Rating action

This rating action is as follows:

• Class A (XS2590244807), EUR 229,500,000: rated BBB_SF
   
• Class B (XS2590245101), EUR 114,500,000: not rated
   
• Class Z (XS2590247735), EUR 442,663,000: not rated

Transaction overview

The transaction is a static cash securitisation of a Cypriot non-performing loans (NPLs) and real estate owned (REO) properties portfolio with a total value of EUR 1.17bn (total adjusted exposure of NPLs and appraised value of REO properties). The portfolio was originated by Hellenic Bank PCL and Cyprus Co-operative Bank Ltd (now Cooperative Asset Management Company Ltd (SEDIPES)) (the originators) and is owned by Themis Portfolio (S1) Management Holdings Ltd, a Cypriot Credit Acquiring Company (CyCAC). The portfolio will be serviced by APS Debt Servicing Cyprus Ltd. According to the servicer’s business plan, expected lifetime collections (net of asset level costs including servicing fees) amount to EUR 476.4m starting from the cut-off date of 31 December 2020.

Most of the pool is composed of senior secured loans (75% of exposure). Borrowers are mainly corporates (72% of exposure). The portfolio is primarily backed by a mix of residential real estate assets and land (55% and 25% of appraised property value, respectively), while the remainder is mainly commercial and industrial real estate. Properties are concentrated in Limassol and Paphos (26% and 21% of appraised property value). Portfolio information reflects Scope’s pool adjustments on collections and repossessed/sold properties since the cut-off date.

The transaction is not a true sale of receivables to Capella Financing S.à r.l (issuer) and implements a two-tier structure for the management of the portfolio. The CyCAC holds the credit rights over the loans and REO Companies (REOCOs), with security rights over the REO assets.

The issuer subscribes to an intercompany loan issued by the CyCAC, structured to allow cash flow from the assets, less certain costs and expenses of the CyCAC, to flow into the issuer’s accounts. These are then used as available funds in the issuer level waterfall to repay the issuer’s liabilities.

The structure comprises three classes of sequentially amortising notes. The class A will pay a fixed rate of 3.5%. Class B will pay a fixed rate of 6.75% and class Z will pay a fixed rate of 8% plus a variable return. Interest on the class B and Z notes is deferrable. The class A notes’ notional of EUR 229.5m is reduced at closing date using net collections received from the cut-off date to the transfer date on March 2023.

Rating rationale

The rating is primarily driven by the expected recovery amounts and timing of collections from the NPLs and REO assets in the portfolio. Our assumptions regarding recovery amounts and timing incorporate the portfolio’s characteristics as well as our economic outlook for Cyprus and assessment of the servicer’s capabilities. The rating is supported by the structural protection provided to the notes and the liquidity reserve available to the class A noteholders. The rating also addresses the issuer’s exposure to key counterparties, with our assessment based on counterparty substitution provisions in the transaction and, when available, our ratings or other public ratings on the counterparties.

The transaction is mainly exposed to counterparty risk from the following counterparties: i) APS Debt Servicing Cyprus Ltd (servicer); ii) Hellenic Bank PCL (CyCAC Cypriot account bank); iii) Citibank Europe Plc (issuer and CyCAC account bank); iv) Citibank, N.A. (paying agent and cash manager); v) Citibank, N.A. (security and note trustee); vi) CSC Luxembourg Services Sà rl (issuer corporate services provider).

Key rating drivers

High share of secured loans (positive)¹. The portfolio is mainly composed of senior secured loans (75% of adjusted exposure).

Out-of-court foreclosure framework (positive)². Since 2018, the foreclosure process in Cyprus is fully out-of-court, leading to a generally improved negotiating position for creditors and shorter time to resolution.

Effective amortisation triggers (positive)³. The structure features a class B interest subordination event based on cumulative net collections received since the portfolio transfer date. If actual cumulative net collections are below 85% of the cumulative net collections projected by the initial business plan, available cash will amortise class A notes prior to the payment of class B interest. This may protect senior noteholders under stressed market conditions. However, the event is not applied in the first two years and can be cured if actual collections return to levels in line with the business plan projections.

