The rating action is as follows:

Senior tranche, EUR 64.11m*: assigned new rating A-_SF

*Outstanding amounts reflect amortisation and defaults as of 31 March 2018.

Transaction overview

The financial guarantee provided by the European Investment Fund (EIF) to Banca Popolare di Bari (BP Bari) is an EU sponsored risk transfer transaction of Italian SME credit rights, i.e. loans and mortgages, in the context of the European Investment Bank (EIB) Group SME initiative for Italy. The credit rights were originated and will be serviced by BP Bari, supervised by the EIF.

The financial guarantee includes five tranches, whereby the EIF agrees to pay to BP Bari 50% of the losses incurred from the reference portfolio, currently EUR 174.5m. The other 50% will be retained by BP Bari. The senior tranche will incur a loss if portfolio losses exceed 26.5% of the portfolio, which corresponds to the credit enhancement provided the by four subordinated tranches.

Under the guarantee agreement, BP Bari receives cash payment from the EIF upon a loan default for 50% of the expected loss determined for the defaulted assets. The allocated losses are then adjusted over the loan recovery process led by BP Bari until the final actual loss is determined and result in an additional loss or a reinstatement of the affected tranche.

Defaulted assets are defined as those overdue more than 90 days or subject to acceleration, restructuring of the credit right or subjective default. The guarantee agreement grants certain contractual rights to the EIF with respect to the scrutiny of credit policy applications and credit processing within BP Bari. BDO Italia Spa, as external verification agent, will review the accuracy of the loss claims.

Scope has not assigned ratings to the Upper Mezzanine tranche, the Middle Mezzanine tranche, the Lower Mezzanine tranche, Senior Loss Piece or the First Loss Piece designed under the guarantee. The guarantee terminates on 30 November 2035.

Rating rationale

The rating reflects the legal and financial structure of the transaction as defined in the guarantee agreement; the credit quality of the underlying portfolio in the context of the macroeconomic conditions in southern Italy; the servicing capabilities and incentives of BP Bari, as well as the limited counterparty credit risk exposure to BP Bari upon the recovery of defaulted assets. The rating also takes into account the supervisory authority granted to BDO Italia SPA as verification agent and the verification rights granted to the EIF as guarantor.

The rating on the senior tranche is driven by the 26.5% credit enhancement available in the structure, which strongly protects the tranche against credit losses, as well as by the benefits of the sequential amortisation of the guarantee notional (credit enhancement available as of 31 March 2018).

The rating accounts for the characteristics of the reference portfolio, which Scope considers to have a credit quality commensurate with a B+ rating. The asset default and recovery assumptions used in the analysis reflect Scope’s view on the general obligor risk profile in BP Bari’s SME loan book and the lending standards that the bank applies. The weighted average portfolio life of 3.3 years is short, which limits the negative impact on the senior tranche of heightened uncertainties related to the fragile macroeconomic situation in Italy. Asset assumptions incorporate the generally weaker economic profile of southern Italy.

The counterparty risk exposure for this transaction is limited, because only very limited funds become commingled with BP Bari. Furthermore, the funds only flow between the EIF and BP Bari without credit exposure to other intermediaries. The EIF also benefits from effective guarantee termination events.

Key rating drivers

Alignment of interests and transaction process supervision (positive). Potential moral hazard leading to higher loss claims under the guarantee is mitigated. BP Bari must maintain a minimum economic interest of 5% in each individual exposure they assigned to the SME initiative. In addition, a material deviation by BP Bari from its internal credit and collection policies would allow a termination of the guarantee. BDO Italia SPA conducts external supervision of the processes. The EIF has a wide range of verification rights under the guarantee.

Experienced loan servicer (positive). The recovery results on defaulted loans will benefit from Cerved Group S.p.A.’s experience in non-performing loan servicing.

Focused originator (positive). BP Bari is a specialised lender with a regional footprint in southern Italy since 1960. The bank is used to working with the weaker economic situation of its clients and takes this into account in its lending decisions.

Efficient guarantee mechanics (positive). The loss claims under the guarantee are based on an expected loss calculation which minimises cash flows between BP Bari and the EIF and significantly reduces counterparty risk exposure to BP Bari.

Asset credit quality (negative). Scope assumes the average credit quality of the portfolio to be commensurate with B+. This reflects the high lifetime default rate, partially offset by recovery expectations.

