The rating actions are as follows:

Class A (ISIN IT0005428138), EUR 154,000,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005428146), EUR 21,000,000: not rated

Class J (ISIN IT0005428153), EUR 4,541,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio with a gross book value of around EUR 679m. The portfolio was originated by 38 Italian banks (see ‘Appendix I’ for the complete list of originators) and will be serviced by Guber Banca S.p.A. as special servicer and Zenith Service S.p.A. as master servicer.

The pool is composed of senior secured loans (65.5%), unsecured loans (30.5%) and junior secured loans (4.0%). Borrowers are mainly corporates (73.5%). Secured loans are backed by residential and commercial properties (35.3% and 27.8% of the property value, respectively). Land and industrial properties represent 17.3% and 15% of total assets value, while other type of assets represent a 4.7%. Properties are mainly concentrated in the north (64.7% of property value), while central and southern regions account for 21.7% and 13.6%, respectively. The issuer acquired the portfolio at the transfer date of 1 December 2020, the portfolio has a cut-off date of 31 July 2020.

The structure comprises three classes of notes with fully sequential principal amortisation: senior class A, mezzanine class B, and junior class J. Class A will pay a floating rate indexed to six-month Euribor, plus a margin of 0.50%. Class B will pay a floating rate indexed to six-month Euribor, plus a margin of 9.5%. Class J will pay a margin of 15.0% plus a variable return and a floating rate indexed to six-month Euribor. Principal and interest of Class J are subordinated to the repayment of the senior and mezzanine notes.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Italy and its assessment of the special servicer’s capabilities. The rating is supported by the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection, and the interest rate hedging agreement.

The rating also addresses the issuer’s exposure to key counterparties, with the assessment based on counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties.

Key rating drivers

Collateral concentrated in northern regions (positive). 64.7% of the portfolio is located in the north of Italy, which typically benefits from shorter and more efficient court procedures than sourthern regions.¹

High share of drive-by valuations (positive). Most of the portfolio’s collateral appraisals are drive-by valuations (58.1%), which are generally more accurate than desktop or CTU valuations.¹

Recent appraisals (positive): 90% of valuations were conducted between 2019 and 2020, meaning asset values are likely to reflect the liquidity risks and price fluctuations currently present in the real estate market.¹

Higher than average share of land and commercial properties (negative). Land represents 17.3% of total property value, which is high compared to peer transactions. Land typically shows high sale price volatility. The share of commercial properties (27.8% of total property value) is also higher than in peer transactions. In addition, around 68% of these properties (in terms of property value) were appraised before the Covid-19 outbreak, therefore, they might be subject to high price volatility, as the appraisal does not consider any potential implications from the pandemic.¹

Material portion of legal proceedings in initial stages (negative). Scope expects a weighted average recovery timing of 7.2 years, which is long compared to peer transactions rated by Scope. Around 52.6% of the secured loans are in the initial legal phase or are yet to have proceedings initiated. This results in a longer expected time for collections than for portfolios with loans in more advanced phases.¹

Hedging structure (negative). A cap spread hedging structure partially mitigates class A notes’ interest rate risk. However, the cap spread notional is below Scope’s expected class A amortisation profile during around half of class A notes’ life.²

Rating-change drivers

Servicer outperformance on recovery timing (upside). The pandemic led to a slowdown of the courts’ activity. A faster than expected courts workout of legal proceedings backlogs faster could lead to an outperformance on recovery timing. This could positively impact the rating.

Long lasting pandemic crisis (downside). Recovery rates are generally highly dependent on the macroeconomic climate. Scope baseline scenario³ foresees a 9% gross domestic product contraction in 2020 before rebounding with growth of 6.1% in 2021. If current crisis will last beyond Scope baseline scenario, liquidity conditions could deteriorate, reducing servicer performance on collection volumes. This could negatively impact the rating.

Quantitative analysis and key assumptions

Scope analysed cash flows, reflecting the transaction’s structural features, to calculate each tranche’s expected loss and weighted average life. Scope analysed the assets and derived a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope performed a specific analysis for recoveries, using different approaches for secured and unsecured exposures. For senior secured exposures, collections were mainly based on the most recent property appraisal values, which were stressed to account for, appraisal type, liquidity and market value risks. Recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceeding, the court issuing the proceeding, and the stage of the proceeding as of the cut-off date. For unsecured and junior secured exposures, Scope used historical line-by-line market-wide recovery data on defaulted loans between 2000 and 2019 and considered the special servicer’s capabilities when calibrating lifetime recoveries. Scope considered that unsecured and junior secured borrowers were classified as defaulted for a weighted average of 4.4 years as of the cut-off date. Scope also analysed historical data provided by the servicer. Scope accounted for the current macro-economic scenario, taking a forward-looking view on the macro-economic developments.

For the class A notes analysis, Scope assumed a gross recovery rate of 31.1% over a weighted average life of 7.2 years. By segment, Scope assumed a gross recovery rate of 43.1% for the senior secured portfolio and 8.2% for the unsecured and junior secured portfolio. Scope has applied an average combined security value haircut of 50.2%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 42.3% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (13.7% on average), reflecting Scope’s view of downside market volatility risk. To calculate the security value haircut rate, Scope has removed the collateral positions sold between the cut-off date and the issue date.

In its analysis, Scope considered transaction’s servicer fees structure and assumed legal expenses to be around 9% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 10% to the 10 largest borrowers in the class A analysis.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in the main input parameters: the portfolio recovery-rate and the portfolio recovery timing. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.
The following shows how the results for class A change compared to the assigned credit rating in the event of:

• a decrease in secured and unsecured recovery rates by 10%, minus two notches.
• an increase in the recovery lag by one year, minus one notch.

