Press Release

DBRS Morningstar Takes Rating Actions on POP NPLs 2020 S.r.l.

Nonperforming Loans

June 15, 2023

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by POP NPLs 2020 S.r.l. (the Issuer):

-- Class A notes upgraded to BBB (high) (sf) from BBB (sf), trend changed to Stable from Positive
-- Class B notes confirmed at CCC (sf), trend changed to Stable from Positive

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 legal final maturity date. The rating on the Class B notes addresses the ultimate payment of principal and interest 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 919.9 million portfolio by gross book value of Italian secured and unsecured nonperforming loans originated and sold to the Issuer by 15 Italian banks.

Fire S.p.A. (Fire) and Special Gardant S.p.A. (Gardant; together with Fire, the special servicers) service the receivables. Master Gardant S.p.A. acts as the master servicer while Banca Finanziaria Internazionale S.p.A. (Banca Finint) has been 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 31 March 2023, focusing on: (1) a comparison between actual collections and the special servicers’ 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 plans: The special servicers’ updated business plans as of December 2022, received in March 2023, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of March 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 May 2023 interest payment date, these triggers had not been breached with actual figures at 179.3% and 134.4%, respectively, according to the special servicers.
-- 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 4.0% of the Class A notes’ principal outstanding balance and is currently 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 May 2023, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 129.2 million, EUR 25.0 million, and EUR 10.0 million, respectively. As of the May 2023 payment date, the balance of the Class A notes had amortised by 46.5% since issuance and the aggregate transaction balance was EUR 164.2 million.

As of March 2023, the transaction was performing above the special servicers’ business plan expectations. The actual cumulative gross collections equalled EUR 136.3 million whereas the special servicers’ initial business plans estimated
cumulative gross collections of EUR 75.7 million for the same period. Therefore, as of March 2023, the transaction was overperforming significantly by EUR 60.6 million (80%) compared with the initial business plans expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 56.3 million at the BBB (sf) stressed scenario for the same period and EUR 67.0 million at the CCC (sf) stressed scenario. Therefore, as of March 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 servicers delivered the second updated portfolio business plans in March 2023. The updated portfolio business plans, combined with the actual cumulative gross collections of EUR 125.2 million as of December 2022, resulted in a total of EUR 371.3 million, which is 6.4% lower than the total gross disposition proceeds of EUR 396.8 million estimated in the initial business plans. Considering the net present value cumulative profitability ratio outperformance to date, this implies a significant reduction of expected collections from the remaining exposures. Excluding actual collections, the special servicers’ expected future collections from April 2023 amount to EUR 238.7 million. The updated DBRS Morningstar BBB (high) (sf) rating stresses assume a haircut of 21.2% to the special servicers’ updated business plan, considering the future expected collections. In DBRS Morningstar’s CCC (sf) scenario, DBRS Morningstar only adjusted the updated special servicers’ forecast in terms of actual collections to date and timing of future expected collections.

The upgrade to the Class A notes addresses the transaction’s (1) improved credit enhancement, (2) faster amortisation of the notes compared with the cap notional schedule that mitigates the transaction’s exposure to the rising interest rate environment, and (3) the profitability on closed accounts. The notes may pass higher rating stress scenarios; however, DBRS Morningstar believes that higher ratings would not be commensurate with the risk associated with the transaction, considering the consistent downward revision of the special servicers’ expectations as well as the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

The final maturity date of the transaction is November 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 these ratings include the Issuer, the special servicers, and Banca Finint which comprise, in addition to the information received at issuance, the investor report as of May 2023; the updated business plan as of December 2022; and the semiannual servicing report as of March 2023.

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 15 June 2022, when DBRS Morningstar removed its ratings on the notes from Under Review with Positive Implications, where they were placed on 15 March 2022, and confirmed its ratings on the Class A and Class B notes at BBB (high) (sf) and CCC (sf), respectively, with Positive trends.

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 188.2 million and EUR 236.3 million at the BBB (high) (sf) and CCC (sf) stress level, respectively, 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 confirmation of the Class A Notes at BBB (high) (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).

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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 23 December 2020

DBRS Ratings GmbH
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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.

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