Press Release

DBRS Morningstar Downgrades Class A Notes of Leviticus SPV S.r.l. to BB (sf), Assigns Negative Trend, and Removes from Under Review with Negative Implications

Nonperforming Loans

February 03, 2021

DBRS Ratings GmbH (DBRS Morningstar) downgraded its rating on the Class A notes issued by Leviticus SPV S.r.l. (the Issuer) to BB (sf) from BBB (sf) and assigned a Negative trend. At the same time, DBRS Morningstar removed the Under Review with Negative Implications status from the Class A notes, which was assigned on 8 May 2020.

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 ultimate payment of principal. DBRS Morningstar does not rate the Class B or Class J notes.

At issuance, the Notes were backed by a EUR 7.4 billion portfolio by gross book value (GBV) consisting of unsecured and secured nonperforming loans originated by Banco BPM S.p.A. (Banco BPM or the Originator).

The receivables are serviced by Credito Fondiario S.p.A. (Credito Fondiario or the Servicer). A backup servicer, Zenith Service S.p.A., was appointed.

RATING RATIONALE
The rating downgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 December 2020, focusing on: (1) a comparison between actual collections and the Servicer´s initial business plan forecast; (2) the collection performance observed over the past 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 initial expectations.
-- Credito Fondiario’s updated business plan, received in May 2020, and the comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition as of December 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. Additionally, interest payments on the Class B notes become subordinated to principal payments on the Class A notes if the Cumulative Gross Collection Ratio or Net Present Value (NPV) Cumulative Profitability Ratio are lower than 70%. These triggers were not breached on the January 2021 interest payment date, with the actual figures being 86.2% and 106.3%, respectively, according to the Servicer.
-- 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 fees. The cash reserve target amount is equal to 4.0% of the sum of Class A and Class B notes principal outstanding and is currently fully funded.

According to the latest payment report of January 2021, the principal amount outstanding of the Class A, Class B, and Class J notes was equal to EUR 1,006.8 million, EUR 221.5 million, and EUR 248.8 million, respectively. The balance of the Class A notes has amortised by approximately 30.1% since issuance. The current aggregated transaction balance is EUR 1,477.2 million.

As of December 2020, the transaction was performing below the Servicer’s initial expectations. The actual cumulative gross collections equal EUR 589.1 million, whereas Servicer’s initial business plan estimated cumulative gross collections of EUR 699.6 million for the same period. Therefore, as of December 2020, the transaction was underperforming by EUR 110.6 million (-15.8%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 378.6 million at the BBB (sf) stressed scenario. Therefore, as of December 2020, the transaction is performing above DBRS Morningstar’s initial stressed expectations.

In May 2020, Credito Fondiario provided DBRS Morningstar with a revised business plan. In this updated business plan, the Servicer assumed lower recoveries compared with initial expectations. The total cumulative gross collections from the updated business plan account for EUR 2,184.5 million, which is 10.7% lower compared with the EUR 2,446.4 million expected in the initial business plan.

Without including actual collections, the Servicer’s expected future collections from January 2021 are now accounting for EUR 1,503.5 million (EUR 1,746.7 million in the initial business plan). The updated DBRS Morningstar BB (sf) rating stress assumes a haircut of 11.4% to the Servicer’s latest business plan, considering future expected collections.

The final maturity date of the transaction is July 2040.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The coronavirus and the resulting isolation measures have resulted in a sharp economic contraction, increases in 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 revised expectation of a moderate medium-term decline in property prices; however, partial credit to house price increases from 2023 onwards is given in noninvestment grade 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 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-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 rating 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: http://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 and/or its agents, which comprise, in addition to the information received at issuance, the updated business plan from Credito Fondiario received in May 2020, updated servicer reports as of December 2020, and the payments report as of January 2021.

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 4 November 2020, when DBRS Morningstar maintained the Under Review with Negative Implications status on the Class A notes.

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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the rating (the Base Case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 1,331.8 million at the BB (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 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 of the Class A notes to CCC (sf).

Generally, 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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alberto Cruces de la Rosa, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 6 February 2019

 
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The rating methodologies used in the analysis of this transaction can be found at: http://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: http://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.

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