Press Release

DBRS Morningstar Confirms Rating on ISEO SPV S.r.l., Changes Trend to Negative from Stable

Nonperforming Loans

May 05, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A Notes issued by ISEO SPV S.r.l. (the Issuer) at BBB (low) (sf) and changed the trend to Negative from Stable.

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. DBRS Morningstar does not rate the Class B or Class J Notes.

As of the 31 March 2019 economic effective date, the Notes were backed by a EUR 858 million portfolio by gross book value consisting of unsecured and secured nonperforming loans originated by Unione di Banche Italiane S.p.A.

Since the 4 December 2019 transfer date, doValue S.p.A. (the Servicer) has serviced the receivables and doNext S.p.A. (formerly Italfondiario S.p.A.) has acted as master servicer. A backup servicer, Banca Finanziaria Internazionale S.p.A. (Banca Finint; formerly Securitisation Services S.p.A.), was also appointed.

RATING RATIONALE
The rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 31 December 2022, focusing on: (1) a comparison between actual collections and the Servicer’s initial business plan forecast; (2) the collection performance observed over recent months; and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Updated business plan: The Servicer’s updated business plan as of December 2022, received in February 2023, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of December 2022 and the 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 begin to 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 net collection ratio or the net present value cumulative profitability ratio is lower than 90%. As of the January 2023 interest payment date, these triggers were cured with actual figures at 96.7% and 107.7%, respectively, according to the Servicer. The accrued interest on the Class B Notes in the last interest period was distributed; nevertheless, the unpaid interests on the Class B Notes in previous periods were deferred and subordinated to principal payment of the Class A Notes until both the cumulative net collection ratio and the net present value cumulative profitability ratio reach 100%.
-- Liquidity support: The transaction benefits from an amortising cash reserve and a recovery expenses cash reserve providing liquidity to the structure and covering a potential interest shortfall on the Class A Notes and senior fees.
The cash reserve target amount is equal to 4% of Class A Notes’ principal outstanding balance and the recovery expenses cash reserve target amounts to EUR 250,000, both fully funded.
-- Interest rate risk: The transaction is exposed to interest rate risk in a rising interest rate environment due to an increasing strike rate in the interest rate cap agreement that slows down the redemption of the Class A Notes.

According to the latest investor report from January 2023, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 179.8 million, EUR 25.0 million, and EUR 13.5 million, respectively. As of the January 2023 payment date, the balance of the Class A Notes had amortised by 46.3% since issuance and the aggregated transaction balance was EUR 218.3 million.

As of December 2022, the transaction was performing slightly above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 185.4 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 184.5 million for the same period. Therefore, as of December 2022, the transaction was overperforming by EUR 0.9 million (0.5%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections as of December 2022 at EUR 131.8 million in the BBB (sf) stressed scenario. Therefore, as of December 2022, actual collections were performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in February 2023, the Servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 185.4 million as of December 2022, results in a total of EUR 461.5 million, which is 10.8% lower than the total gross disposition proceeds of EUR 517.2 million estimated in the initial business plan. Excluding actual collections, the Servicer’s expected future collections from January 2023 amount to EUR 276.1 million. The updated DBRS Morningstar BBB (low) (sf) rating stresses assume a haircut of 13.3% to the Servicer’s updated business plan, considering future expected collections.

While DBRS Morningstar observed an improved performance trend in terms of cumulative collection ratio, the updated business plan delivered in February 2023 provides for reduced lifelong gross collections compared with the last business plan. Furthermore, the cumulative net collection ratio has been below 100% since issuance.
In light of the above, DBRS Morningstar does not deem the performance trend to be sustainable yet and confirmed the current rating assigned to the Class A Notes. Furthermore, considering the Servicer’s lower expectations on future gross collections and a rising interest environment, DBRS Morningstar changed the trend to Negative from Stable.

The final maturity date of the transaction is July 2039.

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.

DBRS Morningstar analysed the transaction structure in 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” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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, doValue S.p.A. and Banca Finint, which comprise, in addition to the information received at issuance, the investor report as of January 2023; the updated business plan as of December 2022; the loan-by-loan data as of December 2022; the quarterly servicer report as of March 2023; and the semiannual servicer report as of December 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 6 May 2022, when DBRS Morningstar confirmed its BBB (low) (sf) rating on the Class A Notes and changed the trend to Stable from Negative.

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 239.4 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 on the Class A 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 on 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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This rating is 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: 16 December 2019

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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