Liquidity (positive)³. The target liquidity reserve amount at each payment date will be equal to 6% of the class A notes’ outstanding balance. Under our base case scenario, the liquidity reserve covers more than six payment periods of class A interest and senior expenses and fees.

Servicer fees (negative)³. The structure does not feature a servicer subordination event. In the context of foreclosures, a large portion of servicer fees is dependent on the open market value of the asset, rather than on gross collections on the loan. This weakens the servicer’s financial incentives to achieve higher collections.

Borrower concentration (negative)¹. The largest 10 and 100 borrowers account for 14.4% and 41.8% of the portfolio’s adjusted exposure, respectively. The portfolio is more concentrated than similar NPL portfolios in Cyprus and other jurisdictions.

Property type (negative)¹. 45.4% of the properties (by appraised value) are land or non-residential. Such assets are generally less liquid than residential assets.

Real estate market’s susceptibility to a surge in supply (negative)⁴. The pre-pandemic five-year (2015-19) pan-Cypriot average of registered sales per year stood at just above 8,000. Resolution of this portfolio and other Cypriot NPL portfolios could add a considerable supply to the real estate market over the next few years, potentially resulting in lower realisable value or longer time to liquidation.

Rating-change drivers

Servicer outperformance (upside). Following the transfer of the portfolio, the servicer will be fully owned by the sponsor. If the change of the ownership leads to better recovery processes and consistent servicer outperformance, this could positively impact the rating.

Lower than expected profitability (downside). If servicer performance in terms of realised collections is below our expectations, this could negatively impact the rating.

Quantitative analysis and assumptions

Scope analysed cash flows, reflecting the transaction’s structural features, to calculate the rated notes’ 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 and REO properties.

Scope performed a specific analysis for recoveries, using different approaches for the portfolio’s secured and unsecured segments. For both the secured loans and the REO assets, Scope’s analysis of collections was mainly based on the latest property appraisal values, which were stressed for the servicer’s appraisal methodologies and liquidity and market value risks. Scope derived recovery timing assumptions using line-by-line asset information detailing the type of legal proceedings and the stage of the proceeding as of the cut-off date. Scope applied a line-by-line approach to derive time-to-sell assumptions for all collateral and REO assets, considering the property type and location. Scope also considered historical data provided by the servicer. For unsecured and junior secured loans, Scope incorporated the servicer’s capabilities when calibrating lifetime recoveries and benchmarked this against historical data from other European jurisdictions.

For analysis of the class A notes, Scope assumed a gross recovery rate of 25% (relative to total adjusted exposure) with a weighted average life of 5.6 years. By portfolio segment, Scope assumed a gross recovery rate of 32.4% for secured loans and 2.2% for unsecured and junior secured loans. Scope has applied an average combined security value haircut of 44.5%, which consists of: i) an average fire-sale discount (including valuation type haircuts) of 34.1% to security values, reflecting liquidity or marketability risks; and ii) property price decline stresses (12.9% on average), reflecting Scope’s view of downside market volatility risk. Scope has addressed dated valuations by incorporating depreciation based on time since valuation. Scope’s calculation of the weighted average security value haircut excludes any collateral sold between the cut-off date and the issue date.

Scope’s analysis considered the senior costs of the companies, servicer fee structure and legal expenses at around 23% of lifetime gross collections. Scope captured single asset exposure risks by applying a specific recovery rate haircut of 15% to the 20 largest borrowers in analysis of the class A notes.

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 the class A notes change compared to the assigned 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, zero-notch impact.

Rating driver references
1. Loan-level data tape of the securitised pool (Confidential)
2. Historical recovery data from the originator (Confidential)
3. Transaction documents (Confidential)
4. Department of Lands and Surveys, Republic of Cyprus

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 relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating, (General Structured Finance Rating Methodology, 25 January 2023; Non-Performing Loan ABS Rating Methodology, 5 August 2022 and Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating (Scope Cash Flow SF EL Model Version 1.1) is available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/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 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, 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 audit. The external 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 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: Mirac Ugur, Specialist
Person responsible for approval of the Credit Rating: David Bergman, Managing Director
The Rating/Oulook was first released by Scope on 31 March 2023. 

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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