Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005394348), EUR 317.8m outstanding: downgraded to BBB_SF from BBB+_SF

Class B (ISIN IT0005394355), EUR 53.0m outstanding: downgraded to CCC_SF from B-_SF

Class J (ISIN IT0005394363), EUR 13.2m outstanding: not rated

Scope’s review was based on available payment information, servicer and investor reporting as of July 2021.

Transaction overview

BCC NPLs 2019 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans extended to companies and individuals in Italy worth EUR 1,324 million by gross book value (GBV). The portfolio was originated by 68 Italian banks, with doValue S.p.A. performing the role of special servicer and Italfondiario S.p.A. the role of master servicer. The transaction closed on 19 December 2019.

As of 30 June 2021, aggregate gross collections were EUR 57.1m, which represents 111% of the original business plan expectations of EUR 51.5m. Around 83% of gross collections (EUR 47.5m) come from open debtors (i.e., debtors for which the recovery process is still ongoing). Total available gross collections are split between judicial proceeds (44.2%), discounted pay-off (‘DPO’) proceeds (33.0%), credit sale proceeds (5.6%) and unclassified collections (17.2%).

In terms of net collections (gross collections reduced by the amount of recovery expenses), aggregate net collections amount to EUR 54.1m, which represents 107% of the original net expectations.

Around 17% of gross collections (EUR 9.6m) come from closed debtors, whose GBV represents around 1.9% of the transaction’s initial GBV. Gross profitability on closed debtors is below the servicers’ expectation in the initial business plan, standing at 76.5%. Gross collections from closed debtors are split between DPO proceeds (64.3%), credit sale proceeds (33.3%) and judicial proceeds (2.4%).

Interests on class B are subordinated to payment of class A principal if the net cumulative collection ratio falls below 90% of the servicers’ business plan target or the NPV profitability ratio falls below 90%. As per last investor report dated July 2021, no class B interest subordination occurred as the net cumulative collection ratio and the NPV profitability ratio stands at 107% and 110%, respectively.

 Rating rationale

The rating action is driven by the observed and expected performance of the transaction, as well as Scope’s updated modelling assumptions, which reflect the transaction’s performance, macro-economic factors, and peer analysis. In particular, the downgrades are mainly driven by significantly weaker than expected profitability on closed positions and asset sales, relative to Scope´s baseline assumptions.

All transaction counterparties continue to support the ratings.

Key rating drivers

Cumulative collections compared to Scope’s expectations (positive)¹: The pace of collections has been significantly faster than expected by Scope at closing and 11% above business plan projections. Higher than expected cumulative collections partially mitigate concerns around weak profitability.

Senior notes’ liquidity protection (positive)¹: A cash reserve provides liquidity protection to senior noteholders, covering senior fees and interest on class A notes. It currently stands at EUR 10.1m (3.0% of class A notes’ principal amount as of the January 2021 payment date).

Closed debtors’ profitability by Scope (negative)¹: Profitability on closed borrowers has been, on average, 24% lower than Scope´s baseline assumptions at closing. In addition, the share of closed borrowers as a percentage of GBV has been very small (1.9%), which in Scope´s view is also reflective of profitability issues.

Higher-than-expected legal expenses (negative)¹: As of June 2021, cumulative legal expenses are 197% higher than the amount projected by the servicer in the initial business plan.

Downward revision of the business plan (negative)¹: The servicer has reviewed the transaction’s original business plan. Overall, the outstanding original business plan projections have been reviewed downward by ca. 4.5%.

Italian economy (negative)²: The Italian economy faced a weak economic growth rate in the first half of 2021 fueled by the Covid-19 pandemic. Despite governmental support measures, increased collateral liquidity risk and weakened borrower liquidity positions could negatively affect the recovery prospects.

Rating-change drivers

Positive. Improving performance on closed borrowers’ profitability, could positively impact the ratings.

Negative. If servicer performance falls short of Scope’s collection amounts and timing assumptions, this could negatively impact the ratings.

Quantitative analysis and 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 to produce a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.

Scope has updated its modelling assumptions to reflect the current performance of the transaction. Scope assumed a 39.0% gross recovery rate over a weighted average life of 6.8 years for the class A analysis, and a 44.9% gross recovery rate over a weighted average life of 6.0 years for the base case analysis.

Sensitivity analysis

Scope tested the resilience of the ratings to deviations in expected recovery rates and recovery timing. 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 results for class A notes change compared to the assigned rating in the event of:

• 10% haircut to recoveries, two notches decrease;
   
• one-year recovery lag increase, zero notches decrease.

The following shows how the results for class B notes change compared to the assigned rating in the event of:

• 10% haircut to recoveries, one notch decrease;
   
• one-year recovery lag increase, zero notches decrease.

Rating driver references
1. Transaction documents and reporting (Confidential)
2. Scope research Italy: high debt-to-GDP remains rating constraint, representing risk should rates abruptly rise

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 the relevant asset assumptions, 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 these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 6 August 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021; General Structured Finance Rating Methodology, 14 December 2020), available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Cash Flow SF EL Model Version 1.1.), 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/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: 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 these Credit Ratings 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 at closing. The external due diligence assessment/asset audit/internal analysis was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Leonardo Scavo, Senior Analyst
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The Credit Rating was first released by Scope Ratings on 19 December 2019.

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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