Press Release

DBRS Morningstar Maintains Ratings of 11 European NPL Transactions Under Review with Negative Implications

Nonperforming Loans

August 06, 2020

DBRS Ratings Limited and DBRS Ratings GmbH (DBRS Morningstar) maintained the Under Review with Negative Implications status on the following classes of securities issued in the context of 11 European nonperforming loan (NPL) transactions:

Popolare Bari NPLS 2016 S.r.l.
--Class A rated BBB (high) (sf)
--Class B rated B (high) (sf)

Popolare Bari NPLS 2017 S.r.l.
--Class A rated BBB (low) (sf)
--Class B rated B (low) (sf)

Siena NPL 2018 S.r.l.
--Class A rated BBB (sf)

Maggese S.r.l.
--Class A rated BBB (low) (sf)

Leviticus SPV S.r.l.
--Class A rated BBB (sf)

Maior SPV S.r.l.
--Class A rated BBB (low) (sf)

2Worlds S.r.l.
--Class A rated BBB (low) (sf)
--Class B rated B (low) (sf)

Ibla S.r.l.
--Class A rated BBB (low) (sf)
--Class B rated CCC (sf)

Belvedere SPV S.r.l
--Class A rated BBB (low) (sf)

European Residential Loan Securitisation 2018-1 DAC
--Class A rated A (sf)
--Class B rated BBB (sf)

BCC NPLs 2018-2 S.r.l.
--Class A rated BBB (low) (sf)
--Class B rated CCC (sf)

KEY RATING DRIVERS AND CONSIDERATIONS

On 30 April 2020, DBRS Morningstar published a commentary titled, “European NPL Transactions’ Risk Exposure to Coronavirus (COVID-19) Effects” (https://www.dbrsmorningstar.com/research/360393/european-npl-transactions-risk-exposure-to-coronavirus-covid-19-effects), where it discussed the overall risk exposure of the European NPL sector to the Coronavirus Disease (COVID-19) and provided a framework for identifying the NPL transactions that are most at risk and likely to be affected by the fallout of the pandemic on the economy. The primary conclusion is that in the short term all European NPL transactions are expected to be at minimum affected by shortfalls resulting from delayed cash collections and impact in terms of recovery values. However, DBRS Morningstar anticipates that each NPL transaction will be affected differently based on factors which are country-specific (i.e., local governments’ coronavirus measures, macroeconomic downturn impact on the real estate market, and external disruptions) and on transaction-specific factors, which determine a different level of vulnerability to liquidity shocks, as further detailed below.

Considering the above framework, the Under Review with Negative Implications status has been maintained based on the following drivers and considerations:
-- Concerns about the liquidity pressure deriving from the disruption to short- and medium- to long-term recoveries and delays in the implementation of the servicer’s strategy because of the measures local governments have undertaken in response to coronavirus.
-- Potential decrease in sale prices and liquidation values of NPL collateral in the medium to long term because of the effects of the deteriorating macroeconomic conditions on the real estate market.
-- Analytical review of the following factors specific to each European NPL transaction in order to determine its risk exposure to the medium- to long-term effects of the crisis, and specifically:
(1) Concentration of receivables towards corporate and small and medium-size enterprise (SME) borrowers.
(2) Real estate collateral features and weight of commercial real estate assets (in particular retail and hospitality).
(3) Evolution of the loan pool composition since issuance and whether any material change or a deterioration of its quality occurred.
(4) Transaction performance to date, with a focus on the combined assessment of net present value profitability ratio and the gross cumulative collection ratio observed to date.
(5) Expected level of cash flow generation envisaged under the updated business plan formulated by the special servicers and comparison with the initial forecasts.
(6) Available forms of liquidity support to mitigate temporary shortfalls on the payment of senior costs and interest on senior notes.
(7) Robustness of the subordination trigger mechanisms and deferral provisions envisaged in respect of the payment of mezzanine/junior interest and servicing fees.
(8) Structure of the payments’ order of priority and senior costs composition.
(9) Special servicer exposure to operational risks and business disruptions.

DBRS Morningstar will consider the reported performance of the European NPL transactions in order to assess the medium- to long-term effects of coronavirus. Additionally, DBRS Morningstar will consider the macroeconomic developments relative to the outbreak of the pandemic, including the duration and severity of the crisis on the local economies with exposure to NPL transactions.

DBRS Morningstar typically endeavours to resolve the status of ratings Under Review with Negative Implications as soon as appropriate. If continued heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time. Sensitivity analysis is not applicable.

The Coronavirus Disease (COVID-19) 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 nonperforming loan securitisations will be disrupted in coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from nonperforming loans 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 assumed reduced collections for the next two quarters and incorporated its revised expectation of a moderate medium-term decline in residential property prices, albeit partial credit to house price increases from 2023 onwards is given on 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 22 July 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar is undertaking a review and will remove the ratings from this status as soon as it is appropriate.

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.

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/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include the most recent performance data provided in the investor reports, servicer reports, and updated business plans (where available), as well as the feedback provided by the portfolio servicers in relation to actual recoveries, expected forecast, and contingency plans following the spread of coronavirus.

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 one or more 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 lead analyst, committee chair, initial rating date, and last rating action date for each transaction is listed as a separate disclosure document associated with this press release.

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

These ratings are Under Review with Negative Implications designation. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. If continued heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time.

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.

Ratings assigned by DBRS Ratings Limited and DBRS Ratings GmbH are subject to EU and U.S. regulations only.

DBRS Ratings Limited
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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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