Rating Action: Moody's takes rating actions on six Italian NPLs deals
Global Credit Research - 22 Jul 2020
Madrid, July 22, 2020 -- Moody's Investors Service ("Moody's") has today confirmed the rating of one note in one Italian NPLs deal and downgraded the ratings of eight notes in six Italian NPLs deals. The downgrades reflect the slower and potentially lower than anticipated cash-flows in the transactions in the context of reduced operability of judicial system, economic disruption and negatively affected investors sentiment following coronavirus outbreak. The confirmation reflects sufficient credit enhancement to maintain the rating. Today's action concludes the placing under review for downgrade of these notes due to the economic disruption caused by the coronavirus outbreak.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL428955 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
The downgrades reflect the slower and potentially lower than anticipated cash-flows in the transactions in the context of reduced operability of judicial system, economic disruption and negatively affected investors sentiment following coronavirus outbreak.
BCC NPLs 2018 S.r.l. was underperforming the special servicer's original projection already before coronavirus outbreak and the portfolio has some concentration in the Lombardia and Emilia Romagna regions which were amongst the most severely affected by the outbreak (39% and 14% of Gross Book Value respectively as of May 2020). Class B notes interest was deferred for the first time on June 2020 payment date.
In the case of BELVEDERE SPV S.R.L., one of the sub-pools was underperforming the special servicer's original projection already before coronavirus outbreak, both of them were underperforming as of May 2020 and the portfolio has some concentration in the Lombardia, Veneto and Emilia Romagna regions which were amongst the most severely affected by the outbreak (27%, 11% and 9% of Gross Book Value respectively as of May 2020).
Popolare Bari NPLs 2016 S.r.l. was underperforming the special servicer's original projection already before coronavirus outbreak. Class B notes interest was deferred for the first time on June 2020 payment date. The portfolio is mainly concentrated in the South of Italy and Islands (64% as of May 2020). The rating of class A notes was downgraded to Baa3(sf) from Baa1(sf) on 24 April 2020.
Popolare Bari NPLs 2017 S.r.l. was underperforming the special servicer's original projection already before coronavirus outbreak and the portfolio has some concentration in the Lombardia and Emilia Romagna regions which were amongst the most severely affected by the outbreak (13% and 7% of Gross Book Value respectively as of March 2020). Also note that about 32% of the pool by Gross Book Value is concentrated on the top 10 obligors which increases potential performance volatility. The rating of class A notes was downgraded to Ba1 (sf) from Baa3 (sf) on 24 April 2020.
Prisma SPV S.r.l. closed in October 2019 and therefore has not deleveraged significantly. It has performed above special servicer original projection's but the portfolio has some concentration to assets located in Lombardia, Veneto, Piemonte and Emilia Romagna are 28%, 9%, 8% and 7% respectively of the gross book value as of March 2020.
BCC NPLs 2019 S.r.l. closed in December 2019 and first payment date will take place on 31 July 2020. It has some concentration to assets located in the North of Italy (around 43% of the real estate value of properties backing first lien loans were located in the north of Italy at closing).
The confirmation reflects sufficient credit enhancement to maintain the ratings.
Slower and potentially lower anticipated cash-flows generated from the recovery process following coronavirus outbreak and economic disruption.
NPL transactions' cash flows depend on the timing and amount of collections. Measures imposed to contain the spread of the coronavirus directly and severely affected the operability of judicial systems, creating a backlog which will delay NPLs securitisations' gross recoveries. Court appraisals, property inspections and auctions were frozen and had to be rescheduled. Until courts return to normal activity, recoveries for transactions will be delayed. April and May collections were generally 50%-75% lower than 2019 average. For the portfolios for which information on June collections is available we are observing improving trend compared to April and May.
Negatively affected investor sentiment
NPL transactions are exposed to investment sentiment and how property markets are functioning. Real estate prices could deteriorate to a varying extent, depending on the magnitude of the economic slowdown and the property characteristics.
The virus has affected and will continue to affect the ability of special servicers to achieve loan sales to other entities or to reach extrajudicial agreements with borrowers under additional stress in this environment.
Due to the current circumstances, Moody's has considered additional stresses in its analysis, including a 6 to 12-month delay in the recovery timing and has downgraded the ratings of the deals that the agency views as more vulnerable to a deterioration of timeline and amount of cash-flows. This higher anticipated vulnerability could be driven by one or more of a number of factors, including: (i) the composition of the loan portfolios (for instance in terms of court and regional distribution); (ii) the credit enhancement under the Notes and the deleveraging since the last rating action; and (iii) the transactions' performance to date. Moody's expects that transactions that were already behind servicers' original projections will have additional difficulty improving underperformance.
In the coming months, liquidity available in the transactions may be needed to ensure payments of senior costs and interest on Notes, given reduced cash flows. Currently, reserves are at target. Moody's expects available liquidity in the transactions to be sufficient to cover over 12 months of senior costs.
We will continue to monitor performance data of each transaction, evolution of operability of judicial systems, performance of special servicers and developments regarding property prices.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the cash flows generated from the recovery process on the non-performing loans from the collapse in Italian economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Moody's has taken into account the potential cost of the GACS Guarantee within its cash flow modelling, while any potential benefit from the guarantee for the senior Noteholders has not been considered in its analysis.
The principal methodology used in these ratings was "Non-Performing and Re-Performing Loan Securitizations Methodology" published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1222103. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the ratings include: (1) the recovery process of the non-performing loans producing significantly higher cash-flows in a shorter time frame than expected; (2) improvements in the credit quality of the transaction counterparties; and (3) a decrease in sovereign risk.
Factors or circumstances that could lead to a downgrade of the ratings include: (1) significantly lower or slower cash-flows generated from the recovery process on the non-performing loans due to either a longer time for the courts to process the foreclosures and bankruptcies, a change in economic conditions from our central scenario forecast or idiosyncratic performance factors. For instance, should economic conditions be worse than forecasted and the sale of the properties generate less cash-flows for the issuer or take a longer time to sell the properties, all these factors could result in a downgrade of the ratings; (2) deterioration in the credit quality of the transaction counterparties; and (3) increase in sovereign risk.
The List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL428955 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
** Rating Solicitation
** Issuer Participation
** Participation: Access to Management
** Participation: Access to Internal Documents
** Disclosure to Rated Entity
** Endorsement ** Lead Analyst ** Releasing Office
** Person Approving the Credit Rating
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis relies on a Monte Carlo simulation that generates a large number of collateral loss or cash flow scenarios, which on average meet key metrics Moody's determines based on its assessment of the collateral characteristics. Moody's then evaluates each simulated scenario using model that replicates the relevant structural features and payment allocation rules of the transaction, to derive losses or payments for each rated instrument. The average loss a rated instrument incurs in all of the simulated collateral loss or cash flow scenarios, which Moody's weights based on its assumptions about the likelihood of events in such scenarios actually occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Maria Turbica Manrique VP - Senior Credit Officer Structured Finance Group Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Michelangelo Margaria Senior Vice President/Manager Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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