What Happens During and After a Servicer Defaults? A Case Study of Gedesco Trade Receivables 2020-1 DAC

In March 2020, Gedesco Trade Receivables 2020-1 DAC (the Issuer) issued certain classes of notes due in January 2026 for a total outstanding principal balance equal to EUR 300 million. Gedesco Services Spain, S.A.U. was appointed as servicer of the transaction.

Although we have not rated the transaction, we are of the view that the negative performance of this transaction is mainly because of (1) the originators' business model that was too reliant on a small number of funding sources, including the securitisation; (2) the reliance that the short-term receivables securitised in this transaction (e.g., promissory notes and direct lending facilities) needed to be continuously refinanced and/or replaced by new short-term debt (rolled over), thereby appearing to be less short term in nature than their remaining time to maturity suggested; and (3) the difficulties for a sizable portion of the borrowers to find alternative lenders in order to repay the Issuer.

In this commentary, we analyse (1) the events that led to the Servicer's default, (2) our opinion on the reasons that worsened the performance of the portfolio, (3) the credit relevance that the origination process had, and (4) the effectiveness of the contractual provisions aimed at preserving the continuity of the portfolio servicing.

"The ultimate principal recovery will mostly depend on the capacity of the back-up servicer to recover the borrowers' receivables", said Lorenzo Simonte, Assistant Vice President, European Nonperforming Loan Ratings. "Or, in the worst-case scenario, the strategy of the security trustee after the serving of an enforcement notice and the enforcement of the relevant securities".