Press Release

DBRS Morningstar Downgrades Ratings on Popolare Bari NPLS 2017 S.r.l., Removes Under Review with Negative Implications Status, and Assigns Negative and Stable Trends

Nonperforming Loans

June 18, 2021

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings of the bonds issued by Popolare Bari NPLS 2017 S.r.l. (the Issuer) as follows:

-- Class A notes to CCC (low) (sf) from B (high) (sf)
-- Class B notes to C (sf) from CCC (sf)

The Under Review with Negative Implications was resolved and Negative and Stable trends were assigned to the Class A and Class B notes, respectively.

The rating of the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in October 2037. The rating of the Class B notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

Given the characteristics of the Class B notes, as defined in the transaction documents, DBRS Morningstar notes that the default would most likely only be recognised at the maturity or early termination of the transaction.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the Notes) by Popolare Bari NPLS 2017 S.r.l. (the Issuer). At issuance, the Notes were backed by an Italian nonperforming loan (NPL) portfolio originated by Banca Popolare di Bari S.c.p.A. and Cassa di Risparmio di Orvieto S.p.A. (the Originators). The total gross book value (GBV) of the portfolio as of November 2017 (the Cut-off Date) was equal to EUR 319.8 million. The pool of receivables was composed of secured and unsecured loans (approximately 56.1% and 43.9% of GBV, respectively) and mostly comprising exposures towards corporate borrowers and Italian small and medium-size enterprises (SMEs). The collateral properties mainly included residential and industrial properties, accounting for 41.2% and 15.9% of the total property value, respectively.

The portfolio is serviced by Prelios Credit Servicing S.p.A., while Securitisation Services S.p.A. operates as backup servicer.

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 March 2021, 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.
-- The Servicer’s updated business plan as of March 2021, received in April 2021, and the comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition 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 April 2021 investor report, the cumulative collection ratio is 49.8% and the present value (PV) cumulative profitability ratio is 95.8%. A subordination event has not occurred. It would occur upon the PV cumulative profitability ratio being under 90% or upon Class A interest shortfalls.
-- 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% of the Class A notes principal outstanding and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest payment report from April 2021, the outstanding principal amounts of the Class A, Class B, and Class J notes were equal to EUR 63.4 million, EUR 10.1 million, and EUR 13.5 million, respectively. The balance of the Class A notes has amortised by approximately 21.7% since issuance. The current aggregated transaction balance is EUR 86.9 million.

As of March 2021, the transaction was performing significantly below the Servicer’s initial expectations. The actual cumulative gross collections equaled EUR 27.0 million, whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 55.2 million for the same period. Therefore, as of March 2021, the transaction was underperforming by EUR 28.3 million (51.2%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 30.7 million at the BBB (low) (sf) stressed scenario and EUR 32.4 million at the B (low) (sf) stressed scenario. Therefore, as of March 2021, the transaction was performing below DBRS Morningstar’s initial stressed expectations.

In April 2021, the Servicer provided DBRS Morningstar with a revised business plan. In this updated business plan, the Servicer assumed recoveries below initial expectations. The total cumulative gross collections from the updated business plan account for EUR 95.8 million, which is 20.4% lower compared with the EUR 120.4 million expected in the initial business plan.

Without including actual collections, the Servicer’s expected future collections from April 2021 are now accounting for EUR 68.8 million, which is less than the current aggregated outstanding balance of the Class A and Class B notes. In its CCC (low) (sf) scenario DBRS Morningstar considers future collections in line with the Servicer’s updated expectations. Considering senior costs, interest due on the notes and the non-occurrence of the subordination event, the full repayment of Class A principal is increasingly unlikely.

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

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 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; however, partial credit to house price increases from 2023 onwards is given in noninvestment grade scenarios. The Negative trend reflects the ongoing uncertainty amid the coronavirus pandemic.

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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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 the Servicer received in April 2021, the investor report as of April 2021, the semiannual Servicer reports and Quarterly Loan by Loan Report as of March 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 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 18 March 2021, 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 Clarice Baiocchi.

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):

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class A notes to CCC (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 CC (sf).
-- 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 at C (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class B notes at C (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.

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

Lead Analyst: Clarice Baiocchi, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 December 2017

DBRS Ratings GmbH
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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.

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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