Morningstar DBRS Downgrades Credit Rating on Class A Notes Issued by BCC NPLs 2018-2 S.r.l. and Confirms Credit Rating on Class B Notes

DBRS Ratings GmbH (Morningstar DBRS) downgraded its credit rating on the Class A Notes issued by BCC NPLs 2018-2 S.r.l. (the Issuer) as follows:

-- Class A Notes to B (low) (sf) from B (sf)

In addition, Morningstar DBRS confirmed its credit rating on the Class B Notes as follows:

-- Class B Notes at CC (sf)

The trend on the Class A Notes remains Negative.

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 on or before the final maturity date in July 2042. The credit rating on the Class B Notes addresses the ultimate payment of both interest and principal. Morningstar DBRS does not rate the Class J Notes.

At issuance, the notes were backed by a EUR 2 billion portfolio by gross book value consisting of a mixed pool of Italian nonperforming residential mortgage loans, commercial mortgage loans, and unsecured loans originated by 73 Italian banks.

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 June 2024, 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 June 2024 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 is lower than 80%. The ratios were at 59.4% and 90.4% as of the July 2024 interest payment date (IPD), respectively, according to the special servicer. The cumulative net collection ratio trigger has been breached since the January 2023 IPD.
-- 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 July 2024 investor report, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 293.6 million, EUR 60.1 million, and EUR 20.0 million, respectively. As of the July 2024 IPD, the balance of the Class A Notes had amortised by 38.6% since issuance and the aggregated transaction balance was EUR 373.7 million.

As of June 2024, the transaction was performing below the special servicer's initial business plan expectations. The actual cumulative gross collections equalled EUR 319.9 million whereas the special servicer's business plan estimated cumulative gross collections of EUR 527.7 million for the same period. Therefore, as of June 2024, the transaction was underperforming by EUR 207.9 million (-39.4%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 405.7 million at the BBB (low) (sf) stressed scenario and EUR 528.8 million at the CCC (sf) stressed scenario. Therefore, as of June 2024, the transaction was performing below Morningstar DBRS' initial stressed expectations both in the BBB (low) (sf) scenario and the CCC (sf) scenario.

In March 2024, the special servicer delivered an updated portfolio business plan (the updated business plan) as of December 2023. The updated business plan, combined with the actual cumulative gross collections of EUR 303.7 million as of 31 December 2023, resulted in a total of EUR 714.6 million in expected gross collections, which is 14.0% lower than the total gross collections of EUR 830.6 million estimated in the initial business plan. Excluding actual collections, the special servicer's expected future collections from January 2024 now account for EUR 410.9 million (EUR 367.8 million in the initial business plan); therefore, the special servicer revised its expectation for collecting on the remaining portfolio upward by considering that part of the current underperformance is timing related. Accordingly, the timing of collections is now expected to be later than initially envisaged.

The updated Morningstar DBRS B (low) (sf) credit rating stress assumes a haircut of 5.6% to the special servicer's updated business plan, considering total future expected collections from July 2024 onward. In the CCC (sf) scenario, Morningstar DBRS adjusted the special servicer's updated forecast only in terms of actual collections to date and timing of future expected collections. Considering senior costs and interest due on the notes, the full repayment of the Class B principal is increasingly unlikely but, considering the transaction structure, a payment default on the Class B Notes would likely occur only a few years from now.

The final maturity date of the transaction is in July 2042.

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 Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

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 ratings 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 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 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, doValue, and Banca Finint which comprise, in addition to the information received at issuance, the investor report as of July 2024; the semiannual servicer report as of June 2024; the loan-by-loan data as of June 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 action on this transaction took place on 6 October 2023, when Morningstar DBRS downgraded its credit ratings on the Class A Notes to B (sf) from B (high) (sf) with a Negative trend and on the Class B Notes to CC (sf) from CCC (low) (sf).

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 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 369.9 million and EUR 395.8 million at the B (low) (sf) and CCC (sf) stress levels, 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: Christian Aufsatz, Managing Director
Initial Rating Date: 20 December 2018

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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 (18 September 2024), https://dbrs.morningstar.com/research/439575
-- 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 (18 September 2024), https://dbrs.morningstar.com/research/439583
-- European RMBS Insight Methodology (18 September 2024), https://dbrs.morningstar.com/research/439573
-- 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 Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571
-- Derivative Criteria for European Structured Finance Transactions (6 September 2024), https://dbrs.morningstar.com/research/439043
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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/439604.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.