by Luzzatti POP NPLs 2021 S.r.l. (the Issuer) to BB (high) (sf) from BBB (sf) and maintained the Negative trend on the credit rating.

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. Morningstar DBRS does not rate the Class B or Class J Notes.

As of the 1 January 2021 cut-off date, the Class A Notes were backed by a EUR 790.5 million portfolio by gross book value (GBV) of Italian secured and unsecured nonperforming loans (NPLs) originated by 12 Italian banks (the Sellers or the Originators). doValue S.p.A. (the Servicer) services the receivables, while Zenith Service S.p.A. acts as the master servicer for the transaction. Centotrenta Servicing S.p.A. (the Backup Servicer) has been appointed to carry out the servicing activities in case the agreement with the Servicer terminates.

The securitised portfolio included secured loans representing approximately 53.7% of the GBV, approximately 89.4% by GBV which benefits from a first-ranking lien mortgage, with unsecured loans representing the remaining 46.3% of the GBV. At the cut-off date, the portfolio mainly represented corporate borrowers (68.4% by GBV), and the properties securing the loans in the portfolio were mainly residential (48.9% by first-ranking lien updated real estate value). The secured collateral was mainly concentrated in the northern regions of Italy (50.6% by first-ranking lien updated real estate value) with Lombardy as the most represented region (40.0% by first-ranking lien updated real estate value).

CREDIT RATING RATIONALE
The credit rating action 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 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 December 2023, approved in July 2024, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The 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 begin to 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 is lower than 90%. As of the April 2024 interest payment date, these triggers had not been breached with actual figures at 224.7% and 135.1%, respectively, per the Servicer.
-- Liquidity support: The transaction benefits from an amortising cash reserve and a recovery expenses cash reserve providing liquidity to the structure and covering a potential interest shortfall on the Class A Notes and senior fees. The cash reserve target amount is equal to 4.0% of the Class A Notes' principal outstanding balance and the recovery expenses cash reserve target amounts to EUR 300,000, both 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 112.3 million, EUR 25.0 million, and EUR 10.0 million, respectively. As of the April 2024 payment date, the balance of the Class A Notes had amortised by 41.2% since issuance and the aggregated transaction balance was EUR 147.3 million.

As of March 2024, the transaction was performing above the Servicer's business plan expectations. The actual cumulative gross collections equalled EUR 100.3 million whereas the Servicer's initial business plan estimated cumulative gross collections of EUR 44.0 million for the same period. Therefore, as of March 2024, the transaction was overperforming by EUR 56.3 million (128.1%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 32.6 million in 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, in April 2024, the Servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 89.3 million as of December 2023, results in a total of EUR 287.5 million, which is 5.9% lower than the total gross disposition proceeds of EUR 305.7 million estimated in the initial business plan. Considering the performance to date, future expected collections have been reduced considerably (by 28.8%). Morningstar DBRS understands that this is because the overperformance to date is the result of closed files in relation to unsecured loans, whereas the workout performance of secured loans has been lagging. Excluding actual collections, the Servicer's expected future collections from April 2024 amount to EUR 186.4 million. The updated Morningstar DBRS BB (high) (sf) credit rating stresses assume a haircut of 17.2% to the Servicer's updated business plan, considering future expected collections.

Considering the revision of the business plan, Morningstar DBRS does not deem the positive performance trend to be sustainable, hence the downgrade of the credit rating on the Class A notes to BB (high) (sf) while maintaining the Negative trend on the credit rating. Morningstar DBRS credit rating also considers continued leakage of available funds to the payment of class B interests, while the positive performance to date has been considered by lowering our distressed sales discount assumptions.

The final maturity date of the transaction is October 2045.

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, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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" (6 August 2024), https://dbrs.morningstar.com/research/437540.

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 Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this credit rating include the Issuer, the Servicer, and Zenith Service S.p.A., which comprise, in addition to the information received at issuance, the investor report as of April 2024, the updated business plan approved in July 2024, the semiannual and quarterly Servicer report as of March 2024, and the quarterly Master Servicer report 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 9 August 2024, when Morningstar DBRS confirmed its credit rating on the Class A Notes at BBB (sf) and maintained the Negative Trend.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on 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 154.3 million at the BB (high) (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 B (low) (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 CCC (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: Pablo Iturriaga, Assistant Vice President,
Rating Committee Chair: Christian Aufsatz, Managing Director,
Initial Rating Date: 23 December, 2021

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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 (6 August 2024), https://dbrs.morningstar.com/research/437540
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- 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
-- 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.