Press Release

DBRS Morningstar Downgrades Ratings on BCC NPLs 2018-2 S.r.l.; Maintains Negative Trends

Nonperforming Loans

November 04, 2022

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings on the Class A Notes and Class B Notes issued by BCC NPLs 2018-2 S.r.l. (the Issuer) to B (high) (sf) and CCC (low) (sf), respectively, from BB (high) (sf) and CCC (sf), respectively. The trends on all ratings remain Negative.

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 repayment of principal on or before the final maturity date in July 2042. The rating on the Class B Notes addresses the ultimate payment of both interest and principal. DBRS Morningstar does not rate the Class J Notes.

At issuance, the notes were backed by a EUR 2 billion portfolio by gross book value consisting of a mixed pool of Italian nonperforming residential mortgage loans, commercial mortgage loans, and unsecured loans originated by 73 Italian banks.

doValue S.p.A. (the servicer) services the receivables, while Banca Finanziaria Internazionale S.p.A., operates as the backup servicer.

RATING RATIONALE
The rating downgrades follow an annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: Assessment of portfolio recoveries as of 30 September 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 the past months; and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: Loan pool composition as of September 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 July 2022 investor report, the most recent available, the cumulative collection ratio is 80.96% and the net present value cumulative profitability ratio is 107.50%. The 80% trigger has been not breached for both the cumulative collection ratio and 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 shortfalls on the Class A Notes. The cash reserve target amount is equal to 3.0% of the Class A Notes’ principal outstanding balance and is currently fully funded.

According to the investor report, the outstanding principal amounts of the Class A, Class B, and Class J Notes were equal to EUR 369.9 million, EUR 60.1 million, and EUR 20.0 million, respectively. The balance of the Class A Notes has amortised by 22.6% since issuance. The current aggregate transaction balance is EUR 450.1 million.

As of June 2022, the transaction was performing below the servicer’s initial business plan expectations. The actual cumulative gross collections equalled EUR 223.2 million whereas the servicer’s business plan estimated cumulative gross collections of EUR 271.5 million for the same period. Therefore, as of June 2022, the transaction was underperforming by EUR 48.3 million (-17.8%). Out of the EUR 54.4 million gross collections registered during the last collection date, EUR 27.1 million (49.8%) derived from note sales with a material discount to the servicer´s executed lifelong expectations for the receivables. As of September 2022, the actual cumulative gross collections increased to EUR 232.6 million compared with June 2022, underperforming by EUR 67.6 million (-22.5%) the business plan expectations up to September 2022. DBRS Morningstar understands that the note sales at material discounts to the servicer´s executed lifelong expectations is not yet reflected in the net present value cumulative profitability ratio that was last reported as of June 2022.

At issuance DBRS Morningstar estimated cumulative gross collections as of June 2022 to be EUR 210.6 million at the BBB (low) (sf) stressed scenario. Therefore, the transaction was performing slightly above DBRS Morningstar’s initial BBB (low) (sf) stressed expectations for the same period.

In September 2022, the servicer delivered an updated portfolio business plan (the updated business plan) as of December 2021. The updated business plan, combined with the actual cumulative gross collections of EUR 168.8 million as of 31 December 2021, results in a total of EUR 759.4 million expected gross collections, which is 8.6% lower than the total gross collections of EUR 830.6 million estimated in the initial business plan. Without including actual collections, the servicer’ expected future collections from January 2022 are now accounting for EUR 590.6 million (EUR 633.7 million in the initial business plan). Hence, the servicer’ expectation for collection on the remaining portfolio was revised considerably downwards and timing of collections is now expected later than initially envisaged. The updated DBRS Morningstar B (high) (sf) rating stress assumes a haircut of 13.0% to the servicer’s updated business plan, considering total future expected collections July 2022 onwards. In DBRS Morningstar’s CCC (low) (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 July 2042.

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 ratings 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 these ratings include the Issuer, the servicer, and Banca Finanziaria Internazionale S.p.A., which comprise, in addition to the information received at issuance, the updated business plan as of December 2021 delivered in September 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 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 2021, when DBRS Morningstar confirmed its BB (high) (sf) and CCC(sf) ratings on the Class A Notes and Class B Notes, and maintained the Negative trends.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 455.1 million at the B (high) (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 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 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 to below CCC (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 below CCC (low) (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.

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

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 December 2018

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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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