Press Release

DBRS Morningstar Confirms Ratings on POP NPLs 2019 S.r.l.; Trend Remains Negative

Nonperforming Loans

May 07, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Class A and Class B notes issued by POP NPLs 2019 S.r.l. (the Issuer) at BBB (sf) and CCC (sf), respectively, and maintained a Negative trend for both classes of notes.

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 mixed pool of Italian nonperforming secured and unsecured loans sold by 12 Italian banks to the Issuer. The gross book value of the loan pool was approximately EUR 826.7 million as of the 1 January 2019 cutoff date. The securitised portfolio was composed of secured loans, representing approximately 51.6% of the gross book value (GBV), and unsecured loans, representing the remaining 48.4% of the GBV. Residential and commercial real estate properties represented 54.0% and 17.6% of the pool by first-lien real estate value, respectively.

The receivables are serviced by Prelios Credit Solutions S.p.A. and Fire S.p.A. (Prelios and Fire or, together, the Servicers). The master servicer is Prelios Credit Servicing S.p.A., and Securitisation Services S.p.A. operates as the backup servicer in the transaction.

RATING RATIONALE
The confirmations follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 December 2020, focusing on: (1) a comparison between actual collections and the Servicers´ initial business plan forecast; (2) the collection performance observed over the past 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 initial expectations.
-- The Servicers’ updated business plan as of December 2020, received in April 2021, and the comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition 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 Gross Collection Ratio or Present Value (PV) Cumulative Profitability Ratio are lower than 90%. These triggers were not breached on the February 2021 interest payment date, with the actual figures being 124.1% and 133.7%, respectively, according to the Servicers.
-- 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 4.5% of the Class A Notes principal outstanding and is currently fully funded.

According to the latest payment report from February 2021, the outstanding principal amounts of the Class A, Class B, and Class J notes were equal to EUR 139.5 million, EUR 25.0 million, and EUR 5.0 million, respectively. The balance of the Class A Notes has amortised by approximately 19.4% since issuance. The current aggregated transaction balance is EUR 169.5 million.

As of December 2020, the transaction was performing above the Servicers’ initial expectations. The actual cumulative gross collections equaled EUR 43.2 million, whereas the Servicers’ initial business plan estimated cumulative gross collections of EUR 33.4 million for the same period. Therefore, as of December 2020, the transaction was overperforming by EUR 9.7 million (29.1%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 27.0 million at the BBB (sf) stressed scenario and EUR 29.1 million at the CCC (sf) stressed scenario. Therefore, as of December 2020, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

In April 2021, the Servicers provided DBRS Morningstar with a revised business plan. In this updated business plan, the Servicers assumed recoveries in line with initial expectations. The total cumulative gross collections from the updated business plan account for EUR 280.9 million, which is 0.1% lower compared with the EUR 281.2 million expected in the initial business plan.

Without including actual collections, the Servicers’ expected future collections from January 2021 are now accounting for EUR 237.7 million (EUR 247.7 million in the initial business plan). Hence, the Servicers’ expectation for collection on the remaining portfolio was revised downwards. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 22.5% to the Servicers’ latest business plan, considering future expected collections. In DBRS Morningstar’s CCC (sf) scenario, the updated Servicers’ forecast were only adjusted in terms of actual collections to date, and timing of future expected collections.

The final maturity date of the transaction is in February 2045.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The coronavirus and the resulting isolation measures have resulted in a sharp economic contraction, increases in 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. The rating is 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; however, partial credit to house price increases from 2023 onwards is given in noninvestment grade scenarios. The Negative trend reflects the ongoing uncertainty amid the coronavirus pandemic.

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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 and/or its agents, which comprise, in addition to the information received at issuance, the updated business plan from the Servicers received in April 2021, updated semiannual and quarterly Servicers reports as of December 2020 and March 2021 and the investor report as of February 2021.

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 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 rating (the Base Case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 184.3 million at the BBB (sf) stress level and of approximately EUR 239.0 million at the CCC (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 A notes to BB (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 CCC (sf).
-- 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 below 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 B notes below 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sebastiano Romano, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 December 2019

DBRS Ratings GmbH
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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: http://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: http://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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