Press Release

DBRS Morningstar Upgrades Rating on Scalabis STC S.A. (compartment Panda) to A (sf) and Changes Trend to Stable from Negative

Nonperforming Loans

October 06, 2022

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class A Notes issued by Scalabis STC S.A. (compartment Panda) (the Issuer) to A (sf) from BBB (sf) and changed the trend to Stable from Negative.

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 the ultimate payment of principal on or before the final legal maturity date. DBRS Morningstar does not rate the Class B and Class J notes.

The notes are collateralised by a mixed pool of portuguese secured and unsecured nonperforming loans (NPLs; collectively, the portfolio) and comprise five different acquisitions by LX Investment Partners between 2019 and 2021 from Banco Comercial Português, Banco Espírito Santo, Caixa Geral de Depósitos, and Banco Português de Investimento. The total gross book value (GBV) of the portfolio as of the 30 April 2021 cut-off date was approximately EUR 1.896 million. The servicer of the portfolio is Algebra Capital Lda (Algebra). The loan pool comprises mainly unsecured loans (90% of the GBV is unsecured) granted to corporate borrowers (69% of the GBV is held by Corporates).

RATING RATIONALE
The rating upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of the portfolio recoveries as of 30 June 2022, with a focus on: (1) a comparison between actual gross collections and the servicer’s initial business plan forecasts; (2) the collection performance observed over the past months, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: loan pool composition as of June 2022 and evolution of its core features since issuance.
-- Liquidity support: the notes benefited from the liquidity support provided by a EUR 2.4 million cash reserve at closing. The cash reserve amortises with a target balance equal to 3.0% of the outstanding balance on the Class A Notes. The balance of the cash reserve was fully funded as of August 2022. The reserve is available to pay senior fees and interest on the Class A Notes.
-- Sequential amortisation: the Class B Notes will begin to amortise following the full repayment of the Class A Notes.
-- Liquidating Structure: interest on the Class B notes will become subordinated to principal payments on the Class A Notes in the event that the cumulative collection ratio (CCR) or the net present value cumulative profitability ratio is lower than 90%, which would facilitate the build-up of credit enhancement in an adverse scenario. Both the CCR and the cumulative profitability ratio have remained above the thresholds. As of June 2022, the transaction is registering a CCR and net cumulative profitability ratio at 164% and 1075%, respectively.
-- Servicer fee deferral structure: the servicer fee subordination mechanism is only tied to the CCR.
-- Unsecured exposures: representing around 90% of the portfolio’s GBV.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

TRANSACTION AND PERFORMANCE
According to the latest investor report, dated August 2022, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 22.0 million, EUR 25.0 million, and EUR 20.0 million, respectively. The balance of the Class A Notes has amortised by 73% since issuance. The current aggregated transaction balance is EUR 67.0 million.

As of June 2022, the transaction was performing above the servicer’s business plan expectations. The actual cumulative gross collections since the transfer date in August 2021 totalled EUR 70.9 million versus the servicer’s business plan estimates of EUR 44.1 million for the same period. Therefore, as of June 2022, the transaction was overperforming by EUR 26.8 million (+60.8%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 25.5 million at the BBB (sf) stressed scenario. Therefore, as of June 2022, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

In July 2022, the Servicer provided DBRS Morningstar with an updated business plan starting from July 2022. In the updated business plan, the Servicer assumes total cumulative gross collections from the transfer date of EUR 207.3 million. Excluding actual collections, the servicer’s now expects EUR 137.0 million future gross collections from July 2022 onwards. The updated DBRS Morningstar A (sf) rating stress assumes a haircut of 47.2% to the servicer’s updated business plan, considering future expected collections.

The rating on the Class A notes also considers the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents (i.e., a minimum rating of BBB (low)).

The final maturity date of the transaction is in October 2075.

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 19 September 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2022 Update | DBRS Morningstar 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/402357 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 (17 May 2022).

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/401817/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, Algebra,ent and Citibank N.A./ London Branch, and includes, in addition to the information received at issuance, the updated business plan received in July 2022; the investor report as of August 2022; and the quarterly servicer report as of June 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 13 August 2021, when DBRS Morningstar finalised its provisional rating on the Class A Notes at BBB (sf) with a Negative trend.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: 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 determine the rating (the base case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 72.3 million at the A (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 A Notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes at A (sf).

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: Alberto Cruces de la Rosa, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 August 2021

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
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.

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.

Download This Press Release