Morningstar DBRS Assigns Credit Rating to Class A 2025 Notes and Downgrades Credit Rating on Class A 2022 Notes Issued by BPL Mortgages S.r.l. (BPL8), Following Restructuring

DBRS Ratings GmbH (Morningstar DBRS) assigned a credit rating of A (sf) to the EUR 2,851,700,000 Class A 2025 Asset Backed Floating Rate Notes due 25 October 2064 (the Class A 2025 Notes) issued by BPL Mortgages S.r.l. (BPL8) (the Issuer), following the transaction restructuring. Morningstar DBRS also downgraded the credit rating of the outstanding EUR 389,457,144 Class A 2022 Asset Backed Floating Rate Notes due 25 October 2064 (the Class A 2022 Notes and, together with the Class A 2025 Notes, the Class A Notes) issued by the same Issuer, from AA (low) (sf) to A (sf).

The credit ratings address the timely payment of interest and the ultimate repayment of principal by the final maturity date in October 2064. The Class A Notes rank pari passu and without any priority among themselves, but with priority over the Class J 2022 Notes and Class J 2025 Notes, which Morningstar DBRS does not rate.

The credit rating actions follow Morningstar DBRS' review of the transaction after the Restructuring. The downgrade of the credit rating of the Class A 2022 Notes is reflective of the reduction of their credit enhancement, which has decreased to 23.8% (calculated as a percentage of the portfolio as of 8 December 2024 and including the cash reserve) from 64.5% as of the last payment date in October 2024.

CREDIT RATING RATIONALE
The transaction is a static cash flow securitisation collateralised by a portfolio of secured and unsecured loans to Italian small and medium-sized enterprises (SMEs), entrepreneurs, artisans, and producer families that were granted by Banco BPM SpA (Banco BPM or the originator), Banco Popolare Società Cooperativa (BP) and Banca Popolare di Milano S.c.a.r.l. (BPM). In January 2017, BP and BPM merged into Banco BPM.

The following amendments were made to the transaction (the Restructuring):
-- With valuation date of 8 December 2024, the originator transferred a new portfolio to the Issuer, which issued new Class A 2025 Notes and Class J 2025 Notes to pay the relevant purchase price on 10 February 2025.
-- On 12 December 2025 the originator repurchased all the defaulted loans as well as loans not compliant with the Simple, Transparent and Standardised (STS) regulation, Capital Requirements Regulation (CRR), and European Central Bank (ECB) regulations.
-- Renegotiations limits calculations were reset to zero and some limits amended.
-- The scheduled interest payment date of 27 January 2025 was postponed to 25 February 2025.

As of the valuation date of 8 December 2024, the portfolio consisted of 33,214 loans extended to 28,546 borrower groups, with an aggregate par balance equal to EUR 4.08 billion, EUR 32.89 million of which was in arrears for less than 30 days. The portfolio consisted of senior unsecured and mortgage-backed loans, representing 38.0% and 62.0% of the outstanding pool balance, respectively.

The portfolio is concentrated in northern Italy, with the largest exposures to Lombardy, Veneto, and Tuscany, representing 41.8%, 15.2%, and 11.2% of the pool, respectively. The initial portfolio also shows a moderate industry concentration, with the top three sector exposures (as per Morningstar DBRS' industry classifications) of real estate, consumer packaged goods, and homebuilding & construction representing 23.1%, 19.3%, and 7.9% of the pool balance, respectively. The initial portfolio is granular with a low borrower concentration. The top one, five, and 10 borrower groups account for 0.6%, 1.7%, and 2.7% of the outstanding portfolio balance, respectively.

PORTFOLIO PERFORMANCE
As of the October 2024 payment date, the loans in arrears for more than 90 days trended up to 0.5% from 0.3% as of the January 2024 payment date. The cumulative defaults represented 0.3% of the original balance. In the context of the Restructuring, the originator repurchased all defaulted and severe delinquent loans.

TRANSACTION STRUCTURE
The transaction is structured with a cash reserve, which will be available to cover expenses, senior fees, and interest payments on the Class A Notes. The target cash reserve is equal to 4.0% of the principal outstanding of the Class A Notes (floored at EUR 12.96 million). The Class A Notes benefit from a total credit enhancement of 23.8%, provided by the overcollateralisation of the portfolio and the cash reserve.

The transaction is exposed to set off risk, which, according to Morningstar DBRS calculations, represented 22.9% of the portfolio balance. The set-off exposure would decrease to 13.5% if all borrowers opted to claim the first EUR 100,000 covered by the Italian deposit guarantee scheme. Morningstar DBRS assumed a set-off risk of EUR 276.50 million in its analysis, considered as a net loss and deducted from the portfolio balance.

