The rating actions are as follows:
Class Ax (ISIN IT0005439150), EUR 158,775,000: rated A-SF
Class Ay (ISIN IT0005439176), EUR 206,225,000: rated A-SF
Class B (ISIN IT0005439606), EUR 74,400,000: rated B+ SF
Class J (ISIN IT0005439614), EUR 23,600,000: not rated
The latest information on the rating, including rating reports and related methodologies, is available on this LINK.*
The transaction is a static cash securitisation of an Italian NPL portfolio with a gross book value of around EUR 1,323m. The portfolio was sold by Ifis NPL Investing S.p.A., part of Banca Ifis Group, and will be serviced by Ifis NPL Servicing S.p.A. as special and master servicer.
The securitised pool is mostly composed of unsecured loans (69.3%). Remaining exposures are senior secured (30.3%) or junior secured (0.4%). Loans are granted mainly to individuals (80.0%) and about 91% of the unsecured portfolio has a wage garnishment order (ODA). Secured loans are backed by residential and non-residential properties (60.8% and 39.2% of total first-lien property value, respectively) that are concentrated in the south of Italy (68.4%). The issuer acquired the portfolio at the transfer date of 1 March 2021 and is entitled to all portfolio collections received since the portfolio cut-off date of 31 July 2020.
The transaction structure comprises four tranches. Classes Ax and Ay are paid pari-passu and pro-rata, while classes B and J are sequentially amortising. The structure comprises an amortising liquidity reserve with a target amount equal to 4.5% of the outstanding class Ax and Ay balance. Interest rate risk on class Ax and Ay notes is partially hedged with an interest rate cap.
The ratings are primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio. The recovery amounts and timing assumptions consider the portfolio’s characteristics, the servicer’s recovery strategy, as well as Scope’s economic outlook for Italy and its assessment of the special servicer’s capabilities. The ratings are supported by the structural protection provided to the notes, the absence of equity leakage provisions, the liquidity protection, and the interest rate hedging agreement.
The ratings also address the issuer’s exposure to key counterparties, with the assessment based on counterparty substitution provisions in the transaction and, when available, Scope’s ratings or other public ratings on the counterparties.
Above-average share of residential assets (positive). 61% of the collateral value is associated with residential assets (against the peer average of 47%), which are more liquid than other types of properties.1
High share of recent valuations (positive). 90% of the property’s valuations have been performed recently (i.e. from 2018 onwards).1
Moderately regular cash flows expected for the ODA portfolio (positive). NPLs that are attached to an ODA generate more regular cash flows than those serviced following other recovery strategies. The seizure of borrower incomes or pensions ensures the issuer is paid monthly, although recovery cash flows are generally spread over several years.1
ODAs are valid and not challengeable (positive). The period for objecting to the ODAs has already elapsed, as represented by the seller. Therefore, the portfolio’s ODAs are valid, existing and not challengeable. Also, the risk of borrowers losing their jobs in the short term due to their employers’ insolvency is limited, as none are subject to insolvency proceedings as at closing.1
Most ODAs’ related legal costs already covered (positive). The seller has already paid all costs and taxes related to ODAs issuances. Remaining legal costs are therefore expected to be minor.1
High share of under-collateralised secured exposures (negative). About 77% of the secured loans’ GBV have a loan to value (LTV) of more than 100%.1
High seasoning (negative). The portfolio without any ODAs has a seasoning of 15 years, among the highest of peer transactions.1
High exposure of ODAs to the private sector (negative). The most frequent events leading to a payment interruption from an ODA are the death or job loss of a borrower. Private sector employees (59% of the pool’s GBV) are generally more exposed to job loss events, while pensioners (28%) are generally more exposed to life events.1
Material share of borrowers with ODAs have a temporary job (negative). About 23% of the employed borrowers (in terms of GBV) have a temporary job. If they are unable to renew their employment contracts or find a new job before the contract expires, the ODA’s associated cash flows will be interrupted, even though the ODA will remain legally valid.1
Hedging structure (negative). An interest rate cap mitigates the class Ax and Ay notes’ interest rate risk only in high-stress scenarios. The cap strike ranges from 0.2% in July 2021 to 3% in July 2037.2
Servicer outperformance on recovery timing (upside). The pandemic led to a slowdown in court activity. An outperformance on recovery timing could occur if courts advance on proceeding backlogs faster than expected.
Rapid economic growth following the pandemic crisis (upside). A scenario of rapid economic recovery would improve liquidity and affordability conditions and prevent a sharp deterioration in collateral values. This could positively affect the ratings, enhancing servicer performance on collection volumes.
