Press Release

DBRS Morningstar Confirms Credit Rating on Penelope SPV S.r.l. at A (low) (sf), Changes Trend to Stable from Negative

Nonperforming Loans

December 22, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit rating on the Class A Notes issued by Penelope SPV S.r.l. (the Issuer) at A (low) (sf) and changed the trend to Stable from Negative.

The notes were initially issued on 3 December 2018 and restructured on 29 December 2021 (the closing date). DBRS Morningstar assigned a credit rating to the Class A Notes in the context of the restructuring of the notes and did not rate the Class B or the Class J Notes. The credit rating on the Class A Notes addresses the timely payment of interest and the ultimately repayment of principal on or before the legal final maturity date in March 2041.

At issuance, the Class A Notes were backed by a portfolio of Italian secured and unsecured nonperforming loans (the portfolio) originated by Intesa Sanpaolo SpA. As of 31 August 2020, the portfolio represented EUR 9.72 billion by gross book value (GBV).

Intrum Italy S.p.A. (the special servicer) services the portfolio while Banca Finanziaria Internazionale S.p.A. (Banca Finint) acts as the master servicer. No backup servicer was appointed for the transaction.

As of 31 August 2020, the portfolio mainly comprised secured borrowers representing 75.1% of the GBV (99.2% by GBV of which benefitted from at least a first-ranking lien mortgage) with unsecured borrowers representing the remaining 24.9% of the GBV. In terms of GBV, the portfolio mainly included corporate borrowers (75.1% by GBV); however, in terms of the number of borrowers, the majority were individuals (78.3%), and the properties securing the loans in the portfolio were mainly residential (56.4% by updated real estate value).

CREDIT 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 31 August 2023, focusing on (1) a comparison between actual collections and the special 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.
-- Portfolio characteristics: The loan pool composition as of 31 August 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). A portion of the interests on the Class B Notes, which represent mezzanine debt, are paid ahead of the principal on the Class A Notes unless certain performance-related triggers are breached (i.e., a present value cumulative profitability ratio of less than 85%, or a cumulative collection ratio of less than 90%, or interest shortfall on the Class A Notes). The reported cumulative collection ratio of 71.7% as at 31 August 2023 is below the trigger therefore interests on the Class B Notes are now subordinated to Class A principal.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure and covering 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 is currently fully funded.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents consistent with DBRS Morningstar´s “Legal Criteria for European Structured Finance Transactions”.
-- The consistency of the hedging agreement with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions”.

TRANSACTION AND PERFORMANCE
According to the latest investor report from September 2023, the outstanding principal amounts of the Class A, Class B, and Class J Notes were EUR 539.3 million, EUR 143.6 million, and EUR 599.6 million, respectively. As of the September 2023 interest payment date, the balance of the Class A Notes had amortised by approximately 45.2% since the restructuring and the current aggregated transaction balance was EUR 1,282.5 million.

As of the August 2023 collection date, the transaction was performing below the special servicer’s initial expectations. The actual cumulative gross collections were EUR 591.0 million whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 832.7 million for the same period. Therefore, as of August 2023, the transaction was underperforming by 29.0% compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative collections of EUR 157.8 million at the A (low) (sf) stressed scenario for the same period. Therefore, as of August 2023, the transaction is performing ahead of DBRS Morningstar’s initial A (low) (sf) stressed expectations.

Pursuant to the requirements set out in the servicing agreement, in August 2023, the servicer delivered an updated portfolio business plan (the updated business plan) as of June 2023. The updated business plan, combined with the actual cumulative gross collections of EUR 538.2 million as of 31 May 2023, results in a total of EUR 2,227.1 million expected gross collections, which is 7.4% lower than the total gross collections of EUR 2,404.6 million estimated in the initial business plan. Hence, the servicer revised its expectation for collection on the remaining portfolio downwards and the timing of collections is now expected to be later than initially envisaged.

The updated DBRS Morningstar A (low) (sf) credit rating stress assumes a haircut of 28.2% to the servicer’s updated business plan, considering total future expected collections from September 2023 onwards.

The final maturity date of the transaction is in March 2041.

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 nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit rating provides 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 www.dbrsmorningstar.com/research/416784.

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” (11 December 2023), https://www.dbrsmorningstar.com/research/425148/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/421590/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 special servicer, and Banca Finint which comprise, in addition to the information received at issuance, the updated business plan as of June 2023 delivered in August 2023; the investor report as of September 2023; the payments report as of September 2023; the quarterly servicer report as of August 2023; and the updated data tape as of August 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. DBRS Morningstar applied an additional haircut to the collections’ vectors following the results of the third-party assessments.

DBRS Morningstar considers the data and information available to it for the purposes of providing these 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.

The last credit rating action on this transaction took place on 25 January 2023, when DBRS Morningstar confirmed its credit rating on the Class A Notes to A (low) (sf) and changed the trend to Negative from Stable.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):
-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 1,355.2 million at the A (low) (sf) credit rating 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 A (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Class A Notes at A (low) (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://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 credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jorge del Pino, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 29 December 2021

DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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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