Morningstar DBRS Confirms Credit Rating on Penelope SPV S.r.l. With a Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating action on the Class A Notes issued by Penelope SPV S.r.l.:

-- Class A Notes confirmed at A (low) (sf) with Stable trend

The notes were initially issued on 3 December 2018 and restructured on 29 December 2021 (the closing date). Morningstar DBRS assigned a credit rating to the Class A Notes in the context of the restructuring of the notes and did not rate the Class B or the Class J Notes. The credit rating on the Class A Notes addresses the timely payment of interest and the ultimately repayment of principal on or before the legal final maturity date in March 2041.

At issuance, the Class A Notes were backed by a portfolio of Italian secured and unsecured nonperforming loans (the portfolio) originated by Intesa Sanpaolo SpA. As of the 1 November 2021 cut-off date, the portfolio represented EUR 9.22 billion by gross book value (GBV).

Intrum Italy S.p.A. (the Servicer) services the portfolio, while no backup servicer was appointed for the transaction.

CREDIT RATING RATIONALE
The confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of August 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 May 2024, received in August 2024, and the comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of August 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). A portion of the interest due on the Class B Notes is paid ahead of the principal on the Class A Notes unless certain performance-related triggers are breached (i.e., a present value cumulative profitability ratio of less than 85%, or a cumulative collection ratio of less than 90%, or an interest shortfall on the Class A Notes). The cumulative collection ratio trigger has been breached since December 2022 payment date, with the actual net cumulative collection ratio at 61.2%, according to the Servicer.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure and covering potential interest shortfall on the Class A Notes and senior fees. The cash reserve target amount is equal to 4% of the Class A Notes' principal outstanding balance and is currently fully funded.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents consistent with Morningstar DBRS´ "Legal and Derivative Criteria for European Structured Finance Transactions".

TRANSACTION AND PERFORMANCE
According to the latest investor report from September 2024, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 367.2 million, EUR 143.6 million, and EUR 599.6 million, respectively. As of the September 2024 interest payment date, the balance of the Class A Notes had amortised by approximately 62.7% since the restructuring and the current aggregated transaction balance was EUR 1,110.3 million.

As of the August 2024 collection date, the transaction was performing below the Servicer's initial expectations. The actual cumulative gross collections as of August 2024 were EUR 815.3 million whereas the Servicer's initial business plan estimated cumulative gross collections of EUR 1.334.2 million for the same period. Therefore, as of August 2024, the transaction was underperforming by 38.9% compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative collections of EUR 273.2 million in the A (low) (sf) stressed scenario for the same period. Therefore, as of August 2024, the transaction is performing above Morningstar DBRS' initial A (low) (sf) stressed expectations.

Pursuant to the requirements set out in the servicing agreement, in August 2024, the Servicer delivered an updated portfolio business plan (the updated business plan) as of May 2024. The updated business plan, combined with the actual cumulative gross collections of EUR 769.3 million as of May 2024, results in a total of EUR 1,922.2 million expected gross collections, which is 20.1% lower than the total gross collections of EUR 2,404.6 million estimated in the initial business plan.

Excluding actual collections, the Servicer's expected future collections from September 2024 account for EUR 1,097.9 million. The updated Morningstar DBRS A (low) (sf) credit rating stress assumes a haircut of 29.4% to the Servicer's updated business plan, considering total future expected collections from September 2024 onwards.

Considering the faster-than-expected amortisation of the Class A notes compared with Morningstar DBRS' initial stressed expectations and the increased subordination, the rated Notes may now pass higher credit rating stresses in the cash flow analysis. However, Morningstar DBRS believes that higher credit ratings would not be commensurate with the risk of the transaction considering the potential higher variability of NPLs' cash flows, the underperformance as of August 2024, the downward revision of the updated business plan and the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

The final maturity date of the transaction is in March 2041.

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 factor(s) 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), 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 rating is:
-- Master European Structured Finance Surveillance Methodology (19 November 2024), https://dbrs.morningstar.com/research/443204

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 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 this credit rating include the Issuer, the Servicer, and Banca Finint which comprise, in addition to the information received at issuance, the updated business plan as of May 2024 delivered in August 2024; the investor report as of September 2024; the payments report as of September 2024; the quarterly servicer report as of August 2024; and the updated data tape as of August 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 issuer took place on 22 December 2023, when Morningstar DBRS confirmed the credit rating on the Class A notes and changed the Trend from Negative to Stable.

The lead analyst responsibilities for this transaction have been transferred to William Taliento.

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 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 775.4 million at the A (low) (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 A (low) (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 A (low) (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.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: William Taliento, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 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 (19 November 2024), https://dbrs.morningstar.com/research/443201
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024),
https://dbrs.morningstar.com/research/443196
-- Master European Structured Finance Surveillance Methodology (19 November 2024),
https://dbrs.morningstar.com/research/443204
-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024), https://dbrs.morningstar.com/research/439583
-- Common RMBS Rating Methodology (18 October 2024),
https://dbrs.morningstar.com/research/441432
-- 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
-- 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.