Scope downgrades Class A and B notes issued by 2Worlds S.r.l. - Italian NPL ABS
Scope Ratings GmbH (Scope) has performed the following rating action after completing a monitoring review on the notes issued by 2 Worlds S.r.l.:
Class A (ISIN IT0005337735), EUR 117.4m: downgraded to CCCSF from B+SF
Class B (ISIN IT0005337743), EUR 30.2m: downgraded to CSF from CCSF
Class J (ISIN IT0005337750), EUR 9.0m: not rated
Scope’s review was based on servicer, investor and payment reporting as of the July 2023 payment date.
2Worlds S.r.l. is a static cash securitisation of secured and unsecured non-performing loans (NPLs) extended to companies and individuals in Italy. The loans were originated by Banco di Desio e della Brianza S.p.A. and Banca Popolare di Spoleto S.p.A. The issuer acquired the portfolio on the transfer date, 12 June 2018, but is entitled to all portfolio collections received since 31 December 2017 (the portfolio cut-off date). The final maturity is in January 2037.
As of the June 2023 collection date, aggregate gross collections were EUR 239.6m, which represents 100.5% of the updated business plan expectations and 70.2% of the original business plan. The sources of total gross collections are judicial proceeds (53.1%), discounted pay-off (DPO) proceeds (27.8%), credit sales proceeds (7.8%), indemnities (0.2%) and other sources of collections (11.1%).
Around 56.6% of gross collections stem from open debtors (i.e. debtors whose recovery process is ongoing) while closed debtors account for 43.4% of gross collections. Since closing, Scope estimates that 14.7% of initial gross book value has been closed.
The class A note has amortised by 59.3% of its notional at closing. Interest on class B notes continue to be subordinated to the payment of class A principal as the cumulative collection ratio is currently below the 85% subordination threshold. The reported net proceeds cumulative collection ratio and NPV profitability ratios are 78.8% and 100.5% respectively. Unpaid class B interests amount to EUR 4.1m.
The review addressed i) the collateral’s observed performance as of the July 2023 payment date; ii) Scope’s forward-looking assumptions, which incorporate expected macroeconomic changes over the transaction’s remaining life; iii) updates to the transaction’s liability structure, liquidity and interest rate hedging; and iv) the issuer’s exposure to key transaction counterparties.
Key rating drivers
The transaction’s key rating drivers are broadly aligned with those in Scope’s last rating action release dated 21 February 2023, with the exception of the weakening of the interest rate hedge, which is now considered a negative driver. This is because the mismatch between the swap notional and the outstanding principal of the rated notes has widened, as the notes have amortised slower than expected. This was mentioned as a potential rating change driver in Scope’s initial rating action release dated 25 June 2018.
Beyond the key rating drivers, other relevant rating factors which we considered during the annual review were the following:
Downward revision of business plan (negative)1. The servicer has revised the initial business plan on five occasions with the most recent update (updated in 2023) being 21.3% below initial expectations. The forecasted recovery proceeds is EUR 113.1m implying a gross coverage ratio of 96.3% on the class A outstanding notes’ balance.
Low profitability of secured closed positions (negative)1. Based on Scope calculations, closed secured debtors account for around 14.8% of the transaction’s initial secured gross book value. The profitability on these debtors, at 79.3%, is below Scope’s expectations under the B case assumptions at closing. Total gross collections from closed borrowers represent 43.4% of cumulative collections.
Positive. Consistent servicer improvement in terms of secured profitability could positively impact the rating.
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 also 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 39.8% over a weighted average life of 4.1 years (from its closing value of 49.5% over 5.3 years). By portfolio segment, Scope assumed a lifetime gross recovery rate of 58.3% and 18.9% for the secured and unsecured portfolios, respectively, over a weighted average life of 4.5 and 3.7 years (from their closing values of 73.6% and 16.7% over 5.7 and 4.8 years).
Scope tested the rating’s resilience to deviations in expected recovery rates and recovery timing. This analysis has the sole purpose of illustrating the rating’s sensitivity 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, zero notches
- Extending the recovery by one year, zero notches
The following shows how the results for the class B note would change compared to the assigned rating in the event of:
10% haircut to recoveries, zero notches
- Extending the recovery by one year, zero notches
Rating driver references
1. Transaction documents and reporting (Confidential)
2. Scope research
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.
Cash flow analysis
Scope performed a cash flow analysis for the transaction using Scope Ratings' Cash Flow Structured Finance Expected Loss Model Version 1.2. This incorporated the relevant asset assumptions, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, 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.
The methodologies used for these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 3 August 2023; Counterparty Risk Methodology, 13 July 2023; General Structured Finance Rating Methodology, 25 January 2023), are 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 1.2), 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/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 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 Ratings and it had a negative 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.
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: Elom Kwamin, Analyst
Person responsible for approval of the Credit Ratings: Antonio Casado, Managing Director
The Credit Ratings were first released by Scope Ratings on 25 June 2018. The Credit Ratings were last updated on 21 February 2023.
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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