Press Release

DBRS Morningstar Confirms Rating on Palatino SPV S.r.l., Changes Trend to Stable from Positive

Nonperforming Loans

June 15, 2023

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

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. (Credito Fondiario) to the Issuer as part of a larger pool of receivables in December 2020.

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 that were acquired by Credito Fondiario 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).

This transaction 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).

Special Gardant S.p.A. acts as special servicer and services the receivables. Master Gardant S.p.A. acts as the master servicer while Banca Finanziaria Internazionale S.p.A. 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: An assessment of portfolio recoveries as of 30 April 2023, focusing on: (1) a comparison between actual collections and the special servicer’s initial business plan forecasts; (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 special servicer’s updated business plan as of February 2023, received in May 2023, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of April 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 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 2023 interest payment date, with the actual figures at 145.7% and 163.1%, respectively, according to the special 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 2023, the outstanding principal amounts of the Class A, Class B1, Class B2, and Class J Notes were EUR 83.6 million, EUR 11.0 million, EUR 12.4 million, and EUR 6.3 million, respectively. As of the June 2023 payment date, the balance of the Class A Notes had amortised by approximately 38.0% since issuance and the current aggregated transaction balance was EUR 113.3 million.

As of April 2023, the transaction was performing above the special servicer’s initial business plan expectations. The actual cumulative gross collections equalled EUR 73.6 million whereas the special servicer’s initial business plan estimated cumulative gross collections of EUR 51.7 million for the same period. Therefore, as of April 2023, the transaction was overperforming by EUR 21.9 million (42.4%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 38.2 million in the BBB (sf) stressed scenario. Therefore, as of April 2023, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, the special servicer delivered an updated portfolio business plan in May 2023. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 68.4 million as of February 2023, resulted in a total of EUR 231.0 million, which is 0.2% lower than the total gross disposition proceeds of EUR 231.5 million estimated in the initial business plan. Excluding actual collections, the special servicer’s expected future collections from May 2023 amount to EUR 157.3 million. The updated DBRS Morningstar BBB (sf) rating stresses assume a haircut of 22.5% to the special servicer’s updated business plan, considering the future expected collections.

The final maturity date of the transaction is December 2045.

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 and the servicer which comprise, in addition to the information received at issuance, the investor report as of June 2023; the updated business plan as of February 2023; and the semiannual servicer report as of April 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 15 June 2022, when DBRS Morningstar confirmed its rating on the Class A Notes at BBB (sf), resolving its Under Review with Positive Implications status, and assigned a positive 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 121.9 million at the BBB (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 BB (high) (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).

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: Alfonso Candelas, Senior Vice President
Initial Rating Date: 25 June 2021

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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