Press Release

DBRS Morningstar Downgrades Ratings on 4Mori Sardegna S.r.l., Changes Trend on Class A Notes to Negative from Stable

Nonperforming Loans

February 16, 2023

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings on the notes issued by 4Mori Sardegna S.r.l. (the Issuer) as follows:

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

DBRS Morningstar also changed the trend on the Class A notes to Negative from Stable and maintained the Stable trend on the Class B notes.

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

At issuance, the Notes were backed by a EUR 1.04 billion portfolio by gross book value (GBV) consisting of secured and unsecured Italian nonperforming loans (NPLs) originated by Banco di Sardegna S.p.A.

The majority of loans in the portfolio defaulted between 2008 and 2017 and are in various stages of resolution. As of the cut-off date, approximately 53% of the pool by GBV was secured. According to the latest information provided by the servicer in September 2022, 48% of the pool by GBV was secured. At closing, the loan pool mainly comprised corporate borrowers (approximately 77% by GBV), which accounted for approximately 75% of the GBV as of September 2022.

The receivables are serviced by Prelios Credit Servicing S.p.A. (Prelios or the servicer) while Banca Finint S.p.A. operates as backup servicer.

RATING RATIONALE
The downgrades follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 31 December 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; and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Updated business plan: The servicer’s updated business plan as of June 2022, received in November 2022, and the comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of September 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 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 or present value cumulative profitability ratio is lower than 90%. These triggers have been breached since the January 2021 interest payment date (IPD), with the actual figures at 59.0% and 109.1% as of the January 2023 IPD, 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 4.9% of the sum of Class A and Class B notes’ principal outstanding and is currently fully funded.
--Interest rate risk: The transaction is exposed to interest rate risk in a rising interest rate environment due to underhedging of the rated notes, which have amortised at a slower pace than the cap notional schedule.

According to the latest investor report from January 2023, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 123.4 million, EUR 13.0 million, and EUR 8.0 million, respectively. As of the January 2023 payment date, the balance of the Class A notes had amortised by 46.8% since issuance and the current aggregated transaction balance was EUR 144.4 million.

As of December 2022, the transaction was performing below the servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 153.6 million whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 267.1 million for the same period. Therefore, as of December 2022, the transaction was underperforming by EUR 113.6 million (-42.5%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 199.9 million at the BBB (low) (sf) stressed scenario and EUR 222.2 million at the B (sf) stressed scenario. Therefore, as of December 2022, the transaction was performing below DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in November 2022, the servicer delivered an updated portfolio business plan. The updated portfolio business plan combined with the actual cumulative gross collections of EUR 137.5 million as of June 2022 resulted in a total of EUR 365.1 million, which is 8.9% lower than the total gross disposition proceeds of EUR 401.0 million estimated in the initial business plan and expected to be realised over a longer period of time. The servicer has been underperforming its updated business plan in the past semester. Excluding actual collections, the servicer’s expected future collections from January 2023 account for EUR 205.9 million. The updated DBRS Morningstar BB (sf) rating stresses assume a haircut of 19.4% to the servicer’s updated business plan, considering future expected collections. In DBRS Morningstar’s CCC (sf) scenario, DBRS Morningstar only adjusted the updated servicer’s forecast in terms of actual collections to date and timing of future expected collections. The negative trend on the Class A notes addresses the interest rate exposure due to underhedging, which, combined with persisting delays in collections, might result in further downgrades, should interest rates increase and/or recoveries be delayed more than expected in the respective rating stress scenario.

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

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 21 December 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/407678/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-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/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.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (7 February 2023), Master European Structured Finance Surveillance Methodology | DBRS Morningstar.

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 surveillance section of 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 these ratings include the Issuer, Prelios, and Banca Finanziaria Internazionale S.p.A. which comprise, in addition to the information received at issuance, the investor report as of January 2023; the semiannual servicer report as of December 2022; and the quarterly loan-by-loan report as of September 2022.

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 16 February 2022, when DBRS Morningstar downgraded its ratings on the Class A and Class B notes to BB (high) (sf) and B (low) (sf) from BBB (low) (sf) and B (sf), respectively, and changed the trends on both classes to Stable from Negative.

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 166.0 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 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 A notes to CCC (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 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).

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, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 June 2018

DBRS Ratings GmbH
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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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