Press Release

DBRS Morningstar Confirms Credit Rating on Luzzatti POP NPLs 2021 S.r.l. and Maintains Negative Trend

Nonperforming Loans

August 09, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit rating on the Class A Notes issued by Luzzatti POP NPLs 2021 S.r.l. (the Issuer) at BBB (sf) and maintained the Negative trend on the credit rating.

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

As of the 1 January 2021 cut-off date, the Class A Notes were backed by a EUR 790.5 million portfolio by gross book value (GBV) of Italian secured and unsecured nonperforming loans (NPLs) originated by 12 Italian banks (the Sellers or the Originators). doValue S.p.A. (the Servicer) services the receivables while Zenith Service S.p.A. acts as the master servicer for the transaction. Centotrenta Servicing S.p.A. (the Backup Servicer) has been appointed to carry out the servicing activities in case of the Special Servicer’s termination.

The securitised portfolio included secured loans representing approximately 53.7% of the GBV, approximately 89.4% by GBV of which benefits from a first-ranking lien mortgage, with unsecured loans representing the remaining 46.3% of the GBV. At the cut-off date, the portfolio mainly represented corporate borrowers (68.4% by GBV) and the properties securing the loans in the portfolio were mainly residential (48.9% by first-ranking lien updated real estate value). The secured collateral was mainly concentrated in the northern regions of Italy (50.6% by first-ranking lien updated real estate value) with Lombardy as the most represented region (40.0% by first-ranking lien updated real estate value).

CREDIT RATING RATIONALE
The rating confirmation follows a review of the transaction and is 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 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 December 2022, approved in July 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 April 2023 interest payment date, these triggers had not been breached with actual figures at 262.26% and 134.98%, 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 4.0% of the Class A Notes’ principal outstanding balance and the recovery expenses cash reserve target amounts to EUR 300,000, 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 April 2023, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 142.1 million, EUR 25.0 million, and EUR 10.0 million, respectively. As of the April 2023 payment date, the balance of the Class A Notes had amortised by 25.6% since issuance and the aggregated transaction balance was EUR 177.1 million.

As of March 2023, the transaction was performing above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 60.4 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 24.3 million for the same period. Therefore, as of March 2023, the transaction was overperforming by EUR 36.1 million (148.2%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 21.2 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, in April 2023, the Servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 51.4 million as of December 2022, results in a total of EUR 297.5 million, which is 2.7% lower than the total gross disposition proceeds of EUR 305.7 million estimated in the initial business plan. The faster-than-expected collections prompt a shortened weighted-average life and a reduction in the future expected collections (-13.1%). Excluding actual collections, the Servicer’s expected future collections from April 2023 amount to EUR 238.3million. The updated DBRS Morningstar BBB (sf) rating stresses assume a haircut of 22.4% to the Servicer’s updated business plan, considering future expected collections.

The final maturity date of the transaction is October 2045.

DBRS Morningstar’s credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784/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 credit rating 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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit rating include the Issuer, the Servicer, and Zenith Service S.p.A., which comprise, in addition to the information received at issuance, the investor report as of April 2023, the updated business plan approved in July 2023, the semiannual and quarterly Servicer report as of March 2023, and the quarterly Master Servicer 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 credit rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

This is the first credit rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Pablo Iturriaga.

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 credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the Base Case):

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 184.9 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 B (low) (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).

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 credit 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://registers.esma.europa.eu/cerep-publication/. 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: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 23 December 2021

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The credit 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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