DBRS Morningstar Downgrades Ratings on Aragorn NPL 2018 S.r.l. Class A Notes, Confirms Class B Notes and Changes the Trend on Class A Notes to Negative from Stable

DBRS Ratings GmbH (DBRS Morningstar) downgraded its rating on the Class A notes issued by Aragorn NPL 2018 S.r.l. (the Issuer) to CCC (high) (sf) from B (low) (sf) and confirmed its rating on the Class B notes at CC (sf). DBRS Morningstar concurrently changed the trend on the Class A notes to Negative from Stable.

The transaction included the issuance of Class A, Class B, and Class J notes (collectively, the notes). 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. The rating of the Class B notes addresses the ultimate payment of interest and principal. The Class J notes are unrated.

The notes are collateralised by an Italian nonperforming loan (NPL) portfolio originated by Credito Valtellinese S.p.A. and Credito Siciliano S.p.A. (collectively, the Sellers). The total gross book value (GBV) of the portfolio as of the 31 December 2017 cut-off date was approximately EUR 1,671 million.

As at the portfolio cut-off date of 31 December 2017, 90.2% of the total GBV was composed of corporate borrowers, and 68% of the GBV comprised 364 borrowers (out of 4,161 total), each having a GBV of more than EUR 1 million. The top 50 borrowers made up 26.8% of the pool GBV at cut off.

The Portfolio is serviced by Credito Fondiario S.p.A. (Credito Fondiario) and Cerved Credit Management S.p.A. (Cerved) (jointly, the Servicers). Credito Fondiario also operates as the Master Servicer in the transaction.

RATING RATIONALE
The rating downgrade follows an annual review of the transaction and is based on the following analytical considerations:
--Transaction performance: Underperformance of the transaction since mid-2018 and further deterioration observed over the last year. The amount of actual cumulative gross collections is 54.9% lower than DBRS Morningstar’s expectations at a CCC (sf) stressed scenario as of 30 June 2021.
--The Servicers’ updated business plan: Estimated total collections during the life of the transaction in the updated business plan of 31 December 2020 are reduced by another 9.6% from the updated business plan of 31 December 2019, bringing the total reduction from the executed business plan to 18.3%.
--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. Additionally, interest payments on the Class B notes become subordinated to principal payments on the Class A notes if the cumulative collection ratio (“CCR”) or present value cumulative profitability ratio (“NPV CPR”) are lower than 90%. In the previous years, there was leakage to Class B interest despite the poor performance. This was due to overstatement of ratios as a result of the mismatch of definitions in the servicing agreement and the T&C documentation. The reported CCR of 50.4% as at 30 June 2021 is now below the trigger and this leakage has stopped. The reported NPV CPR is 105.5%. The updated collections as per the Servicers’ updated business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the aggregate outstanding balance of the Class A and Class B notes.

TRANSACTION AND PERFORMANCE
According to the latest payment report from January 2021, the outstanding principal amounts of the Class A, Class B, and Class J notes were equal to EUR 414.6 million, EUR 66.8 million, and EUR 10.0 million, respectively. The balance of the Class A notes has amortised by approximately 18.6% since issuance. The current aggregated transaction balance is EUR 491.4 million.

As of June 2021, the transaction was performing below the Servicers’ initial expectations. The actual cumulative gross collections equaled EUR 164.0 million whereas the Servicers’ initial business plan estimated cumulative gross collections of EUR 363.8 million for the same period. Therefore, as of June 2021, the transaction was underperforming by EUR 219.8 million (-54.9%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 233.3 million at the BBB (low) (sf) stressed scenario and EUR 308.1 million at the CCC (sf) stressed scenario. Therefore, the transaction is performing below DBRS Morningstar’s stressed expectations as of 30 June 2021.

In April 2021, the Servicers provided DBRS Morningstar with a revised business plan as of December 2020. In this updated business plan, the Servicers assumed recoveries below initial expectations. The total cumulative gross collections from the updated business plan amounted to EUR 631.8 million, which is 18.3% lower than the EUR 773.0 million expected in the initial business plan.

Without including actual collections, the Servicers’ expected future collections from July 2021 now account for EUR 472.4 million (EUR 469.6 million if adjusted for the actual collections in the first half of 2021) versus EUR 409.1 million in the initial business plan; hence, the Servicers revised their expectation upward for collection on the remaining portfolio. The updated DBRS Morningstar CCC (high) (sf) rating stress assumes a haircut of 1.3%, to the Servicers’ latest business plan, considering future expected collections.

The updated collections as per the Servicers’ updated business plan are not sufficient to pay down the outstanding balance of the Class A notes alone or the total of the Class A and Class B notes. DBRS Morningstar has downgraded the transaction by one notch to CCC (high) (sf) and changed the trend to Negative from Stable as it continues to closely monitor the underperformance observed thus far compared with the Servicers’ initial business plan as well as the development of the macroeconomic and real estate scenarios within the current market environment.

The final maturity date of the transaction is in July 2038.

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 in some cases to 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 revised expectation of a moderate medium-term decline in residential property prices, albeit partial credit to house price increases from 2023 onwards is given in non-investment-grade scenarios.

On 16 April 2020, the DBRS Morningstar Sovereign group released 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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).

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.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Credito Fondiario, Cerved, and Citibank N.A., which comprise an updated business plan as of 31 December 2020 provided by Credito Fondiario and Cerved, latest investor report as of 31 January 2021 provided by Citibank N.A., and monthly servicer reports up to 30 June 2021 provided by Credito Fondiario and Cerved.

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 5 August 2020, when DBRS Morningstar downgraded its rating on the Class A notes to B (low) (sf) from BBB (low) (sf), its rating on the Class B notes to CC (sf) from CCC (sf), and assigned Stable trends to both classes of 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 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 629.8 million at the CCC (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 A notes to CC (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 to CC (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 to CC (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: 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: Clarice Baiocchi, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 14 June 2018

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 Nonperforming Loans Securitisations (19 May 2021), https://www.dbrsmorningstar.com/research/378681/rating-european-nonperforming-loans-securitisations.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/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.
-- European RMBS Insight Methodology (3 June 2021), https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (21 December 2020), https://www.dbrsmorningstar.com/research/371597/european-rmbs-insight-italian-addendum.
-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- 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.
-- 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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.