Press Release

DBRS Morningstar Downgrades Ratings on 2Worlds S.r.l., Assigns Negative Trends and Removes Under Review with Negative Implications Status

Nonperforming Loans

February 04, 2021

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings of the Class A and Class B notes issued by 2Worlds S.r.l. from BBB (low) (sf) and B (low) (sf) to BB (sf) and CCC (sf), respectively, and assigned Negative trends to the ratings. These downgrades resolved the Under Review with Negative Implications status of the 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). At issuance, the Notes were backed by a EUR 1.0 billion portfolio by gross book value (GBV) consisting of secured and unsecured nonperforming loans (NPLs) originated by Banco di Desio e della Brianza S.p.A. and Banca Popolare di Spoleto S.p.A. The majority of loans in the portfolio defaulted between 2014 and 2017 and are in various stages of resolution. The receivables are serviced by Cerved Credit Management S.p.A. (the special servicer), while Cerved Master Services S.p.A. operates as the master servicer and Banca Finanziaria Internazionale S.p.A. was appointed as the backup servicer for the transaction. As of December 2020, the portfolio’s GBV totalled EUR 831.2 million.

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 December 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 18 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.
-- The special servicer’s updated business plan, received in April 2020, which has new projections starting from the first quarter of 2020, and its comparison with the initial collection expectations and actual performance as of December 2020.
-- 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).
-- Performance ratios and underperformance events: as per the January 2021 payment report, the cumulative net collection ratio is 86.0% and the NPV cumulative profitability ratio is 125.1%. The 85% subordination event trigger is set at a lower threshold compared with other Italian NPL transactions.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, and covering against potential interest shortfall on the Class A notes and senior costs. The cash reserve target amount is equal to 4.05% of the Class A and Class B notes’ principal outstanding balance and it is fully funded as of the January 2021 payment date.

TRANSACTION PERFORMANCE

According to the January 2021 payment report, the principal amounts outstanding of the Class A, Class B, and Class J notes were EUR 189.2 million, EUR 30.2 million, and EUR 9.0 million, respectively. The balance of the Class A notes has amortised 34.4% since issuance.

The performance of the transaction has been deteriorating since the second half of 2019. As reported in the most recent semiannual servicer report, the actual cumulative gross collections as of 31 December 2020 were EUR 142.1 million, whereas the initial business plan prepared by the servicer assumed gross recoveries amounting to EUR 166.7 million for the same period. Therefore, with a gross cumulative collection ratio of 85.2%, the transaction is underperforming by 14.8% compared with the servicer’s initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 40.0 million at the BBB (low) (sf) scenario and EUR 50.8 million at the B (low) (sf) scenario for the same period.

In April 2020, DBRS Morningstar received a revised business plan prepared by the special servicer. 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 412.3 million, which is 7.7% lower than the EUR 446.7 million expected in the initial business plan, and represents a further reduction compared with the revised business plan released in 2019 (which was 4.2% lower than the initial forecast).

Without including actual collections, the special servicer’s expected gross collections from January 2020 amounted to EUR 308.3 million. The updated DBRS Morningstar BB (sf) rating stress assumes a haircut of 15.1% to the special servicer’s latest business plans, also considering actual collections since January 2020 that were lower than expected in the updated business plan as of January 2020.. Actual collections since January 2020 amounted to EUR 38.1 million, which is behind the EUR 54.9 million expected in the updated business plan for the same period. In DBRS Morningstar’s CCC (sf) scenario, the updated servicer’s forecast were only adjusted in terms of actual collections and timing stress.

The final maturity date of the transaction is in January 2037.

The Coronavirus Disease (COVID-19) 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 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 incorporated its expectation of a moderate medium-term decline in property prices, but gave partial credit to expected 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 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.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

DBRS Morningstar notes that this press release was amended on February 7, 2022, to include the Negative trend change rating action in the table, which was previously omitted due to an administrative oversight.

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 special servicer, Cerved Credit Management S.p.A., and the corporate services provider, Banca Finanziaria Internazionale S.p.A. These comprise: the latest semiannual servicing report dated 31 December 2020, the latest payment report as of January 2021, an updated loan data tape as of 31 December 2020, and an updated business plan prepared by the servicer and received in April 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 4 November 2020, when DBRS Morningstar maintained the Under Review with Negative Implications status on the Class A and Class B 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 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 233.2 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).

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 274.6 million at the CCC (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 confirmation of the Class B notes 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 B notes 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.

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.

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

Lead Analyst: Sebastiano Romano, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 June 2018

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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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