Rating action

The transaction comprises the following instruments:

Class A (ISIN IT0005428138), EUR 129.8m current balance: downgraded to BB+_SF from BBB_SF

Class B (ISIN IT0005428146), EUR 21.0m current balance: not rated

Class J (ISIN IT0005428153), EUR 4.5m current balance: not rated

Scope’s review was based on servicer, investor and payment reporting as of the July 2022 payment date.

Transaction overview

Buonconsiglio 3 S.r.l. is a static cash securitisation of an Italian non-performing loans portfolio worth around EUR 665.0m (EUR 679.0m at closing) by gross book value. The portfolio was originated by 38 Italian originator banks (see ‘Appendix I’ for the complete list of originators) and is serviced by Guber Banca S.p.A. as special servicer and Zenith Service S.p.A. as master servicer. The transaction closed on 14 December 2020 and the legal maturity is in January 2041.

As of July 2022, cumulative gross collections were EUR 38.9m, which represents 146% of the original business plan expectations of EUR 26.7m. Total gross collections are split between judicial proceeds (59%), discounted payoff (‘DPO’) proceeds (19%) and other types of collections (22%).

Around 48% of gross collections (EUR 18.8m) stem from open debtors (i.e., debtors for which the recovery process is still ongoing), while closed debtors account for 52% of gross collections (EUR 20.1m) with reference to 10% of the transaction’s initial GBV. Gross collections linked to closed debtors are split between judicial proceeds (40%), DPO proceeds (34%) and other types of collection (26%).

Rating rationale

The rating is driven by the transaction’s actual and expected performance as reflected in Scope’s modelling assumptions. At the last monitoring review, recovery expenses are materially above Scope’s assumptions and profitability is below Scope’s expectations at B case, both factors driving the rating downgrade. Scope has updated its recovery estimates assumptions considering the transaction-specific performance, developments in macroeconomic fundamentals, and peer transaction benchmarks.

The rating considers the issuer’s exposure to key counterparties.

Key rating drivers

Pace of collections (positive)¹: Aggregate net collections are above Scope’s timing expectations under the B case scenario and above the original business plan expectations. The fast pace of collections partially offsets the negative impact of below than expected profitability and above than expected costs.

Secured closed debtors’ profitability by Scope (negative)¹: Profitability on secured closed borrowers is 15% lower than Scope´s expectations for the B case scenario. The share of secured closed borrowers is 8% of secured GBV at closing. The servicer business plan at closing envisaged a backloaded profitability (i.e., profitability on closed positions should improve over time, according to the business plan). However, we expect that profitability will remain subdued, particularly considering the ongoing deterioration of macro-economic conditions.

High recovery expenses (negative)¹. Cumulative recovery expenses are 17.4% of gross cumulative collections, above Scope’s expectation of 9% and highly above the average of peer transactions rated by Scope. High legal costs eroded available proceeds, resulting into a below average amortisation pace of the class A notes. Recovery expenses were related, among the others, to passive litigations which were initiated pre-closing but can be considered as one-off events. Additionally, the servicer front-loaded some recovery expenses as it anticipated cash-flows versus its business plan projections. Even though we therefore expect the expense ratio to decrease over time, it is likely to remain above our initial expectations.

Rating-change drivers

Positive. Lower recovery expenses could positively impact the rating.

Negative. Collection strategies with low profitability and/or delayed collections may negatively impact the rating.

Quantitative analysis and assumptions

Scope analysed cash flows reflecting the transaction’s structural features to calculate each tranche’s conditional 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. At the B case, Scope assumed a lifetime gross recovery rate of 35.9% over a remaining weighted average life of 4.4 years. By portfolio segment, Scope assumed a lifetime gross recovery rate of 49.3% and 11.7% for the secured and unsecured portfolios, respectively.

Sensitivity analysis

Scope tested the resilience of the rating to deviations in expected recovery rates and 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 notes change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus 2 notches;
   
• a one-year recovery lag increase, 0 notches.

Rating driver references
1. Transaction documents and reporting (Confidential)

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, 5 August 2022; Counterparty Risk Methodology, 14 July 2022; General Structured Finance Rating Methodology, 17 December 2021), are available on https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
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/ratings-and-research/structured-finance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

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 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 the 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 at closing. The external due diligence assessment/asset audit 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 is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The 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: Rossella Ghidoni, Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The Credit Rating was first released by Scope Ratings on 14 December 2020.

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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