Rating Action: Moody's assigns definitive rating to the Notes issued by Summer SPV S.r.l.
Global Credit Research - 30 Dec 2020
Milan, December 30, 2020 -- Moody's Investors Service ("Moody's") has today assigned the following definitive rating to the Notes issued by Summer SPV S.r.l. (the "Issuer"):
....EUR 85.4M Class A Asset Backed Floating Rate Notes due October 2040, Assigned Baa2 (sf)
Moody's has not assigned ratings to the EUR 10M Class B Asset Backed Floating Rate Notes due October 2040 and to EUR 1M Class J Asset Backed Fixed Rate and Variable Return Notes due October 2040, which are also issued at the closing of the transaction.
The transaction is a static cash securitisation of non-performing loans ("NPLs") granted by BPER Banca S.p.A. ("BPER", Baa2(cr)/P-2(cr)) and Banco di Sardegna S.p.A. ("BdS", unrated), part of the BPER group. This represents the fourth post financial crisis NPL transaction sponsored by banks belonging to the BPER group.
The assets supporting the Notes are NPLs with a gross book value ("GBV") of EUR 322 million as of July 31, 2020 ("Cut Off date"). The gross collections from the Cut Off date to November 2020 amount to around EUR 5.4 million.
The portfolio will be serviced by Fire S.p.A. ("Fire", unrated) in the role of special servicer. Banca Finanziaria Internazionale S.p.A. ("Banca Finint", unrated) will be acting as master servicer and monitoring agent. In addition, Cerved Master Services S.p.A. (not rated) has been appointed as back-up servicer at closing and will step in to take over the role of master servicer in case the master servicer agreement is terminated. The monitoring agent together with the back-up servicer, Cerved Master Services S.p.A, will help the Issuer to find a substitute special servicer in case the servicing agreement with Fire is terminated.
Moody's rating reflects an analysis of the characteristics of the underlying pool of defaulted loans, sector-wide and originator-specific performance data, protection provided by credit enhancement, the roles of external counterparties, and the structural integrity of the transaction.
In order to estimate the cash flows generated by the pool, Moody's used a model that, for each secured loan, generates an estimate of: (i) the timing of collections; and (ii) the collected amounts, which are then used in the cash flow model that is based on a Monte Carlo simulation.
In Moody's view, the credit positive features of this deal include, among others:
(i) the portfolio composition: (a) 48.7% of the loans in term of GBV are secured: 44.4% by a first lien mortgage and 4.3% by a junior lien; (b) in relation to the secured portfolio benefitting from a first lien mortgage, residential properties represent around 79.5% of GBV and the weighted average Loan to Value is as low as 72%; (c) almost all properties relating to first lien mortgage have a third party valuation dating back to no later than 2018; (d) the portfolio is extremely granular: top 1, top 10 and top 20 obligors represent around 0.20%, 1.51% and 2.83%, respectively, of the pool in GBV terms; (ii) Class B margin is set at 12% and the portion of the Class B coupon that is paid senior to Class A principal is capped at a level of 12%, furthermore Class B coupon is postponed to a more junior position in the waterfall should cumulative recoveries rate be lower than 90% of the expected cumulative recovery rate according to the initial business plan anticipated by the special servicer; and (iii) special servicing fees are linked to the performance of the deal thus aligning special servicer interest to the interest of the Noteholders.
However, the transaction has several credit negative features, such as: (i) secured loans representing around 76.3% of the GBV of the secured portfolio are reported to be still in the initial stage of the legal proceeding, which means that cash flows from these loans will likely be generated at a later time; (ii) 2.7% of GBV of the portfolio are reported to be properties which are undergoing or are expected to undergo a bankruptcy procedure, whereas bankruptcy procedures usually take significantly longer than a foreclosure; (iii) loans collateralized by land represent 8.9% in terms of real estate value and 0.5% refer to hotels. These are usually less liquid than other property types; and (iv) part of the property value assessment was conducted before the coronavirus pandemic outbreak, whereas the effect of the pandemic can be reflected in lower market values in the future. Moody's has taken into account the potential impact of a sudden decline of the real estate market in its modelling.
-Key transaction structure features:
Reserve fund: The transaction benefits from a cash reserve equal to 4% of the Class A Notes' balance (corresponding to around EUR 3.4 million at closing) that amortizes in line with the Class A Notes and is funded by a limited recourse loan granted by BPER. The cash reserve is replenished immediately after the payment of interest on the Class A Notes and provides mainly liquidity support to the Class A Notes.
Hedging: The transaction is hedged against fluctuations of the six-month EURIBOR rate, to which the notes are indexed. In particular, Class A note benefits from a combination of two interest rate cap agreements linked to six-month EURIBOR with J.P. Morgan AG (Aa1 (cr)/P-1 (cr)) acting as cap counterparty. The cap counterparty will pay if Euribor is between 0.0% and 0.20% at closing and moving up to the 0.0%-1.40% range in October 2035. As the six-month EURIBOR to be paid on Class A Notes is also capped from the first payment date at 0.2% and increasing up to 1.4%, in line with the second cap strike and to 1.6% afterward, the interest rate risk in the transaction is mitigated in most of the scenarios. The notional of the interest rate cap agreements is equal to the outstanding balance of the Class A Notes at closing and is decreasing over time with pre-defined amounts. Class B Notes are expected not to be hedged by the cap agreement, nonetheless Class B Notes interest that can be senior to Class A Notes principal repayment is contractually capped at 12%.
Moody's used its NPL cash-flow model as part of its quantitative analysis of the transaction. Moody's NPL model enables users to model various features of a European NPL ABS transaction - recovery rates under different scenarios, yield as well as the specific priority of payments and reserve funds on the liability side of the ABS structure.
-Counterparty risk analysis:
Fire acts as special servicer of the non-performing loans for the Issuer, while Banca Finint is the master servicer and monitoring agent and the calculation agent of the transaction. Cerved Master Servicer S.p.A. (not rated) will act the back-up master servicer.
Most of the collections are paid directly into the issuer collection account at BNP Paribas Securities Services (Aa3/P-1 deposit ratings), acting through its Milan Branch, with a transfer requirement if the rating of the account bank falls below Baa3.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of consumer assets from the current weak Italian economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. 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.
The principal methodology used in this rating was "Non-Performing and Re-Performing Loan Securitizations Methodology" published in April 2020 and availbale 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 rating:
The Notes' rating is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The evolution of the associated counterparties' risk, the level of credit enhancement and Italy's country risk could also impact the Notes' 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is 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_1243406.
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.
Francesca Pilu Vice President - Senior Analyst Structured Finance Group Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Olga Gekht Senior Vice President/Manager Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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