Rating action

Scope Ratings GmbH (Scope) has completed a monitoring review of the following notes issued by POP NPLs 2019 S.r.l.:

Class A (ISIN IT0005396061): EUR 101.1m: downgraded to BB+_SF from BBB-_SF

Class B (ISIN IT0005396079): EUR 25.0m: downgraded to CC_SF from CCC_SF

Class J (ISIN IT0005396087): EUR 5.0m: not rated

Scope’s review was based on servicer, investor and payment reporting as of the 6 February 2023 payment date.

Transaction overview

PoP NPLs 2019 S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy worth EUR 826.7 million by gross book value (GBV) at closing. The master servicer is Prelios Credit Servicing S.p.A. and the special servicers are Prelios Credit Solutions S.p.A. and Fire S.p.A.. The portfolio was originated by 12 Italian regional banks. The transaction closed on 23 December 2019.

Aggregate gross collections amount to EUR 103.6m as of 6 February 2023. The source of total gross collections is mostly represented by judicial proceeds (54.9%) and discounted-payoff proceeds (41.4%).

The class A note has amortised by 41.5% of its notional at closing while the reported net proceeds cumulative collection ratio and NPV profitability ratios are 126.6% and 118.0% respectively.

Rating rationale

The review addressed a) the observed performance of the collateral as of the review cut-off date, b) Scope´s forward-looking performance assumptions, in the context of the expected macro-economic environment over the remaining life of the transaction, c) the transaction´s updated liability structure, liquidity and interest rate hedging arrangements, and e) the issuer´s exposure to key transaction parties.

Key rating drivers

The transaction's key rating drivers continue to be aligned with those disclosed on our last rating action release, dated August, 15, 2022, except for the negative rating driver related to the secured closed debtor’s profitability, which improved year on year. A new negative rating driver is represented by the uncertainty regarding potential future indemnities for about EUR 26mn, for which the process is still ongoing and by the downward revision of the business plan by ca. 5% (on a lifetime basis) compared to its value at closing¹.

Rating-change drivers

Positive. A material decrease in legal costs could positively impact the ratings.

Negative². Slowdown of the Italian economy driven by persistent inflationary pressures combined with tighter monetary policy, and the potential deterioration of borrowers’ affordability conditions could impair servicers’ performance on collections.

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. At the B case, Scope assumed a lifetime gross recovery rate of 32.8% over a weighted average life of 4.6 years (from its closing value of 34.4% over 5.7 years). By portfolio segment, Scope assumed a lifetime gross recovery rate of 25.3% and 7.5% for the secured and unsecured portfolios, respectively, over a weighted average life of 4.9 and 3.5 years (from their closing values of 28.5% and 5.9% over 6.1 and 3.6 years).

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 would change compared to the assigned rating in the event of:

• 10% haircut to recoveries, minus three notches;
• a one-year recovery lag increase, zero notch;

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

• 10% haircut to recoveries, minus one notch;
• a one-year recovery lag increase, minus one notch;

References
1. Transaction documents and reporting (Confidential)
2. Scope research               

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, 25 January 2023), 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 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. The external due diligence assessment 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
These Credit Ratings were 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 Ratings were first released by Scope Ratings on 23 December 2019. The Credit Ratings were last updated on 15 August 2022.
 
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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