Press Release

DBRS Morningstar Upgrades Rating on Sirio NPL S.r.l., Changes Trend to Positive from Stable

Nonperforming Loans

April 27, 2023

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class A Notes issued by Sirio NPL S.r.l. (the Issuer) to BBB (high) (sf) from BBB (sf) and changed the trend to Positive from Stable.

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. DBRS Morningstar does not rate the Class B or Class J Notes.

As of the 31 December 2019 cut-off date, the Notes were backed by a EUR 1.23 billion portfolio consisting of secured and unsecured Italian nonperforming loans originated by Unione di Banche Italiane S.p.A.

The receivables are serviced by Prelios Credit Servicing S.p.A. (the Servicer) while Banca Finanziaria Internazionale S.p.A. (Banca Finint) was appointed as backup servicer.

RATING RATIONALE
The rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 28 February 2023, 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 November 2022, received in March 2023, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of February 2023 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 begin to 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 net collection ratio or the net present value cumulative profitability ratio are lower than 90%. As of the March 2023 interest payment date, these triggers had not been breached with actual figures at 229.2% and 144.2%, respectively, per the Servicer.
-- Liquidity support: The transaction benefits from an amortising cash reserve and a recovery expenses cash reserve providing liquidity to the structure and covering a 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 balance and the recovery expenses cash reserve target amounts to EUR 250,000, both fully funded.
-- 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 from March 2023, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 145.0 million, EUR 35.0 million, and EUR 9.9 million, respectively. As of the March 2023 payment date, the balance of the Class A Notes had amortised by 50.0% since issuance and the aggregated transaction balance was EUR 189.9 million.

As of February 2023, the transaction was performing above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 181.7 million whereas the Servicer’s initial business plan estimated
cumulative gross collections of EUR 83.7 million for the same period. Therefore, as of February 2023, the transaction was overperforming by EUR 98.0 million (117.1%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 64.1 million in the BBB (sf) stressed scenario. Therefore, as of February 2023, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in March 2023, the Servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 165.6 million as of November 2022, results in a total of EUR 464.6 million, which is 0.9% lower than the total gross disposition proceeds of EUR 468.9 million estimated in the initial business plan. The faster than expected collections prompt a shortened weighted average life and a reduction of the future expected collections (-23.6%), while lifelong projections remained overall in line with the expectations at issuance, as a consequence of the high profitability levels registered on closed accounts. Excluding actual collections, the Servicer’s expected future collections from March 2023 amount to EUR 283.6 million. The updated DBRS Morningstar BBB (high) (sf) rating stresses assume a haircut of 20.2% to the Servicer’s updated business plan, considering future expected collections.

Considering the outperformance registered since issuance and the increased subordination, the rated bonds now pass higher rating stresses in the cash flow analysis. However, considering the high concentration of proceeds expected in the upcoming periods according to the updated business plan, DBRS Morningstar does not yet deem this performance trend to be sustainable in the medium to long term. However, considering the current overperformance and the high profitability levels of the transaction, the rating on the class A Notes was upgraded and a positive rating trend was assigned.

The final maturity date of the transaction is 30 September 2038.

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), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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, the Servicer, and Banca Finint which comprise, in addition to the information received at issuance, the investor report as of March 2023; the updated business plan as of November 2022; the semiannual servicer report as of February 2023: and the quarterly loan-by-loan report as of February 2023.

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 27 April 2022, when DBRS Morningstar confirmed its rating on the Class A Notes at BBB (sf) with a Stable trend.

The lead analyst responsibilities for this transaction have been transferred to William Taliento.

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 226.3 million at the BBB (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 confirmation of the Class A Notes at BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade on the Class A Notes to BBB (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: William Taliento, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 16 December 2020

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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