Press Release

DBRS Morningstar Downgrades Credit Ratings on BCC NPLs 2018-2 S.r.l.

Nonperforming Loans

October 06, 2023

DBRS Ratings GmbH (DBRS Morningstar) downgraded its credit ratings on the following notes issued by BCC NPLs 2018-2 S.r.l. (the Issuer):

-- Class A Notes to B (sf) from B (high) (sf)
-- Class B Notes to CC (sf) from CCC (low) (sf)

DBRS Morningstar maintained the Negative trend on the Class A Notes’ credit rating. The credit rating on the Class B Notes does not have a trend.

The transaction represents the issuance of Class A, Class B, and Class J Notes (collectively, the Notes). The credit 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 credit 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.

CREDIT RATING RATIONALE
The credit rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 30 June 2023, focusing on (1) a comparison between actual collections and the special servicers’ 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.
-- Portfolio characteristics: The loan pool composition as of June 2023 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).
-- Performance ratios and underperformance events: As per the most recent July 2023 payment report, the cumulative collection ratio was 70.2% and the net present value cumulative profitability ratio was 107.4%. Since the January 2023 interest payment date, the cumulative collection ratio has breached the 80% limit, so that interest payments on the Class B Notes are subordinated to the repayment of principal on the Class A Notes.
-- 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 3.0% of the Class A Notes’ principal outstanding and is currently fully funded.
-- Interest rate impact: The transaction benefits from overhedging in a rising interest rate environment because of a low strike rate in the interest rate cap agreement as well as a higher cap notional amount compared with the outstanding balance of the Class A Notes.

TRANSACTION AND PERFORMANCE
According to the latest investor report from July 2023, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 310.9 million, EUR 60.1 million, and EUR 20.0 million, respectively. As of the July 2023 payment date, the balance of the Class A Notes had amortised by 35.0% since issuance and the aggregated transaction balance was EUR 391.0 million.

As of June 2023, the transaction was performing below the Servicer’s initial business plan expectations. The actual cumulative gross collections equalled EUR 282.6 million whereas the Servicer’s business plan estimated cumulative gross collections of EUR 394.0 million for the same period. Therefore, as of June 2023, the transaction was underperforming by EUR 111.4 million (-28.3%). EUR 64.9 million (23.0%) of gross collections registered as of June 2023 were derived from note sales with a material discount to the Servicer’s executed lifelong expectations for the receivables. DBRS Morningstar understands that the note sales’ material discounts to the Servicer’s executed lifelong expectations are not directly reflected in the net present value cumulative profitability ratio that was last reported as of June 2023, because of the discrepancy between actual collection time and expected collection time in the initial business plan.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 303.8 million in the BBB (low) (sf) stressed scenario. Therefore, as of June 2023, the transaction was performing below DBRS Morningstar’s initial stressed expectations.

In June 2023, the Servicer delivered an updated portfolio business plan (the updated business plan) as of December 2022. The updated business plan, combined with the actual cumulative gross collections of EUR 265.0 million as of 31 December 2022, results in a total of EUR 744.3 million in expected gross collections, which is 10.4% lower than the total gross collections of EUR 830.6 million estimated in the initial business plan. Without including actual collections, the Servicer’s expected future collections from January 2023 are now accounting for EUR 479.2 million (EUR 491.7 million in the initial business plan). Hence, the Servicer’s expectation for collection on the remaining portfolio was revised downward and timing of collections is now expected later than initially envisaged.

The updated DBRS Morningstar B (sf) credit rating stress assumes a haircut of 6.6% to the Servicer’s updated business plan, considering total future expected collections from July 2023 onward. In DBRS Morningstar’s CCC (sf) scenario, the Servicer’s updated forecast was adjusted only in terms of actual collections to date and timing of future expected collections. Considering senior costs and interest due on the Notes, the full repayment of the Class B principal is increasingly unlikely, but, considering the transaction structure, a payment default on the Class B Notes would likely occur only a few years from now.

The final maturity date of the transaction is in July 2042.

DBRS Morningstar’s credit ratings on the Class A Notes and Class B Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Class Balance.

DBRS Morningstar’s credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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 www.dbrsmorningstar.com/research/416784.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit 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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit 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 2022 delivered in June 2023; the investor report as of July 2023; the semiannual servicer report as of June 2023; and the loan-by-loan data as of June 2023.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating actions on this transaction took place on 4 November 2022, when DBRS Morningstar downgraded its credit ratings on the Class A Notes and Class B Notes to B (high) (sf) and CCC (low) (sf), respectively, from BB (high) (sf) and CCC (sf), respectively. The trends on all credit ratings remained Negative.

The lead analyst responsibilities for this transaction have been transferred to Sijia Aulenbacher.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the Base Case):
-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 422.3 million at the B (sf) credit rating 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 (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).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class B Notes at CC (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class B Notes at CC (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 credit 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://registers.esma.europa.eu/cerep-publication/. 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.

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

Lead Analyst: Sijia Aulenbacher, Senior Analyst
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
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The credit 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 [email protected].

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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