Rating driver references
1 Loan-by-loan data tape of the securitised pool (confidential)
2 Transaction’s documents
3 Italy’s debt sustainability remains a challenge, despite low interest costs and pro-growth agenda

Appendix I
Originators
CASSA RURALE DOLOMITI - CREDITO COOPERATIVO ITALIANO
CASSA RURALE ROTALIANA E GIOVO - BANCA DI CREDITO COOPERATIVO - SOC. COOP.
BANCA DI CREDITO COOPERATIVO DI SPELLO E BETTONA SOCIETÀ COOPERATIVA
BANCA DI CREDITO COOPERATIVO DI CHERASCO - SOC. COOP.
BANCANAGNI CREDITO COOPERATIVO SOCIETÀ COOPERATIVA
CASSA RURALE VALSUGANA E TESINO - BANCA DI CREDITO COOPERATIVO SOCIETÀ COOPERATIVA
BANCA ADRIA COLLI EUGANEI - CREDITO COOPERATIVO SOCIETÀ COOPERATIVA
ROMAGNABANCA CREDITO COOPERATIVO ROMAGNA EST E SALA DI CESENATICO - SOCIETÀ COOPERATIVA
LA CASSA RURALE – CREDITO COOPERATIVO ADAMELLO GIUDICARIE VALSABBIA PAGANELLA - SOCIETÀ COOPERATIVA
CREDITO COOPERATIVO - CASSA RURALE ED ARTIGIANA DEL FRIULI VENEZIA GIULIA - SOCIETÀ COOPERATIVA
BANCATER CREDITO COOPERATIVO FVG - SOCIETÀ COOPERATIVA
CASSA RURALE ALTA VALLAGARINA E LIZZANA - BANCA DI CREDITO COOPERATIVO - SOCIETÀ COOPERATIVA
BANCA DI CREDITO COOPERATIVO DI CASTAGNETO CARDUCCI SOCIETÀ COOPERATIVA PER AZIONI
BANCA CENTRO LAZIO CREDITO COOPERATIVO - SOCIETÀ COOPERATIVA
BANCA DI CREDITO COOPERATIVO DELLA ROMAGNA OCCIDENTALE - SOCIETÀ COOPERATIVA
BCC FELSINEA - BANCA DI CREDITO COOPERATIVO DAL 1902 SOCIETÀ COOPERATIVA
BANCA MALATESTIANA - CREDITO COOPERATIVO - SOCIETÀ COOPERATIVA
CASSA PADANA BANCA DI CREDITO COOPERATIVO SOCIETÀ COOPERATIVA
BANCA DI CARAGLIO, DEL CUNEESE E DELLA RIVIERA DEI FIORI SCRL - CREDITO COOPERATIVO
BANCA DEL VENETO CENTRALE CREDITO COOPERATIVO SOC. COOP.
BANCA DEL TERRITORIO LOMBARDO - CREDITO COOPERATIVO - SOCIETÀ COOPERATIVA
BANCA MONTE PRUNO - CREDITO COOPERATIVO DI FISCIANO, ROSCIGNO E LAURINO - SOC. COOP.
BANCA DI CREDITO COOPERATIVO DI SAN GIOVANNI ROTONDO - SOCIETÀ COOPERATIVA
BANCA PREALPI SAN BIAGIO CREDITO COOPERATIVO - SOCIETÀ COOPERATIVA
BANCA LAZIO NORD CREDITO COOPERATIVO SOC. COOP. PER AZIONI
BANCA DI CREDITO COOPERATIVO LA RISCOSSA DI REGALBUTO - SOCIETÀ COOPERATIVA
CASSA CENTRALE BANCA CREDITO COOPERATIVO ITALIANO S.P.A.
CASSA DI TRENTO, LAVIS, MEZZOCORONA E VALLE DI CEMBRA BANCA DI CREDITO COOPERATIVO - SOCIETÀ COOPE
BANCO MARCHIGIANO CREDITO COOPERATIVO
BANCA SICANA – CREDITO COOPERATIVO DI SOMMATINO, SERRADIFALCO E SAMBUCA DI SICILIA – SOCIETÀ COOPERATIVA
BENE BANCA CREDITO COOPERATIVO DI BENE VAGIENNA (CUNEO) S.C.
CREDITO COOPERATIVO CENTRO CALABRIA SOC. COOP.,
BANCA POPOLARE DI CORTONA SOCIETÀ COOPERATIVA PER AZIONI
BANCA POPOLARE DI LAJATICO SOCIETÀ COOPERATIVA PER AZIONI
MEDIOCREDITO TRENTINO-ALTO ADIGE S.P.A.
BANCA POPOLARE DELL'ALTO ADIGE S.P.A.
BANCA SELLA S.P.A.
CASSA DI RISPARMIO DI CENTO S.P.A.

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF/EL Model Version 1.1 incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for this rating are the Non-Performing Loan ABS Rating Methodology (9 September 2020) and the Methodology for Counterparty Risk in Structured Finance (8 July 2020), available on www.scoperatings.com.
The model used for this rating is Cash Flow Model v1.1. is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

Solicitation, key sources and quality of information
The rated entity and its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, agents of the issuer, 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 rating 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 received a third-party asset due diligence assessment. The external due diligence assessment was considered when preparing the rating and it has no impact on the credit rating. Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Rossella Ghidoni, Associate Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 14 December 2020.

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
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