Rating action

Scope Ratings GmbH (Scope) has taken the following rating actions:

Class A1, EUR 522.6m (ISIN IT0005548919): rated AAA_SF

Class A2, EUR 263.1m (ISIN IT0005548927): rated AAA_SF

Class B, EUR 267.6m (ISIN IT0005548935): rated BBB+_SF

Class J, EUR 196.4m (ISIN IT0005548943): not rated

The latest information on the ratings, including rating reports and related methodologies, is available on this LINK.

Transaction overview

The transaction is a static true-sale cash securitisation of Italian lease receivables originated by Alba Leasing S.p.A. (Alba). The portfolio comprises leases granted to Italian SMEs (83.1%), large corporate borrowers (10.4%) and individual entrepreneurs (6.5%) to finance equipment (63.3%), real estate properties (18.8%), transportation assets (15.7%), and air, naval & rail assets (2.3%). This transaction is not exposed to residual value risk because the assets’ residual value is not securitised.

Leases were originated between 2010 and 2023, with 92.1% originated between 2021 and 2023. The portfolio has a weighted average seasoning of 1.6 years and a weighted average remaining time to maturity of 5.4 years. Around 92.9% of the pool pays a floating interest rate referenced to three-month Euribor; 6.5% pays a fixed rate; 0.6% pays a floating rate referenced to one-month Euribor.

The structure comprises four classes of notes with fully sequential principal amortisation: senior class A1 and A2, mezzanine class B, and junior class J. Notes are floating, based on three-month Euribor plus a margin.

Rating rationale

The ratings reflect the notes’ protection against portfolio losses, provided by the quality of the underlying collateral and by the transactions legal and financial structure. The ratings are mainly driven by the securitised portfolio’s characteristics and its expected performance as well as the servicer’s ability and incentives. Scope accounted for the current macro-economic scenario, taking a forward-looking view on the macro-economic developments.

Class A1 and A2 notes benefit, respectively, from 57.8% and 36.6% of credit enhancement from subordination (excluding the class J portion funding the cash reserve). Class B notes benefit from 15.0% of credit enhancement (excluding the class J portion funding the cash reserve). The cash reserve equal to 1% of the outstanding amount of the rated notes provides liquidity support during the life of the transaction. As the reserve amortises, any released amounts will be available to repay the notes.

The ratings consider the issuer’s exposure to key counterparties. To assess the issuer’s exposure to credit counterparty risks Scope considered counterparty substitution provisions in the transaction, counterparty ratings from Scope, when available, or public ratings.

Key rating drivers

Static portfolio (positive). The portfolio will start amortising immediately after closing, reducing the risk of performance volatility compared to revolving transactions.^1,2

Back-up servicer (positive). Banca Finanziaria Internazionale S.p.A., the transaction’s back up servicer, would be able to take over servicing activities within 30 business days. Banca Finanziaria Internazionale S.p.A. cooperates with two other back-up servicers, Agenzia Italia S.p.A. and Trebi Generalconsult S.r.l.²

No residual value risk (positive). Investors are not exposed to the risk that obligors do not exercise the residual option, or to the possible loss of residual value upon the originator’s liquidation. The issuer benefits from interest paid on the residual value during the life of each lease contract, which gradually increases the excess spread available to cover defaults and losses.^2,3

Short lifetime exposure (positive). The portfolio of lease receivables has a relatively short remaining weighted average life of 2.8 years as of the cut-off date, assuming 0% CPR and 0% defaults.¹

No set-off risk (positive). No borrowers have any deposits or derivative contracts with Alba.^1,2

Liquidity protection (negative). The cash reserve provides limited liquidity support to Class A. Considering a stressed Euribor assumption (Euribor three months was assumed to increase up to 6.5% during the first four years), the reserve will cover around two months of senior fees and interest on the most senior notes. A liquidity shock upon a servicer disruption event is mitigated by the appointment of a back-up servicer since closing that would take over servicing activities and swiftly notify debtors to redirect their payments into the issuer’s account. The cash reserve is floored at 0.5% of the outstanding balance of the rated notes. Therefore, liquidity protection will increase over time as the notes amortise.²

Recoveries upon default of the originator (negative). In the event of insolvency of the originator, the issuer's claims to the proceeds from the sale or re-lease of the leased properties may not be effective and enforceable against Alba’s insolvency receiver. Scope has only relied on recovery proceeds from the voluntary payments of the borrowers.³

Upside rating-change drivers

Materially lower defaults and/or significantly higher than expected recoveries could drive improved performance and could lead to an upgrade of the class B note.

