Morningstar DBRS Changes Trend to Negative From Stable on Class B Notes Issued by POP NPLs 2020 S.r.l., Confirms Credit Ratings

DBRS Ratings GmbH (Morningstar DBRS) changed the trend on the Class B notes issued by POP NPLs 2020 S.r.l. (the Issuer) to Negative from Stable and confirmed its credit ratings on the Class A and Class B notes as follows:

-- Class A at BBB (high) (sf)
-- Class B at CCC (sf)

The trend on the Class A notes remains Stable.

The transaction represents the issuance of Class A, Class B, and Class J notes (collectively, the notes). The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal. The credit rating on the Class B notes addresses the ultimate payment of principal and interest. Morningstar DBRS 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.

CREDIT RATING RATIONALE
The credit 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 March 2024, focusing on (1) a comparison between actual collections and the special servicers' initial business plan forecast, (2) the collection performance observed over recent months, and (3) a comparison between the current performance and Morningstar DBRS' expectations.
-- Updated business plan: The special servicers' updated business plan as of December 2023, received in May 2024, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of March 2024 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 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 2024 interest payment date, these triggers had not been breached with actual figures at 147.1% and 131.1%, respectively, according to the special servicers.
-- 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 4.0% of the Class A principal outstanding and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from May 2024, the outstanding principal amounts of the Class A, Class B, and Class J notes were EUR 95.9 million, EUR 25.0 million, and EUR 10.0 million, respectively. As of the May 2024 payment date, the balance of the Class A notes had amortised by 60.3% since issuance, and the current aggregated transaction balance is EUR 130.9 million.

As of March 2024, the transaction was performing above the special servicers' business plan expectations. The actual cumulative gross collections equalled EUR 178.1 million, whereas the special servicers' initial business plan estimated cumulative gross collections of EUR 121.1 million for the same period. Therefore, as of March 2024, the transaction was overperforming by EUR 57.0 million (47.1%) compared with the initial business plan expectations. Nevertheless, the overperformance reduced compared to one year ago, as actual collections from April 2023 to March 2024 were below the special servicers' initial expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 86.9 million at the BBB (sf) stressed scenario and EUR 108.2 million at the CCC (sf) stressed scenario. Therefore, as of March 2024, the transaction is performing above Morningstar DBRS' initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in May 2024, the special servicers delivered an updated portfolio business plan as of December 2023.

The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 167.2 million as of December 2023, results in a total of EUR 351.7 million, which is 11.4% lower than the total gross disposition proceeds of EUR 396.8 million estimated in the initial business plan. Considering the material overperformance to date, this implies a substantial reduction of expected collections from the remaining exposures.

Excluding actual collections as of March 2024, the special servicers' expected future collections from April 2024 amount to EUR 171.1 million. The updated Morningstar DBRS BBB (high) (sf) rating stresses assume a haircut of 17.9% to the special servicers' updated business plan, considering the future expected collections. In Morningstar DBRS' CCC (sf) scenario, the special servicers' updated forecast was adjusted only in terms of actual collections to the date and timing of future expected collections, resulting in EUR 174.0 million recovery expectation.

Considering the benefit from the interest rate cap and the rapid redemption, the Class A notes may now pass higher credit rating stresses in the cash flow analysis. However, Morningstar DBRS does not deem the senior principal redemption path to be sustainable yet, as also evidenced by the special servicers' underperformance compared with the initial business plan in the collection period between April 2023 and March 2024, and the special servicers' downward revision of total collection expectations according to the most recent business plan. In addition, there is some exposure to the transaction account bank, considering the replacement provisions outlined in the transaction documents. Hence, Morningstar DBRS confirmed the credit rating on the Class A notes at BBB (high) (sf) with a Stable trend.

The final maturity date of the transaction is November 2045.

Morningstar DBRS' credit ratings on the Class A and Class B notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Class Balance.

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

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings" at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS 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 March 2024), https://dbrs.morningstar.com/research/429051.

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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://dbrs.morningstar.com/research/421590.

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 2024; the updated business plan as of December 2023; and the semiannual servicing report as of March 2024.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit rating, Morningstar DBRS was supplied with third-party assessments. However, this did not affect the credit rating analysis.

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

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

The last credit rating actions on this transaction took place on 15 June 2023, when Morningstar DBRS took the following credit rating actions: (1) upgraded Class A notes to BBB (high) (sf) from BBB (sf), (2) confirmed Class B notes at CCC (sf), (3) changed the trend on Class A notes to Stable from Positive, and (4) changed the trend on Class B notes to Stable from Positive.

The lead analyst responsibilities for this transaction have been transferred to Sijia Aulenbacher.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS 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 140.5 million and EUR 174.0 million at the BBB (high) (sf) and CCC (sf) stress level, respectively, a 5% and 10% decrease in the base case recovery rate.
-- Morningstar DBRS 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).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A notes BBB (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a downgrade of the Class B notes to CC (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class B notes to CC (sf).

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Sijia Aulenbacher, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 December 2020

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
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://dbrs.morningstar.com/about/methodologies.

-- Rating European Nonperforming Loans Securitisations (5 June 2023), https://dbrs.morningstar.com/research/415383
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051
-- European RMBS Insight Methodology (25 March 2024), https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Italian Addendum (2 October 2023), https://dbrs.morningstar.com/research/421317
-- European CMBS Rating and Surveillance Methodology (17 January 2024), https://dbrs.morningstar.com/research/426818
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.