Press Release

DBRS Morningstar Downgrades Ratings on Popolare Bari NPLs 2016 S.r.l.; Assigns Negative Trends

Nonperforming Loans

November 04, 2020

DBRS Ratings Limited (DBRS Morningstar) downgraded its ratings on the Class A and Class B notes issued by Popolare Bari NPLs 2016 S.r.l., as follows:

Class A Notes to BB (sf) from BBB (high) (sf)
Class B Notes to CCC (sf) from B (high) (sf)

These downgrades resolve the Under Review with Negative Implications status of the notes, which was assigned on 8 May 2020 and maintained on 6 August 2020. DBRS Morningstar concurrently assigned Negative trends to the ratings of the Class A and Class B notes.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the notes). At issuance, the notes were backed by a EUR 480 million portfolio by gross book value (GBV) consisting of secured and unsecured nonperforming loans (NPLs) originated by Banca Popolare di Bari, Banca Tercas, and Banca Caripe. All entities were merged into Banca Popolare di Bari S.c.p.A. (BPB, or the originator). The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios, or the servicer). A backup servicer, Securitisation Services S.p.A., was appointed and will act as a servicer in case of termination of the appointment of Prelios.

RATING RATIONALE
The rating downgrades follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 August 2020, focusing on: (1) a comparison between actual collections and the special servicer’s initial business plan forecasts; (2) the collection performance observed over the past six 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.
-- Special servicer’s updated business plan, received in February 2020, which has new projections starting from December 2019, and its comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition as of May 2020 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 2020 payment report, the cumulative collection ratio is 75.1% and the NPV cumulative profitability ratio is 103.2%. The 90% limit was breached so the Class B interests are being subordinated to the repayment of the Class A principal.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering against potential interest shortfall on the Class A notes and senior costs. The cash reserve target amount is equal to 3% of the Class A and Class B notes principal outstanding and is currently fully funded.

TRANSACTION AND PERFORMANCE

According to the latest June 2020 investor report, the principal amounts outstanding of the Class A, Class B, and Class J notes were equal to EUR 81.3 million, EUR 14 million, and EUR 10 million, respectively. The balance of the Class A notes has amortised by 35.7% since issuance.

The performance of the transaction has been deteriorating since the first half of 2018. As reported in the most recent semiannual servicer report, the actual cumulative gross collections (GDPs) as of 30 June 2020 equal EUR 65.4 million, whereas the initial business plan prepared by the servicer assumed cumulative gross collections of EUR 90.5 million for the same period. Therefore, with a gross cumulative collection ratio (Gross CCR) of 75.1%, the transaction is underperforming by 24.9% compared with the servicer’s initial expectations.

However, at issuance, DBRS Morningstar estimated cumulative gross collections of EUR 41.6 million at the BBB (high) (sf) scenario and of EUR 57.9 million at the B (high) (sf) scenario for the same period. Therefore, as of June 2020, the transaction is performing above DBRS Morningstar’s initial expectations.

In February 2020, DBRS Morningstar received a revised business plan prepared by the special servicer, as provided by the original documentation of the transaction. In this updated business plan, the special servicer assumed lower recoveries compared with initial expectations. The total cumulative gross collections from the updated business plan account for EUR 183.7 million, which is 6.9% lower than the EUR 197.2 million expected in the initial business plan. Also, by adjusting the updated business plan for actual collections up to 31 August 2020, the decrease in total gross collections compared with the initial business plan goes up to 7.3%.

Without including actual collections, the special servicer’s expected future collections from December 2019 are now amounting to EUR 123.3 million. The updated DBRS Morningstar BB (sf) rating stress assumes a haircut of 12.6% to the special servicer’s latest business plans, considering actual collections from December 2019 to August 2020. These actual collections amount to EUR 8.4 million, well behind the EUR 28.4 million expected in the updated business plan for the same period.

DBRS Morningstar’s CCC (sf) scenario was only adjusted in terms of actual collections as seen above and timing stress. Total collections at CCC (sf) amount to EUR 122.4 million, which represents a 0.75% haircut on Prelios’ expectations.

It is important to note that this updated business plan does not include coronavirus-related adjustments as it was provided in February 2020. With the spread of the pandemic, the average monthly amount of gross collections recorded in the six months ended 30 June 2020 has reduced in absolute value compared with the monthly average recorded in the previous two semesters (-22.8% compared with the H2 of 2019 and -54.1% compared with the same period last year). However, a significant recovery in judicial proceeds was observed in June 2020; therefore, more time is required in order to assess the actual impact of the crisis.

In its rating review, DBRS Morningstar used the Italian residential market value decline (MVD) rates outlined in the "Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda" methodology published on 21 September 2020. DBRS Morningstar notes that the currently proposed Italian residential MVDs in the "European RMBS Insight: Italian Addendum - Request for Comment" methodology published on DBRS Morningstar website on 2 November 2020 are not likely to lead to a further rating action. For details, see the following methodology: https://www.dbrsmorningstar.com/research/369177/european-rmbs-insight-italian-addendum-request-for-comment.

The final maturity date of the transaction is in December 2036.

The coronavirus disease and the resulting isolation measures have resulted in a sharp economic contraction, increased unemployment rates, and reduced investment activities. DBRS Morningstar anticipates that collections in European nonperforming loan (NPL) securitisations will continue to be disrupted in the coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. The rating is 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 incorporated its expectation of a moderate medium-term decline in property prices, but gave partial credit to house price increases from 2023 onwards in non-investment-grade rating stress scenarios.

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-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.

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” (22 April 2020).

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.

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 this rating include the servicer, Prelios Credit Servicing S.p.A. and the corporate services provider, Securitisation Services S.p.A., which comprise the two latest semiannual Investor Report dated 31 December 2019 and 30 June 2020; the Servicer Report as of 31 August 2020; an updated property data tape as of 31 May 2020; and an updated business plan prepared by the servicer and received in February 2020.

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 6 August 2020, when DBRS Morningstar maintained the Under Review with Negative Implications status on the Class A and Class B notes.

The lead analyst responsibilities for this transaction have been transferred to Manon Naegels.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 107.8 million at the BB (sf) stress level and EUR 122.4 million at the CCC (sf) stress level for the remaining transaction term; a 2.5%, 5%, and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 2.5%, ceteris paribus, would lead to a downgrade of the Class A and Class B notes to CCC (sf) and below CCC (sf), respectively.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A and Class B notes to below 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 and Class B notes to below CCC (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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.

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

Lead Analyst: Manon Naegels, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 12 August 2016

DBRS Ratings Limited
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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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