Press Release

DBRS Morningstar Downgrades Ratings on Popolare Bari NPLs 2017 S.r.l.; Maintains Under Review Negative Status

Nonperforming Loans

December 18, 2020

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings on the Class A and Class B notes issued by Popolare Bari NPLs 2017 S.r.l., as follows:

--Class A Notes to B (high) (sf) from BBB (low) (sf)
--Class B Notes to CCC (sf) from B (low) (sf)

The ratings remain Under Review with Negative Implications.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the notes). At issuance, the notes were backed by a EUR 319.8 million portfolio by gross book value (GBV) consisting of secured and unsecured nonperforming loans (NPLs) originated by Banca Popolare di Bari S.c .p.a and Cassa di Risparmio di Orvieto S.p.A. (the originators). The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios, or the servicer). A backup servicer, Banca Finanziaria Internazionale S.p.A. (formerly, Securitisation Services S.p.A.), was appointed and will act as a servicer in case of the termination of the appointment of Prelios.

RATING RATIONALE
The rating downgrades follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 October 2020, focusing on: (1) a comparison between actual collections and the special servicer’s initial business plan forecasts and (2) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Special servicer’s updated business plan, received in December 2020 and its comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition as of October 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).
-- Performance ratios and underperformance events: as per the most recent October 2020 investor report, the cumulative collection ratio is 63.6% and the present value (PV) cumulative profitability ratio is 96.8%. A subordination event has not occurred as it would occur upon the PV cumulative profitability ratio being under 90% or upon Class A interest shortfalls.
-- 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 costs. The cash reserve target amount is equal to 4% of the Class A notes principal outstanding and is currently fully funded.

TRANSACTION AND PERFORMANCE

According to the latest October 2020 investor report, the principal amounts outstanding of the Class A, Class B, and Class J notes were equal to EUR 64.2 million, EUR 10.1 million, and EUR 13.5 million, respectively.

Although the performance of the transaction together with the cumulative collection ratio (CCR) have been deteriorating since closing, the relatively weak subordination event triggers led to continuous payment of Class B interest, which is credit negative for Class A. The balance of the Class A notes has amortised by 20.7% since issuance.

As reported in the most recent semiannual servicer report, the actual cumulative gross collections (GDPs) as of 30 October 2020 were EUR 25.4 million, whereas the initial business plan prepared by the servicer assumed cumulative gross collections of EUR 41.3 million for the same period. Therefore, with a CCR of 63.6%, the transaction is underperforming by 36.4% compared with the servicer’s initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 26.2 million at the BBB (low) (sf) scenario and of EUR 27.5 million at the B (low) (sf) scenario for the same period. Therefore, as of October 2020, the transaction was performing below DBRS Morningstar’s stressed expectations at closing.

To date only 22.7% of the actual cumulative GDP have been from judicial proceeds. The servicer is leveraging on note sales and discounted payoffs (DPOs) as part of the recovery strategy (29.5% and 40.3% of the actual cumulative GDP, respectively). Although note sales is not a profitable strategy, DPOs have been compensating the low amount of judicial proceeds and keeping the overall profitability of the transaction stable with a PV cumulative profitability ratio at 96.8% as of 30 October 2020.

In December 2020, DBRS Morningstar received a revised business plan prepared by the special servicer, as provided for by the original documentation of the transaction. In this updated business plan, the special servicer assumed lower recoveries compared with initial expectations. The total cumulative gross collections from the updated business plan account for EUR 96.4 million, which is 19.9% lower than the EUR 120.4 million expected initially. It is important to note that this updated business plan does not include Coronavirus Disease (COVID-19) related adjustments, as it was prepared early 2020.

The downgrade of the ratings and the decision to maintain the Under Review with Negative Implications status are based on (i) the current significant underperformance of the transaction, (ii) the worsening servicer forecast considering the 2020 updated business plan, and (iii) the current uncertainties deriving from the pandemic and the market environment. DBRS Morningstar endeavours to resolve the status of ratings Under Review with Negative Implications as soon as appropriate. If continued heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time. During its review, DBRS Morningstar will assess the updated business plan and the changes from previous expectations in detail, and may change its stressed assumptions as a result.

The final maturity date of the transaction is in October 2037.

The coronavirus and the resulting isolation measures have resulted in a sharp economic contraction, increased unemployment rates, and reduced investment activities. DBRS Morningstar anticipates that collections in European NPL securitisations will continue to be disrupted in the coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. For this transaction, DBRS Morningstar considered a potential decrease in recoveries as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. These scenarios were last updated on 2 December 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/370673/dbrs-morningstar-releases-global-macroeconomic-scenarios-december-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/362327 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.

ESG CONSIDERATIONS
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.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
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: https://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 servicer, Prelios Credit Servicing S.p.A. and the corporate services provider, Banca Finanziaria Internazionale S.p.A. (former Securitisation Services S.p.A.), which comprise the latest semiannual investor report dated 30 October 2020; the latest semiannual servicer report as of 30 October 2020; the latest payment report dated 30 October 2020; and an updated business plan prepared by the servicer and received in December 2020.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, 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 4 November 2020, when DBRS Morningstar maintained the Under Review with Negative Implications status on 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.

These ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. If continued heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time.

The stress scenarios sensitivities do not apply to ratings Under Review with Negative Implications.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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 Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 December 2017

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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