DBRS Morningstar Confirms Ratings of Marathon SPV S.r.l.; Changes Trend to Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Class A and Class B notes issued by Marathon SPV S.r.l. (the Issuer) at BBB (sf) and B (high) (sf), respectively. The Negative trend of the ratings, which was assigned on 8 May 2020, changed to Stable.

The transaction included 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 principal, while 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.

As of the 30 September 2019 cut-off date, the Notes were backed by a EUR 5.03 billion by gross book value (GBV) portfolio consisting of Italian unsecured nonperforming loans (NPLs). The loans were sold by Marte SPV S.r.l. and Pinzolo SPV S.r.l., and as of the cut-off date, almost 20% of the loans by GBV were or had been linked to promissory notes (cambiali). Hoist Italia S.r.l. (Hoist, or the Special Servicer) services the receivables. Banca Finanziaria Internazionale S.p.A. (Finint, or the Master Servicer) acts as master servicer. A backup servicer, Centotrenta Servicing S.p.A., was appointed and will act as a servicer if the appointment of Hoist is terminated.

The majority of loans in the portfolio defaulted between 2011 and 2017. The portfolio is unsecured and consists of pools of receivables acquired over time by Hoist Finance AB (the Seller), the majority of which were purchased between 2014 and 2018. In terms of product type, the portfolio comprises revolving credit cards, various unsecured banking products, personal loans, finalised loans, and auto loans. The securitised nonperforming portfolio was originated by the following entities: Agos Ducato S.p.A., Banca 24/7, Banco Popolare, Barclays, BMW Bank, Cofidis, Consel S.p.A., Consum.IT, Credit Agricole Cariparma, Deutsche Bank S.p.A., Fiditalia, Findomestic, Ford Bank, Iccrea Banca Impresa S.p.A., Mercedes Benz Financement, Santander Consumer Bank AG, and UBI Banca.

According to the latest information provided by the special servicer in October 2020, the GBV of the portfolio is EUR 4.9 billion and about 19% of the loans by GBV are linked to promissory notes (cambiali).

RATING RATIONALE
The rating confirmations follow the first annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 October 2020, focusing on: (1) a comparison between actual gross collections and the servicer’s initial business plan forecast; (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.
-- Portfolio characteristics: loan pool composition as of 31 October 2020 and evolution of its core features since issuance.
-- Transaction liquidating structure: until a first-level subordination event occurs, Class A amortisation percentage is set at 90% of the issuer available funds, allowing some leakage of collections to junior items of the pre-acceleration order of priority of payments. The first-level subordination event occurs when the cumulative collection ratio is less than 95%, at which point, the amortisation of notes is fully sequential, and the Class B notes begin to amortise following the full repayment of the Class A notes. Additionally, interest payments on the Class B Notes, which represents mezzanine debt, is paid prior to the principal of the Class A notes until the second-level subordination event occurs, which is triggered when the cumulative collection ratio is less than 80%. These triggers were not breached on the October 2020 interest payment date, with the actual ratio as of 31 October 2020 being 102.95%.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A Notes and senior fees. The cash reserve target amount is equal to 3.0% of the principal outstanding on the Class A Notes and is currently fully funded.

According to the latest investment report of October 2020, the principal amount outstanding on the Class A, Class B, and Class J notes was equal to EUR 196.8 million, EUR 23.4 million, and EUR 16.9 million, respectively. The balance of the Class A and Class B Notes has amortised by approximately 31.3% and 30.5%, respectively, since issuance. The current aggregated principal outstanding balance of the Notes is EUR 237.1 million.

As of October 2020, the transaction was performing above the Special Servicer’s initial expectations. The actual cumulative gross collections equal EUR 135.6 million, whereas Hoist’s initial business plan estimated cumulative gross collections of EUR 132.6 million for the same period. Therefore, as of 31 October 2020, the transaction’s performance is above the Special Servicer’s initial expectations by approximately EUR 3.0 million (+2.3%).

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 111.1 million in the BBB (sf) stressed scenario, while in the B (high) (sf) scenario the estimated cumulative gross collections were EUR 123.3 million. Therefore, as of 31 October 2020, the transaction is overperforming compared with DBRS Morningstar’s stressed expectations.

Considering past performance only, the rated bonds would now pass higher rating stresses in the cash flow analysis, but taking into account that more information, such as an updated business plan and the most recent update on historical performance still have to be released, DBRS Morningstar confirmed the current ratings assigned to the Class A and Class B notes and will continue to monitor whether the current positive performance is sustainable in the medium to long term. In light of the current performance of the transaction, the rating trend assigned to the Class A and Class B notes changed to Stable from Negative.

Without including actual collections, the expected future collections in the initial business plan from 1 October 2020 amount to EUR 435.7 million. DBRS Morningstar’s BBB (sf) rating stress assumes a haircut of 41.3% to the Special Servicer’s initial business plan, while DBRS Morningstar’s B (high) (sf) rating stress assumes a haircut of 36.0% to the Special Servicer’s initial business plan, considering future expected collections.

The final maturity date of the transaction is 31 October 2034.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

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 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 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 quarter.

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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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 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 these ratings include the Issuer, the Special Servicer, and the Master Servicer, which comprise an updated data tape and detailed performance data as of 31 October 2020, and quarterly investor report as of October 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 8 May 2020, when DBRS Morningstar assigned a Negative trend to the ratings of the Class A and Class B notes.

The lead analyst responsibilities for this transaction have been transferred to Sebastiano Romano.

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 confirm the ratings (the Base Case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 255.8 million at the BBB (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 the rating of the Class A Notes being maintained at BBB (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to the rating of the Class A Notes being maintained at BBB (sf).

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 278.8 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 B Notes to B (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 CCC (high) (sf).

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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Sebastiano Romano, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 December 2019

DBRS Ratings GmbH
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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.

-- Rating European Non-Performing Loans Securitisations (13 May 2020)
https://www.dbrsmorningstar.com/research/360970/rating-european-non-performing-loans-securitisations.
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020)
https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020) https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020)
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.

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.