Obligor concentrations (negative). The portfolio contains significant obligor concentration, i.e. the top 48 obligors account for 42.2% of the entire portfolio balance. Scope applies a stress for every obligor that accounts for more than 0.5% of the portfolio balance.

Italian economy (negative). The Italian economy is gradually recovering; however, this trend is jeopardised by significant political uncertainty. Moreover, this transaction focuses on the Italian south, a region that has generally high unemployment and below-average economic output.

Rating-change drivers

Positive. A fast recovery of employment in Italy, in particular in the south, could lower the expected defaults in the transaction. However, Scope expects this recovery to be slow and focused on the northern part of the country. In addition, there is the permanent risk of a new recession until deeper fundamental reforms are tackled in Italy that address public spending and fiscal pressure in general, and the labour market in particular.

Positive. Faster-than-expected portfolio amortisation, due to high prepayments, will result in credit enhancement build-up and may positively impact the ratings.

Negative. Worse-than-expected performance of the assets, such as significant adverse deviations in recovery rates or default rates, are among the factors that could negatively impact the ratings.

Quantitative analysis and key assumptions

Scope applied its large homogenous portfolio approximation approach when analysing the granular collateral pool. The agency considered a portfolio amortisation and loss allocation analysis of the tranches as described under the guarantee. In its analysis Scope considered two portfolio segments, made of secured and unsecured exposures.

Scope derived the reference portfolio default and recovery assumptions using segment-specific vintage data provided by BP Bari. The data shows defaults based on a 180 days-past-due default definition and recoveries on SME exposures flagged as ‘sofferenza’, a period that is generally beyond 180 days overdue. The data reflects the default and recovery performance of the bank between 2007 and 2016, which are years containing a significant level of stress for Italian SMEs.

Scope has determined a point-in-time lifetime default rate of 14.3% for the unsecured loan segment and 28.0% for the secured loan segment defined as 90 days-past-due and incorporating a relatively high cure rate of 30% for unsecured and 25% for secured exposures, together with coefficients of variation of 50% and 76%, respectively. The high coefficients of variation reflect the volatility found in the default vintage data. It also reflects the 20 percentage points top-obligor stress that Scope applied to 42.2% of the portfolio to capture risks linked to portfolio concentration. Scope did not consider a long-term economic cycle adjustment. The period for which the bank provided performance data did not yield significantly different levels of default rate and default volatility, compared to the corporate loan default data made available by the Bank of Italy from 1996 to 2014, a period that captures a full economic cycle in Italy.

Scope’s recovery estimates account for the portfolio’s heterogeneous asset nature. Scope assumed base case recovery rates of 54.0% for the unsecured and 70% for the secured segment, respectively. The recovery rate assumptions include a discounting at the weighted average rates of the respective portfolio segment to account for the loss claim mechanism as expressed under the guarantee and adjustments for the cure rates expressed above. BP Bari did not provide collateral information for the secured exposures. Scope applied a rating-conditional stress resulting in recovery rate assumptions of 41.0% for unsecured and 55.3% for secured exposures for A-_SF.

Scope considered different portfolio prepayment assumptions ranging from 0% to 14% and took into account the most conservative outcome for the senior tranche.

Scope has determined that the guarantee’s default definitions do not justify an additional stress on the default rate or the recovery rate assumptions. In particular, the transaction only allows restructurings to minimise losses in an exposure which is close to default.

Rating sensitivity

Scope tested the resilience of the rating against deviations of the main input parameters: the portfolio mean-default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results for the senior tranche change when the portfolio’s expected default rate increases by 50%, or the portfolio’s expected recovery rate reduces by 50%, respectively:

• Sensitivity to default rate assumptions, one notch;
• Sensitivity to recovery rates, four notches.

Methodology

The methodologies used for this rating, the SME ABS Rating Methodology and the Methodology for Counterparty Risk in Structured Finance are available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

Solicitation, key sources and quality of information

The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has not relied on a third-party asset due diligence/asset audit. However, material misrepresentation leads to loss claims being void, checked by external verification agent.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory Disclosures 

This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Sebastian Dietzsch, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The ratings were first released by Scope on 14 August 2018. 
The ratings concern a financial instrument, which has been rated by Scope for the first time.

Potential conflicts 

Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability

© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.
Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs.