Morningstar DBRS Confirms Credit Rating on Luzzatti POP NPLs 2023 S.r.l.; Maintains Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its BBB (high) (sf) credit rating on the Class A Notes issued by Luzzatti POP NPLs 2023 S.r.l. (the Issuer). The trend on the credit rating remained Stable. Morningstar DBRS does not rate the Class B or the Class J Notes also issued in this transaction.

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 June 2043.

As of the relevant selection dates, the Class A Notes were backed by a EUR 313.4 million portfolio by gross book value (GBV or the total due amount) of Italian secured and unsecured nonperforming loans (NPLs) originated by 12 Italian banks (the Sellers or the Originators).

doValue S.p.A. (doValue or the Servicer) services the receivables, while doNext S.p.A. acts as the Master Servicer for the transaction. Blue Factor S.p.A. will act as the backup servicer facilitator in case of termination of the agreement with the Master Servicer.

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 November 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.
-- Portfolio characteristics: The loan pool composition as of November 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 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 either the cumulative net collection ratio or the net present value cumulative profitability ratio is lower than 90%. These triggers were not breached on the November 2024 collection date, with actual figures at 129.1% and 168.3%, respectively, 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.

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 51.7 million, EUR 11.0 million, and EUR 3.0 million, respectively. As of the June 2024 interest payment date, the balance of the Class A Notes had amortised by approximately 33.3% since issuance and the aggregated transaction balance as of June 2024 was EUR 65.7 million.

As of the November 2024 collection date, the transaction was performing above the Servicer's initial expectations. The actual cumulative gross collections as of November 2024 were EUR 39.2 million whereas the Servicer's initial business plan estimated cumulative gross collections of EUR 30.2 million for the same period. Therefore, as of November 2024, the transaction was overperforming by 29.8% compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative collections of EUR 27.0 million in the BBB (high) (sf) stressed scenario for the same period. Therefore, as of November 2024, the transaction is performing above Morningstar DBRS' initial BBB (high) (sf) stressed expectations.

Pursuant to the requirements set out in the servicing agreement, the Servicer is expected to deliver the first updated portfolio business plan (the updated business plan) in April 2025.

According to the initial business plan, the Servicer's expected future collections from June 2024 amount to EUR 100.6 million. The updated Morningstar DBRS BBB (high) (sf) credit rating stress assumes a haircut of 19.4% to the Servicer's initial business plan, considering total future expected collections from June 2024 onwards.

Considering the outperformance registered since issuance and the increased subordination, the rated Notes may now pass higher credit rating stresses in the cash flow analysis. However, Morningstar DBRS does not yet deem this performance trend to be sustainable in the medium to long term, considering the potential higher variability of NPLs' cash flows. Therefore, Morningstar DBRS believes that higher credit ratings would not be commensurate with the risk of the transaction and confirmed the current credit rating assigned to the Class A Notes together with the Stable Trend.

The final maturity date of the transaction is in June 2043.

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) 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 Zenith Global, which comprise, in addition to the information received at issuance, the investor report as of June 2024; the semi-annual Servicer report as of November 2024; and the updated data tape as of November 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 the 28 December 2023, when Morningstar DBRS assigned a credit rating of BBB (high) (sf) with Stable Trend to the Class A Notes.

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 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 81.1 million at the BBB (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 confirmation of the Class A Notes at BBB (high) (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 BB (high) (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: 28 December 2023

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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.