DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the following classes of notes issued by 4Mori Sardegna S.r.l. (the Issuer):
-- Class A at BBB (low) (sf)
-- Class B at B (sf)
The trend on all ratings remains Negative.
The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the Notes). The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal. The rating on the Class B notes addresses ultimate payment of interest and ultimate payment of principal. DBRS Morningstar does not rate the Class J Notes.
As of the transfer date on 7 June 2018, the Notes were backed by a EUR 1.03 billion portfolio by gross book value (GBV) consisting of secured and unsecured Italian nonperforming loans (NPLs) originated by Banco di Sardegna S.p.A. (the Originator). The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios or the Servicer). A backup master servicer, Securitisation Services S.p.A., was appointed and will act as a servicer in case of termination of the appointment of Prelios.
The majority of loans in the portfolio defaulted between 2008 and 2017 and are in various stages of resolution. As of the transfer date, approximately 53% of the pool by GBV was secured and 94.4% of the secured loans by GBV benefitted from a first-ranking lien. According to the latest information provided by the Servicer in March 2020, the percentage of secured GBV of the portfolio remains almost equal at 52%. At closing, the loan pool was mainly represented by corporate borrowers (approximately 77% by GBV), and continues to be almost equal at 76%.
The rating confirmations follow the second annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 June 2020, focusing on: (1) A comparison between actual gross collections and the Servicer’s initial business plan’s forecast; (2) The collection performance observed over the past six months, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) A comparison between the current performance and DBRS Morningstar’s expectations.
-- Servicer’s updated business plan: received in October 2019 and compared with the Servicer’s initial collection expectations.
-- Portfolio characteristics: loan pool composition as of 31 March 2020, and evolution of its core features since issuance.
-- Transaction liquidating structure: the order of priority entails a fully sequential amortisation of the notes – (i.e., the Class B notes will begin to amortise following the full repayment of the Class A notes and the Class J notes will amortise following the repayment of the Class B notes). Additionally, interest payments on the Class B notes become subordinated to principal payments on the Class A notes if the Cumulative Net Collection Ratio or Net Present Value Cumulative Profitability Ratio are lower than 90%. These triggers were not breached on the June 2020 interest payment date, with the actuals being 95.5% and 106.8%, respectively.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure covering against potential interest shortfall on the Class A notes and senior fees. The cash reserve target amount is equal to 4.9% of the sum of Class A and Class B notes principal outstanding and is currently fully funded.
According to the latest payment report of July 2020, the principal amount outstanding of the Class A, Class B, and Class J notes was equal to EUR 191.5 million, EUR 13.0 million, and EUR 8.0 million, respectively. The balance of the Class A notes amortised by approximately 17.4% since issuance. The current aggregated transaction balance is EUR 212.5 million.
As of June 2020, the transaction was performing below the Servicer’s initial expectations. The actual cumulative gross collections equal EUR 70.5 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 81.2 million for the same period.
At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 60.6 million at BBB (low) (sf) stressed scenario and of EUR 67.9 million at B (sf) stressed scenario. Therefore the transaction is performing above DBRS Morningstar’s stressed expectations as of 30 June 2020. However, DBRS Morningstar has maintained the Negative trends as it continues to closely monitor the underperformance observed thus far compared with the servicer’s business plan, as well as the development of the macroeconomic and real estate scenarios within the current market environment.
In October 2019, Prelios provided DBRS Morningstar with a reviewed business plan. The updated business plan is in line with the Servicer’s initial expectations. The total cumulative gross collections from the updated business plan account for EUR 401.1 million, which is in line with the EUR 401.0 million expected in the initial business plan.
Without including actual collections, the expected future collections from June 2020 account for EUR 335.1 million (EUR 335.0 million in the initial business plan). DBRS Morningstar’s BBB (low) (sf) and B (sf) rating stresses assume a haircut of 23.4% and 15.1%, respectively, to the Servicer’s updated business plan, considering future expected collections.
The final maturity date of the transaction is 31 January 2037.
DBRS Morningstar analysed the transaction structure using Intex DealMaker.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp economic contraction, increases in unemployment rates and reduced investment activities. DBRS Morningstar anticipates that collections in European NPL securitisations will be disrupted in coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar assumed reduced collections for the next two quarters and incorporated its revised expectation of a moderate medium-term decline in residential property prices, albeit partial credit to house price increases from 2023 onwards is given to noninvestment grade scenarios.
The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 22 July 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced reports.
For more information on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (22 April 2020).
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found at: http://www.dbrsmorningstar.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include the Issuer, the Servicer, and the backup master servicer, which comprise an updated data tape as of 31 March 2020, detailed performance data as of June 2020, updated business plan provided in October 2019, and semi-annual payment report as of July 2020.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 8 May 2020, when DBRS Morningstar assigned a Negative trend to the ratings of the Class A and Class B notes.
The lead analyst responsibilities for this transaction have been transferred to Sebastiano Romano.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the ratings (the Base Case):
-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 256.8 million at the BBB (low) (sf) stress level, a 5% and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would maintain the rating of the Class A notes at BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to B (high) (sf).
-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 284.4 million at the B (sf) stress level, a 5% and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class B notes to B (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class B notes to CCC (sf).
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Sebastiano Romano, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 June 2018
DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Rating European Non-Performing Loans Securitisations (13 May 2020)
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 July 2020), https://www.dbrsmorningstar.com/research/363998/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda
-- European CMBS Rating and Surveillance Methodology (13 December 2019)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019)
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.