DBRS Ratings Limited (DBRS Morningstar) downgraded its rating on the Class A Notes issued by Aragorn NPL 2018 S.r.l. (the Issuer) to B (low) (sf) from BBB (low) (sf) and its rating on the Class B Notes to CC (sf) from CCC (sf). DBRS Morningstar concurrently assigned Stable trends to the ratings.
The transaction included the issuance of Class A, Class B, and Class J Notes (collectively, the Notes). The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final legal maturity date. The rating of the Class B Notes addresses the ultimate payment of interest and principal. The Class J notes are unrated.
The Notes are collateralised by an Italian nonperforming loan (NPL) portfolio originated by Credito Valtellinese S.p.A. and Credito Siciliano S.p.A. (collectively, the Sellers). The total gross book value (GBV) of the portfolio as of 31 December 2017 cut-off date was approximately EUR 1,671 million.
As at cut off, 90.2% of the total GBV was composed of corporate borrowers, and 68% of the GBV comprised 364 borrowers (out of 4,161 total), each having GBV over EUR 1 million. The top 50 borrowers made up 26.8% of the pool GBV at cut off.
The rating downgrades follow the second annual review of the transaction and are based on the following analytical key considerations:
-- The underperformance of the transaction since mid-2018 and further deterioration observed over the last six months, despite the profitability levels recorded as of the last interest payment date (31 December 2019) of 113.9%.
--The amount of actual cumulative gross collections being 38.9% lower than DBRS Morningstar’s expectations at a CCC (sf) stressed scenario as of 30 June 2020.
--The 9.6% reduction in the amount of gross collection forecast estimated in the updated portfolio business plan formulated by Credito Fondiario S.p.A. (CF) and Cerved Credit Management S.p.A. (CCM; and together with CCM, the Servicers), further underperformance in the first semester of 2020, and further anticipated effects of Coronavirus Disease (COVID-19), which were not built into the servicer’s updated business plan as of 31 December 2019.
--The updated collections as per the servicer’s updated business plan are not sufficient to pay down the aggregate outstanding balance of the Class A and Class B notes.
--The documentation mismatch caused (and may cause future) leakage of funds that could have been used to further amortise the Class A Notes due to a mismatch in the definitions of Net Present Value (NPV) Profitability and Cumulative Collection ratios in the servicing agreement and terms and conditions of the notes.
TRANSACTION AND PERFORMANCE
According to the latest investor report dated 31 January 2020, the principal amount outstanding of the Class A, Class B, and Class J Notes was EUR 451.2 million, EUR 66.8 million, and EUR 10.0 million, respectively. The balance of the Class A Notes amortised by approximately 11.45% since issuance.
At the cut-off date, the GBV distribution per year of default was concentrated between 2011 and 2017, representing 95.4% of the portfolio GBV distribution. The collections distribution per year of default follows almost the same trend of the GBV distribution at cut off, with more of the collections coming from the loans that defaulted in 2016-2017 period.
The transaction has been underperforming consistently since inception. The servicer provided an updated business plan in March 2020 (at the December 2019 cut-off date), with a cumulative gross disposal proceeds (GDP) reduced by 9.6% from the executed business plan (the executed business plan cumulative GDP of EUR 773 million vs updated business plan cumulative GDP EUR 698 million).
The executed business plan estimated collections of EUR 99.1 million during the first semester of 2020. Such amount was reduced to EUR 52.6 million in the updated business plan. The actual collection during this semester was equal to EUR 25.7 million, in part as a result of the effects of court closures due to the coronavirus.
As at 30 June 2020, the actual collections are 46.7% behind the executed business plan GDP, 18.2% behind the updated business plan and 15.3% behind the BBB (low) (sf) stressed GDP.
At inception, DBRS Morningstar estimated a EUR 142.8 million cumulative gross cash flow as of June 2020 at the BBB (low) (sf) scenario and a gross cash flow of EUR 197.8 million at the CCC (sf) scenario. While the actual cumulative gross collections for the same period are 15.3% below DBRS Morningstar’s initial estimation under a BBB (low) (sf) scenario, the transaction is currently performing below our expectations by 38.9% in a CCC (sf) scenario.
To date, 56.5% of the collections derived from discounted payoffs (DPOs), 23.8% from judicial proceeds, 17.2% from note sales, and 2.5% from other sources. For closed or resolved cases, the note sales resulted in the highest discount versus the executed business plan at 30.8%, while DPO proceeds resulted in a smaller discount at 4.5%.
As of 31 December 2019, net collections anticipated in the executed business plan prepared by CF and CCM were EUR 24.0 million and EUR 69.0 million, respectively. The actual cumulative net collections as of 31 December 2019 were EUR 41.5 million and EUR 39.8 million, respectively, with CF overperforming and CCM underperforming. This difference between the actual and estimated net proceeds increased to EUR 109 million (with EUR 92.4 million of this underperformance deriving from CCM) as at 30 June 2020.
