Press Release

DBRS Morningstar Confirms Rating of Palatino SPV S.r.l., Removes from Under Review with Positive Implications Status, and Assigns Positive Trend

Nonperforming Loans

June 15, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating of the Class A Notes issued by Palatino SPV S.r.l. (the Issuer) at BBB (sf), and assigned a Positive trend to the rating. At the same time, DBRS Morningstar removed the Class A Notes’ Under Review with Positive Implications status, which was assigned on 15 March 2022.

The transaction entails the issuance of the Class A, Class B1, Class B2, and Class J Notes (collectively, the Notes) backed by an Italian nonperforming loan (NPL) portfolio sold by Credito Fondiario S.p.A to the Issuer as part of a larger pool of receivables (the Original Claims) in December 2020. It represents the restructuring of the Notes originally issued to finance the aforementioned acquisition in the context of a securitisation transaction following the standard provisions under Italian securitisation law (Law n. 130/1999).

As of the 31 July 2020 cut-off date, the gross book value (GBV) of the portfolio was approximately EUR 865.3 million and comprised NPLs acquired by Credito Fondiario S.p.A., and originated by different Italian banks, including Banca Carige S.p.A. (58.3% of total GBV) and Credito Valtellinese SpA (17.1% of total GBV).

The receivables are serviced by Special Gardant S.p.A. (the Special Servicer). Master Gardant S.p.A. (Master Gardant) acts as the master servicer while Banca Finaziaria Internazionale S.p.A. (Banca Finint) operates as the backup servicer.

RATING RATIONALE
The confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 April 2022, focusing on: (1) a comparison between actual collections and the Servicer’s initial business plan forecast; (2) the collection performance observed over recent 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 Servicer’s updated business plan as of February 2022, which was received in May 2022, and the comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition as of April 2022 and the 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 B1 Notes will begin to amortise following the full repayment of the Class A Notes, the Class B2 Notes will begin to amortise following the full repayment of the Class B1 Notes and the Class J Notes will amortise following the repayment of the Class B2 Notes). Additionally, interest payments on the Class B1 Notes and Class B2 Notes become subordinated to principal payments on the Class A Notes if the gross cumulative collection ratio or the present value cumulative profitability ratio are lower than 100%. These triggers were not breached on the June 2022 interest payment date, with the actual figures at 167.3% and 172.9%, respectively, according to the Servicer.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfall on the Class A Notes and senior fees. The cash reserve target amount is equal to 4.5% of the Class A Notes principal outstanding balance and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from June 2022, the outstanding principal amounts of the Class A, Class B1, Class B2, and Class J Notes were EUR 106.5 million, EUR 11.0 million, EUR 12.4 million, and EUR 6.3 million, respectively. As of the June 2022 payment date, the balance of the Class A Notes had amortised by approximately 21.1% since issuance and the current aggregated transaction balance was EUR 136.2 million.

Actual collections pertaining to the portfolio from the cut-off date up to the end of May 2021 amounted to EUR 37.9 million. According to the transaction documents, collections amounting to EUR 34.8 million that were recovered between the cut-off date and 30 April 2021 were distributed to the original noteholders, while portfolio proceeds from 1 May 2021 onward (including EUR 3.1 million of actual collections as of 31 May 2021) were for the benefit of the restructured notes and were distributed in accordance with the Issuer’s priority of payments on the interest payment date falling in December 2021. Cumulative collection ratio and present value cumulative profitability ratio tests are conducted based on collections received and recovery expenses incurred from 1 April 2021 onward and compared with the servicer business plan’s forecasts starting from the same date.

As of April 2022, the transaction was performing above the Servicer’s business plan expectations. The actual cumulative gross collections from 1 April 2021 equalled EUR 42.2 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 26.5 million for the same period. Therefore, as of April 2022, the transaction was overperforming by EUR 15.7 million (59.0%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 18.7 million at the BBB (sf) stressed scenario. Therefore, as of April 2022, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in May 2022, the Servicer provided DBRS Morningstar with a revised portfolio business plan combined with the actual cumulative collections as of February 2022. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 34.5 million as of February 2022, results in a total of EUR 233.5 million, which is 0.9% higher than the total gross disposition proceeds of EUR 231.5 million estimated in the initial business plan. Excluding actual collections, the Servicer’s expected future collections from May 2022 account for EUR 193.2 million. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 17.2% to the Servicer’s updated business plan, considering future expected collections from May 2022.

Considering the faster than expected collections and the high profitability ratio registered since issuance as well as the increased subordination, the rated bonds now pass higher rating stresses in the cash flow analysis. However, considering the early stage of the transaction DBRS Morningstar does not yet deem this performance trend to be sustainable in the medium to long term and confirmed the current rating assigned to the Class A Notes. However, considering the current overperformance and the profitability level of the transaction, a positive rating trend was assigned to the Class A Notes.

The final maturity date of the transaction is in December 2045.

The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in commercial real estate prices for certain property types.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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/384146 and https://www.dbrsmorningstar.com/research/360393.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings..

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include the Issuer and Master Gardant, which comprise, in addition to the information received at issuance, the payment report as of June 2022; the semiannual Servicer report as of April 2022; and the updated business plan received in May 2022.

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 15 March 2022, when DBRS Morningstar placed the rating of the Class A Notes Under Review with Positive Implications.

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 with 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 downgrade of the Class A Notes to BBB (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)

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.

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

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 June 2021

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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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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