Downside rating-change drivers

Slowdown of the Italian economy driven by persistent inflationary pressures combined with tighter monetary policy, and the potential deterioration of lessees’ capacity to fulfil their payments could impair portfolio’s performance.

Quantitative analysis and assumptions

Scope has performed a cash flow analysis considering the portfolio characteristics and the main structural features. Scope applied its large homogenous portfolio approximation approach when analysing the highly granular collateral pool and projecting cash flows over its amortisation period. The cash flow analysis considers the probability distribution of the portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche. Scope has considered asset and liability amortisation and the evolution in the pool’s composition.

Scope analysed the transaction assuming three distinct asset segments: i) Transport & Air, Naval and Rail; ii) Equipment; and iii) Real Estate. The original pool included four portfolio segments: Transport, Equipment, Real Estate and Air, Naval & Rail. Scope adjusted the composition of the portfolio by grouping together the Transport segment with the Air, Naval & Rail segment.

For the three segments i) Transport & Air, Naval and Rail, ii) Equipment and iii) Real Estate, Scope assumed, respectively, mean default rates of 4%, 5% and 8.5% and coefficients of variation of 75%, 64% and 80%. The respective segments’ base case recovery rates are 35%, 35%, and 15%. On an aggregate portfolio basis, the mean default rate is 5.5%, the coefficient of variation is 73.9% and the base case recovery rate is 31.2%.

Vintage data was provided until Q4 2022. However, Scope calibrated its assumptions on default rates and coefficients of variation using 2010-2019 vintage data for each portfolio segment, which reflects the performance of the lease book originated by Alba. Scope did not consider the later vintages since those were shaped largely by the moratorium in Italy, potentially underestimating default rates.

Scope considered the 2010-2019 vintage data period to be sufficiently long to cover more than one full economic cycle, as it includes the severe recession which Italy suffered during 2012-2014. However, Scope adjusted the coefficients of variation upwards to capture post-moratorium economic uncertainties which could reflect negatively on the portfolio’s performance.

Scope assumed an average recovery of 31.2% for the portfolio. This assumption was adjusted with rating-conditional haircuts resulting in average recovery assumptions of 17.5%, and 24.5% for the Class A1/A2 and B notes analysis, respectively. Recovery assumptions only consider unsecured recoveries from the lessees and guarantors.

Scope considered the assets’ amortisation characteristics and assumed a default timing reflecting a constant default intensity. Scope decreased portfolio excess spread by around 50 bps to address the risk of spread compression due to prepayments and defaults of the highest yielding leases. In addition, Scope reduced the portfolio initial balance by about 1% to account for potential commingling (0.4%) and claw-back (0.6%) losses.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the portfolio’s mean default rate and the portfolio recovery rate. 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 quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Class A1: sensitivity to default rate, zero notches; sensitivity to recovery rate, zero notches.
   
• Class A2: sensitivity to default rate, minus two notches; sensitivity to recovery rate, zero notches.
   
• Class B: sensitivity to default rate, minus three notches; sensitivity to recovery rate, minus one notch.

Rating driver references
1. Loan-by-loan data tape of the securitised pool (Confidential)
2. Transaction documents (Confidential)
3. Originator’s vintage data (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow Structured Finance Expected Loss 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 these Credit Ratings, (SME ABS Rating Methodology, 16 May 2023; General Structured Finance Rating Methodology, 25 January 2023; Counterparty Risk Methodology, 14 July 2022) available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Cash Flow Structured Finance Expected Loss Model Version 1.1) available in Scope Ratings’ list of models, published under: https://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 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. The external asset audit 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: Rossella Ghidoni, Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
These Credit Ratings were first released by Scope Ratings on 27 June 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. A member of the Board of Trustees of Scope Foundation has a significant relationship with Société Generale SA, a related third party to this transaction. The Scope Foundation is a 20% shareholder of Scope Management SE, the general manager of Scope SE & Co KGaA (“Scope Group”). Scope Foundation has no financial or economic interest in Scope SE & Co KGaA and the main function of the foundation is to preserve the European identity of the shareholder structure of Scope Group.

Conditions of use / exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.