DBRS Morningstar further analysed the changes in the updated business plan (cut-off date of 31 December 2019) and collections to date with specific focus on:
--Individual servicer performance to date based on closed and resolved borrowers;
--Expected overall individual servicer performance based on the updated business plan;
--Performance based on GDP size, with a breakdown of borrowers with expected GDP above EUR 1 million and borrowers with expected GDP below EUR 1 million and respective collections and weighted-average life (WAL) in the executed business plan versus expectations in the updated business plan.
As per the executed business plan, 188 borrowers contribute over EUR 1million GDP, while the remaining 3,973 contribute less than EUR 1 million GDP each.
As per the updated business plan, the reduction in collections is mostly due to a revised expectation in recoveries deriving from borrowers where the initial expectation was to recover more than EUR 1 million. DBRS Morningstar notes that while the GDP is reduced, the WAL of collections also decreased. Out of the EUR 74 million difference between the executed business plan and the updated business plan, EUR 67.3 million relate to these 188 borrowers.
The EUR 67.3 million reduction is the net effect of EUR 8.1 million increase and EUR 75.4 million decrease in GDP expectations. Of the EUR 75.4 million reduction, EUR 16.4 million relate to collected and closed transactions (with a 30.4% downward adjustment); EUR 8.6 million is written off and EUR 50.3 million relates to a 19.7% reduction in future collection expectations. The 8.1 million relates to an increase in GDP expectations for certain positions (majority of which, EUR 7 million, is being serviced by CF).
Based on the information provided, the majority of the downward reduction in collections expectations derives from a revised expectation of future collections from CF on borrowers for which the initial business plan envisaged collections higher than EUR 1 million (37.2 million for CF and 30.0 million for CCM).
Of the EUR 95.2 million collected until 31 December 2019, EUR 57.2 million relates to positions collected and closed. The executed business plan collection amount of these positions was EUR 74.4 million and as such, these were closed EUR 17.2 million below budget (23.1% lower).
The cumulative net collection ratio and the NPV Profitability ratio reported as at 31 December 2019 were 91.81% and 113.9%, respectively, which are above the 90% subordination trigger set for both ratios.
There is an ongoing discussion between the noteholders and other parties of the securitisation regarding the interpretation of the definition of Cumulative Collection Ratio and the NPV Profitability Ratio, which could lead to an amendment of the contractual documentation.
The Cumulative Collection Ratio is defined as, in respect of a payment date, the aggregate percentage ratio, as indicated in the immediately preceding semi-annual servicing reports between: (1) the cumulative aggregate net collections since the economic effective date of transfer of the portfolio; and (2) the net expected collections, excluding all collections arising from any proceeds deriving from the disposal of individual claims, which are not servicing disposal available proceeds.
The net collections (the numerator) is defined as GDP less recovery expenses while net expected collections (the denominator) is defined as GDP less recovery expenses and servicing fees, thereby leading to an artificially high CCR ratio despite the poor performance.
Using a consistent definition (excluding servicing fees figures for both numerator and denominator) would lead to a cumulative collection ratio of circa 81% instead of 91.81% as of 31 January 2020. This would have triggered a subordination event and the payment of the Class B interest would have been subordinated, together with a larger amount of the servicing fees. Due to this mismatch between the numerator and denominator, EUR 7.4mm has been paid out as Class B interest instead of amortising Class A notes.
The same approach is confirmed in the calculation of the NPV Profitability Ratio where the Target Prices (denominator) have been calculated considering the present value of the net cash flow (after servicing fees) while the numerator is the present value of the net collections (before the servicing fees).
The final maturity date of the transaction is the 31 July 2038.
DBRS Morningstar analysed the transaction structure using Intex DealMaker.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an 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 nonperforming loans 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 incorporated its expectation of a moderate medium-term decline in property prices, but gave partial credit to house price increases from 2023 onwards in noninvestment-grade rating stress scenarios. DBRS Morningstar updated its estimated gross cash flow at the B (low) (sf) scenario to EUR 592.3 million (a discount of 15.3% from the updated servicer business plan of EUR 699 million).
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 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-forrating-sovereign-governments.
The sources of data and information used for these ratings include Credito Fondiario S.p.A. (CF), Cerved Credit Management S.p.A. (CCM), and Citibank N.A., which comprise an updated business plan as of 31 December 2019 provided by CF and CCM, latest investor report as of 31 January 2020 provided by Citibank N.A.and monthly servicer reports up to 30 June 2020 provided by CF and CCM.
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 placed the ratings of the Class A and Class B Notes Under Review with Negative Implications.
The lead analyst responsibilities for this transaction have been transferred to Sinem Erol-Aziz.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on
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 determine the ratings (the Base Case):
-- Recovery Rates Used: Cumulative Base Case Recovery Amount of approximately EUR 592.3 million at the B (low) (sf) stress level, a 5% and 10% decrease of the Cumulative 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 A Notes to CCC (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 CC (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would maintain the rating of the Class B Notes at CC (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would maintain the rating of the Class B Notes at CC (sf).
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/cerepweb/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.
Lead Analyst: Sinem Erol-Aziz, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 June 2018
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The rating methodologies used in the analysis of this transaction can be found at:
-- 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-financeservicers
-- 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 firstname.lastname@example.org.