The rating actions are as follows:

Class A (ISIN IT0005451254), EUR 64,700,000: assigned a final rating of BBB_SF

Class B (ISIN IT0005451262), EUR 9,500,000: not publicly rated

Class J (ISIN IT0005451270), EUR 4,000,000: not rated

Transaction overview

The transaction is a static cash securitisation of an Italian NPL portfolio with a gross book value (’GBV’) of around EUR 356m. The portfolio is composed of receivables originated by certain Italian financial institutions and acquired by illimity Bank S.p.A. (through Aporti S.r.l.) between 2018 and 2020. The issuer is entitled to receive all the portfolio collections received since the cut-off date of 31 December 2020. The portfolio will be serviced by Prelios Credit Servicing S.p.A.

The pool is composed of secured loans (73.0% of GBV, of which 68.5% senior secured and 4.5% junior secured) as well as unsecured loans (27% of GBV). Borrowers are mainly corporates (94.4%). Secured loans are backed by residential and non-residential properties (32.7% and 67.3% of the total first-lien property value, respectively) that are rather concentrated in the north of Italy (46.7%) followed by southern (32.7%), and central (20.6%) regions. Asset information reflects aggregation by loans and Scope’s pool adjustments related to collections and sold properties since the cut-off date.

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 2.8%. Class B will pay a floating rate indexed to six-month Euribor, plus a margin of 7.5%. The Euribor component on class A and class B coupon is floored at zero. Class J principal and interest 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 Scope’s 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 exposures to the key transaction counterparties. Scope considered counterparty substitution provisions in the transaction, counterparty ratings from Scope, when available, or public ratings.

Key rating drivers

Class A structural protection (positive). The class A noteholders are mainly protected by the subordination of class B principal and junior notes liabilities. Class B interest payments will be fully deferred if the servicer fails to meet at least 90% of business plan targets regarding cumulative collections or profits on closed positions. In addition, up to 30% of the special servicer’s performance fees will be deferred subject to certain underperformance events.¹

Interest rate risk hedged (positive). Interest rate risk on class A notes is partially mitigated by a hedging structure which caps the six-month Euribor rate at an increasing strike rate (starting from 0.0% from July 2022 up to 1.0% in January 2038) over a pre-defined notional balance. The cap notional schedule is aligned with the expected amortisation profile of the class A notes.¹

Geographically diversified pool (positive). The portfolio is well distributed among Italian regions, with some concentration in the north (43.8% of GBV). The north of Italy benefits from the country’s most dynamic economic conditions and, in general, the most efficient tribunals.²

Above-average borrower concentration (negative). The 10 and 100 largest borrower exposures account for 35.9% and 77.9% of gross book value. These figures are above average compared to peer transaction rated by Scope. This may expose the transaction to high performance volatility, depending on the recoveries from those few large borrowers.²

Significant portion of legal proceedings in initial stages (negative). Based on Scope’s analysis, around 78.9% 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 loans in more advanced phases.²

High share of statistical and AVM valuations (negative). Most of the portfolio’s collateral appraisals are either statistical or were conducted with an automated valuation model (‘AVM’) by external appraisers (47.2%), which are generally less accurate than desktop or drive-by valuations.²

Seasoned unsecured and junior secured portfolio (negative). The weighted average time since default is around 6.7 years for the unsecured and junior secured portfolio. Most unsecured recoveries are realised in the first years after a default according to historical data.³

Rating-change drivers

Faster judicial recovery timing (upside). The pandemic led to a slowdown in court activity. An outperformance on recovery timing could occur if courts advance on proceeding backlogs faster than expected.

Rapid economic growth following the pandemic crisis (upside). A scenario of rapid economic recovery would improve liquidity and affordability conditions and prevent a sharp deterioration in collateral values. This could positively affect the rating, enhancing transaction’s performance on collection volumes.

Long lasting pandemic crisis (downside). Recovery rates are highly dependent on the macroeconomic environment. Scope baseline scenario foresees GDP growth of 5.6% in 2021 after a contraction in 2020. If the current crisis lasts beyond Scope’s baseline scenario^4,5, borrowers’ affordability and real estate market liquidity 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. As the first step, Scope analysed the assets to produce 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. Scope derived recovery timing assumptions 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 6.7 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 28.6% over a weighted average life of 7.1 years. By segment, Scope assumed a gross recovery rate of 39.8% for the senior secured portfolio and 4.4% for the unsecured and junior secured portfolio. Scope has applied an average combined security value haircut of 58.8%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 52.0% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (13.9% on average), reflecting Scope’s view of downside market volatility risk.

In its analysis, Scope considered the actual 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 25% 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 one notch.
   
• an increase in the recovery lag by one year, zero notches.

Rating driver references
1. Transaction documentation (confidential)
2.  Loan-by-loan data tape of the securitised pool (confidential)
3. Servicer’s historical data (confidential)
4. Italy’s debt sustainability remains a challenge, despite low interest costs and pro-growth agenda
5. 2021 Sovereign Outlook: Recovery at last, with monetary and fiscal frameworks in transition, and diverging sovereign rating implications

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

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ 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 Credit Rating are the Non-Performing Loan ABS Rating Methodology (9 September 2020), the General Structured Finance Rating Methodology (14 December 2020) and the Methodology for Counterparty Risk in Structured Finance (8 July 2020), available on https://www.scoperatings.com/#!methodology/list.
The model used for this Credit Rating is Cash Flow Model v1.1., available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The Rated Entity and its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting this Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit/internal analysis was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Leonardo Scavo, Senior Analyst.
Person responsible for approval of the Credit Rating: Olivier Toutain, Executive Director.
The Credit Rating was first released by Scope Ratings on 28 June 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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