Press Release

DBRS Morningstar Confirms Rating on Buonconsiglio 3 S.r.l. with Negative Trend

Nonperforming Loans

November 02, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A notes issued by Buonconsiglio 3 S.r.l. (the Issuer) at BBB (sf) and maintained the Negative trend.

In this transaction, Class A, Class B, and Class J notes (collectively, the Notes) were issued. The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before its final maturity date of January 2041. DBRS Morningstar does not rate the Class B or the Class J notes.

At issuance, the Notes were backed by a EUR 679.05 million portfolio by gross book value consisting of a mixed portfolio of Italian secured and unsecured nonperforming loans originated by Cassa Centrale Banca Credito Cooperativo Italiano S.p.A., 31 co-operative banks belonging to Cassa Centrale group, and six other Italian private banks.

The receivables are serviced by Guber Banca S.p.A. (the Servicer) while Zenith Service S.p.A was appointed to carry out the master servicing activities.

RATING RATIONALE
The rating confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 June 2022, focusing on: (1) a comparison between actual collections and the servicer’s initial business plan (the business plan); (2) the collection performance observed over recent 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.
-- Portfolio characteristics: the loan pool composition as of June 2022 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 June 2022 semiannual servicer report, the cumulative collection ratio is 142.6% and the net present value cumulative profitability ratio is 115.8%. The 90% trigger has not been breached for either the cumulative collection ratio or the net present value cumulative profitability ratio.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure and covering potential interest shortfall on the Class A notes. The cash reserve target amount is equal to 4.0% of the Class A notes’ principal outstanding and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from July 2022, the outstanding principal amounts of the Class A, Class B, and Class J notes were equal to EUR 129.8 million, EUR 21.0 million, and EUR 4.5 million, respectively. As of the July 2022 payment date, the balance of the Class A notes has amortised by 15.7% since issuance. The current aggregated transaction balance is EUR 155.3 million.

As of June 2022, the transaction was performing above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 38.9 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 26.7 million for the same period. Therefore, as of June 2022, the transaction was performing above the initial business plan expectations by EUR 12.3 million (46.0%).

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 21.5 million at the BBB (sf) stressed scenario. Therefore, as of June 2022, the transaction was performing above DBRS Morningstar’s BBB (sf) initial stressed expectations.

In August 2022, the servicer delivered an updated portfolio business plan (the updated business plan) as of March 2022. The updated business plan, combined with the actual cumulative gross collections of EUR 28.3 million as of March 2022, results in a total of EUR 244.3 million in expected gross collections, which is 0.2% lower than the total gross collections of EUR 244.7 million estimated in the initial business plan. Excluding actual collections, the servicer’s expected future collections from July 2022 onward now estimated to be EUR 211.0 million. DBRS Morningstar’s updated BBB (sf) rating stress assumes a haircut of 21.5% to the servicer’s updated business plan, considering total future expected collections from July 2022 onward. In DBRS Morningstar’s CCC (sf) scenario, the servicer’s updated forecast was only adjusted in terms of actual collections to date and timing of future expected collections.

The final maturity date of the transaction is in January 2041.

The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in commercial real estate prices for certain property types.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 19 September 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/402907/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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/402357 and https://www.dbrsmorningstar.com/research/360393.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

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.

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/401817/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report:https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include the Issuer, the Servicer, and Zenith Service S.p.A which comprise, in addition to the information received at issuance, the updated business plan delivered in August 2022 as of March 2022; the investor report as of July 2022; the semiannual servicer report as of June 2022; and the quarterly servicer report as of September 2022.

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 this rating 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 13 December 2021, when DBRS Morningstar confirmed its rating on the Class A notes at BBB (sf) with a Negative trend.

The lead analyst responsibilities for this transaction have been transferred to William Taliento.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 165.6 million at the BBB (sf) stress level, a 5% and a 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 confirmation of the Class A notes at B (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 CCC (sf).

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: https://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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: William Taliento, Senior Analyst, Credit Ratings
Rating Committee Chair: David Lautier , Senior Vice President, Global Esoteric Finance
Initial Rating Date: 14 December 2020

DBRS Ratings GmbH
Neue Mainzer Straße 75
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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