Banco BPM covers several roles in the transaction, such as the roles of servicer, collection account bank, and account bank. Banco BPM holds the servicer collection account, the collection account, and the cash reserve account. No backup servicer is appointed at transaction closing; however, Banca Finanziaria Internazionale S.p.A. acts as backup servicer facilitator. Morningstar DBRS deems Banco BPM to be a dominant counterparty in this transaction. Based on the account bank's rating and the replacement provisions included in the transaction documents, Morningstar DBRS considers the counterparty risk to be consistent with the credit ratings assigned to the Class A Notes, in accordance with its "Legal and Derivative Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS determined its credit ratings based on the principal methodology and the following analytical considerations:
-- The amendments to the transaction that became effective on 7 February 2025;
-- The overall portfolio performance as of the October 2024 payment date, particularly with regard to low levels of delinquencies and defaults;
-- Morningstar DBRS determined the probability of default (PD) for the portfolio using the historical performance information supplied. Morningstar DBRS assumed an annualised PD of 4.7% and 2.1% for mortgage and nonmortgage loans, respectively.
-- The assumed weighted-average life (WAL) of the portfolio was 3.5 years.
-- Morningstar DBRS used the PDs and WAL as inputs for its SME Diversity Model to generate the hurdle rate for the assigned credit ratings.
-- Morningstar DBRS determined the recovery rate by considering the market value declines for Europe, the security level, and collateral type. Morningstar DBRS used recovery rates of 78.9% and 21.2% for the secured and unsecured loans, respectively, at the A (sf) credit rating level. The assumed portfolio WA recovery rate was 51.1% at the A (sf) credit rating level.
-- Morningstar DBRS determined the breakeven rates for the interest rate stresses and default timings using its cash flow tool.
-- The available credit enhancement to the Class A Notes to cover the expected losses assumed in line with the A (sf) credit rating level.

Morningstar DBRS' credit ratings on the Class A Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related class balances.

Morningstar DBRS' credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

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

Morningstar DBRS analysed the transaction structure in its proprietary Excel-based cash flow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is Rating CLOs Backed by Loans to European SMEs (19 November 2024), https://dbrs.morningstar.com/research/443198.

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.

Morningstar DBRS reviewed the legal documents provided in the context of the Restructuring, executed on 12 December 2024, 16 December 2024, and 7 February 2025. A review of any other transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent 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 these credit ratings include investor reports provided by Banca Finanziaria Internazionale S.p.A., servicer reports, and performance data relating to the receivables provided by the originator and arranger, Banco BPM.

Morningstar DBRS received the following data information, split by secured and unsecured loans:
-- Quarterly static default data from Q4 2017 to Q3 2024,
-- Quarterly dynamic delinquency data from Q4 2017 to Q3 2024,
-- Quarterly dynamic prepayment data from Q4 2017 to Q3 2024, and
-- Annual migration matrixes from 2013 to 2023, split by mid-corporate and small business.

In addition, Morningstar DBRS received loan-level characteristics, contractual amortisation profile, and borrowers' set-off exposure as of 8 December 2024.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

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 credit rating on the Class A 2025 Notes concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

The last credit rating action on the Class A 2022 Notes of this transaction took place on 26 April 2024, when Morningstar DBRS upgraded its credit rating on the Class A 2022 Notes to AA (low) (sf) from A (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Ilaria Maschietto.

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):

-- PD Rates Used: Base-case PDs of 4.7% and 2.1%, for mortgage and nonmortgage loans, respectively, a 10% and 20% increase on the base-case PD.
-- Recovery Rates Used: Base-case recovery rates of 51.1% at the A (sf) credit rating level, a 10% and 20% decrease in the base-case recovery rate.

Morningstar DBRS concludes that a hypothetical increase of the base-case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would each lead to a downgrade of the transaction to A (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the Class A Notes to BBB (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.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Ilaria Maschietto, Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 27 April 2022

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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 CLOs Backed by Loans to European SMEs (19 November 2024) and Morningstar DBRS SME Diversity Model 2.7.1.5 https://dbrs.morningstar.com/research/443198.
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024) https://dbrs.morningstar.com/research/443196
-- European RMBS Insight Methodology (3 December 2024) https://dbrs.morningstar.com/research/444100
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024 https://dbrs.morningstar.com/research/439913
-- Global Methodology for Rating CLOs and Corporate CDOs (19 November 2024) https://dbrs.morningstar.com/research/443207
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024) https://dbrs.morningstar.com/research/439571
-- 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.