DBRS Morningstar Confirms Ratings on 4Mori Sardegna S.r.l.; Trends Remain Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Class A and Class B notes issued by 4Mori Sardegna S.r.l. (the Issuer) at BBB (low) (sf) and B (sf), respectively, with Negative trends.

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 the ultimate payment of principal. The rating on the Class B notes addresses the ultimate payment of interest and principal on or before the legal final maturity date. DBRS Morningstar does not rate the Class J notes.

As of the cut-off date on 31 December 2017, the Notes were backed by a EUR 1.04 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 majority of loans in the portfolio defaulted between 2008 and 2017 and are in various stages of resolution. As of the cut-off date, approximately 53% of the pool by GBV was secured. According to the latest information provided by the servicer in March 2021, 50% of the pool by GBV was secured. At closing, the loan pool mainly comprised corporate borrowers (approximately 77% by GBV) and the portion continues to be almost equal at 76%.

The receivables are serviced by Prelios Credit Servicing S.p.A. (the Servicer) while Securitisation Services S.p.A. operates as backup servicer.

RATING RATIONALE
The rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 June 2021, focusing on: (1) a comparison between actual collections and the Servicer´s 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 Servicer’s updated business plan as of June 2020, received in November 2020, 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 collection ratio or present value cumulative profitability ratio are lower than 90%. These triggers have been breached since January 2021 interest payment date, with the actual figures at 73.5% and 109.1%, respectively, according to the Servicer.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure covering 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.

TRANSACTION AND PERFORMANCE
According to the latest payment report from July 2021, the outstanding principal amounts of the Class A, Class B, and Class J notes were equal to EUR 160.2 million, EUR 13.0 million, and EUR 8.0 million, respectively. The balance of the Class A notes has amortised by approximately 30.9% since issuance. The current aggregated transaction balance is EUR 181.2 million.

As of June 2021, the transaction was performing below the Servicer’s initial expectations. The actual cumulative gross collections equalled EUR 104.2 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 154.8 million for the same period. Therefore, as of June 2021, the transaction was underperforming by EUR 50.6 million (-32.7%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 113.1 million at the BBB (low) (sf) stressed scenario and EUR 126.2 million at the B (sf) stressed scenario. Therefore, the transaction is performing below DBRS Morningstar’s stressed expectations as of 30 June 2021; 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 November 2020, the Servicer provided DBRS Morningstar with a revised business plan as of June 2020. In this updated business plan, the Servicer assumed recoveries below initial expectations. The total cumulative gross collections from the updated business plan amounted to EUR 390.9 million, which is 2.5% lower than the EUR 401.0 million expected in the initial business plan.

Without including actual collections, the Servicer’s expected future collections from July 2021 now account for EUR 260.0 million versus EUR 246.2 million in the initial business plan; hence, the Servicer revised its expectation for collection on the remaining portfolio upward. The updated DBRS Morningstar BBB (low) (sf) and B (sf) rating stress assumes a haircut of 17.9% and 9.2%, respectively, to the Servicer’s latest business plan, considering future expected collections.

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

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The coronavirus 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 incorporated its expectation of a moderate medium-term decline in residential property prices, albeit partial credit to house price increases from 2023 onwards is given in non-investment-grade scenarios.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-2021-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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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).

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.

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.

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/381451/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 Servicer received in November 2020 as of June 2020; the investor report as of July 2021; the semiannual Servicer reports as of June 2021; and the Quarterly Loan by Loan Report as of March 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 4 August 2020, when DBRS Morningstar confirmed the rating on the Class A notes at BBB (low) (sf) and the rating on the Class B notes at B (sf) with a Negative trend.

The lead analyst responsibilities for this transaction have been transferred to Clarice Baiocchi.

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 213.5 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 lead to a downgrade of the Class A notes to 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 236.0 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. 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: Clarice Baiocchi, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 June 2018

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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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 Nonperforming Loans Securitisations (19 May 2021), https://www.dbrsmorningstar.com/research/378681/rating-european-nonperforming-loans-securitisations.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions

-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- European RMBS Insight Methodology (3 June 2021), https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (21 December 2020), https://www.dbrsmorningstar.com/research/371597/european-rmbs-insight-italian-addendum.
-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.