Long-lasting pandemic crisis (downside). Recovery rates are generally highly dependent on the macroeconomic environment. Scope baseline scenario3,4 foresees GDP growth of 5.6% in 2021 after a contraction in 2020. If the current crisis lasts beyond our baseline scenario, affordability among borrowers and real estate liquidity could deteriorate, reducing servicer performance on collection volumes. This could negatively impact the ratings.
Higher unemployment rates (downside). If the pandemic situation lasts longer than expected or its impact on national employment is higher than expected, the likelihood of job losses will increase, limiting the effectiveness of the ODAs. The servicer’s alternative recovery strategies are key to ensuring an exposure is recovered in case of job losses. As a mitigant, the servicer can pursue an ODA strategy for any employed or retired guarantor of the exposure.
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 and derived a rating-conditional cash flow projection of gross recoveries for the portfolio of defaulted loans.
Scope performed a specific analysis for recoveries, using different approaches for secured and unsecured exposures. For senior secured exposures, collections were mainly based on the most recent property appraisal values, which were stressed to account for, appraisal type, liquidity and market value risks. Recovery timing assumptions were derived using line-by-line asset information detailing the type of legal proceeding, the respective court, and the legal stage of the proceeding as of the portfolio’s transfer date. For unsecured and junior secured exposures without any wage garnishment strategy, Scope calibrated lifetime recoveries based on the historical line-by-line market-wide recovery data on defaulted loans between 2000 and 2019, also considering the special servicer’s capabilities and servicer-specific historical data. For unsecured exposures with ODAs, Scope calibrated the lifetime recoveries based on servicer’s specific historical line-by-line recovery data for the analysed portfolio and since the ODA’s issuance date. Scope also assessed the efficiency and structure of the wage garnishment operational process. Scope considered that unsecured and junior secured borrowers were classified as defaulted for a weighted average of 4.0 years as of the cut-off date. Scope accounted for the current macro-economic scenario, taking a forward-looking view on the macro-economic developments.
For the class Ax and Ay notes analysis, Scope assumed a gross recovery rate of 37.8% over a weighted average life of 5.5 years. By segment, Scope assumed a gross recovery rate of 19.0% for the senior secured portfolio and 46.0% for the unsecured and junior secured portfolio. Scope has applied an average combined security value haircut of 68.2%, which consists of i) an average fire-sale discount (including valuation type haircuts) of 60.9% to security valuations, reflecting liquidity or marketability risks; and ii) property price decline stresses (18.8% on average), reflecting Scope’s view of downside market volatility risk. To calculate the security value haircut rate, Scope has removed the collateral positions sold between the cut-off date and the issue date.
For the analysis of the class B notes, Scope assumed a gross recovery rate of 49.2% over a weighted average life of 5.8 years. By segment, Scope assumed a gross recovery rate of 24.0% for the senior secured portfolio and 60.2% for the unsecured and junior secured portfolio.
In its analysis, Scope considered transaction’s servicer fees structure and assumed legal expenses to be around 2% of lifetime gross collections. Scope captured single asset exposure risks by applying a recovery rate haircut of 33.3% to the 20 largest borrowers in the class Ax and Ay analysis.
Scope tested the resilience of the ratings 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 ratings to input assumptions and is not indicative of expected or likely scenarios.
The following shows how the results for class Ax and Ay change compared to the assigned credit ratings in the event of:
The following shows how the result for class B changes compared to the assigned credit rating in the event of:
* The sentence was added on 22 March 2021. The sentence was not included in the original publication.
Rating driver references
1. Loan-by-loan data tape of the securitised pool (confidential)
2. Transaction’s documents (confidential)
3. Italy’s debt sustainability remains a challenge, despite low interest costs and pro-growth agenda
4. 2021 Sovereign Outlook Recovery at last, with monetary and fiscal frameworks in transition, and diverging sovereign rating implications
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 default and recovery rate assumptions over the portfolio’s amortisation period, 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.
The methodologies used for these Credit Ratings are the Non-Performing Loan ABS Rating Methodology (9 September 2020), the General Structured Finance Rating Methodology (14 December 2020) and the Methodology for Counterparty Risk in Structured Finance (8 July 2020), available on www.scoperatings.com.
The model used for these Credit Ratings is Cash Flow Model v1.1., available in Scope Ratings’ list of models, published under: https://www.scoperatings.com/#!methodology/list.
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-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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-scale. 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://www.scoperatings.com/#!methodology/list.
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 Ratings: public domain, the Rated Entities’ Related Third Parties and the Rated Entity.
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. The external due diligence assessment 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.
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, Associate Director.
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director.
The Credit Ratings were first released by Scope Ratings on 19 March 2021.
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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