Business Plans Evolution
A DBRS commentary on NPL Securitizations
In a recent commentary, DRBS Morningstar examines the changes in current collection expectations of Italian nonperforming loan (NPL) servicers compared to their executed business plans, focusing on our publicly rated Italian NPL securitisations.
The data captured in DRBS Morningstar's report, "Italian NPL Securitisations Performance – Q1 2024 Update," confirms that recovery ratios have generally continued to deteriorate for earlier transactions and remained on average above the unit for more recent ones. However, this performance indicator should be read in conjunction with the evolution of the servicers' forecasts, both in terms of recovery rate assumptions and timing expectations.
While the trend is still negative, DRBS Morningstar observed an overall slowdown in downward revisions to business plan expectations with the latest releases. Additionally, transactions issued under the Guarantee Asset Protection Scheme (GACS) as amended in March 2019 (GACS 2.0) seem to have incorporated the effects of the pandemic into their business plans with more conservative assumptions, especially regarding timing.
Collection delays, in part due to court closures during the pandemic, combined with relatively more aggressive timing and recovery expense assumptions underlying the underwritten business plan, emphasized the negative variation in terms of collection net present value (NPV) for transactions issued under the first version of the GACS law (GACS 1.0). Conversely, the outperformance registered by the most recent transactions, along with longer expected weighted-average life (WAL) and higher recovery expenses implied in their executed business plans, resulted in positive NPV variations for several GACS 2.0 transactions.
Updated Business Plans
To date, DRBS Morningstar has received at least one updated version of the servicer business plan for 33 of the 37 Italian NPL transactions rated since 2016. The four exceptions are: Siena NPL 2018 S.r.l. (Siena) (latest update received in 2020), Belvedere SPV S.r.l. (Belvedere) (only received an update for the portion managed by the servicer Bayview Italia S.r.l.), and Andor SPV S.r.l. (Andor) and Luzzatti Pop NPLs 2023 S.r.l. (Pop 23) (both issued at the end of 2023, with the first updated business plans due in 2025 according to the servicing agreements).
The comparison between the initial gross proceeds estimated by the servicer and the latest updated business plan forecasts (including actual performance as of the relevant cut-off date) indicates that servicers have generally reduced the expected gross recoveries for both GACS 1.0 and GACS 2.0 transactions.
The average reduction is 10.4%, with Popolare Bari NPLs 2017 S.r.l. (Bari 2017), Popolare Bari NPLs 2016 S.r.l. (Bari 2016), Aragorn NPL 2018 S.r.l. (Aragorn), and Maggese S.r.l. (Maggese) experiencing the highest reductions at 30.0%, 27.2%, 26.6%, and 25.5%, respectively. Exceptions to the general trend include Buonconsiglio 4 S.r.l. (Buonconsiglio 4), Fino 1 Securitisation S.r.l. (Fino), Grogu SPV S.r.l. (Grogu), and Marathon SPV S.r.l. (Marathon), which have shown slight increases of 0.6%, 0.8%, 1.1%, and 5.3%, respectively, compared to their initial business plans.
DRBS Morningstar has also observed an overall slowdown in downward revisions to business plans. For GACS 1.0 transactions, the average reduction in the executed business plan was 18.1% with the latest update, compared to 16.1% and 12.2% in the second-last and third-last updates, respectively. Conversely, GACS 2.0 transactions appear to have incorporated the effects of the pandemic into their business plans, showing an average reduction of just 5.4%.
Impact of Original Timing Assumptions and Actual Performance on Expected NPV
DRBS Morningstar observes that GACS 2.0 transactions displayed, on average, a longer executed (expected) WAL (average of 4.9 years) compared with GACS 1.0 transactions (average WAL of 4.1 years). Additionally, for several GACS 1.0 transactions, the business plan revisions and underperformance resulted in a longer WAL than originally expected. However, for most GACS 2.0 transactions, the WAL embedded in the updated business plan was subsequently shortened due to good performance to date.
To capture the impact of time distribution and recovery expenses assumptions, DRBS Morningstar computed the variation by comparing the NPV of net collections (gross collections net of legal and procedural expenses) according to the executed business plan and the latest expectations. For GACS 1.0 transactions, the negative variation was emphasized by collection delays and higher recovery expenses (NPV average reduction of 20.9% compared to 18.1% on a nominal gross basis), while for several GACS 2.0 transactions, the shortened WAL and lower recovery expenses resulted in positive NPV differences (NPV average decrease of just 2.1% versus 5.4% on a nominal gross basis).
The impact of deviations from the original timing expectations can significantly affect the likelihood of principal repayment and, consequently, the credit rating. Most Italian NPL securitisations are structured with features that may accelerate senior amortisation rates when performance exceeds original expectations, or exacerbate the deterioration of transactions performing below initial expectations.
In More Detail:
GACS Fee Structure: The GACS fee structure provides for gradual step-up rates during the first seven years before dropping to the long-run rate. If a transaction amortizes slower than expected, an increased percentage of periodic collections will be redirected to the payment of GACS fees, leaving fewer funds for senior principal repayment. This could further slow down amortisation in a vicious cycle. Conversely, transactions that shorten recovery timing might end up paying less in GACS fees than originally expected, potentially accelerating senior amortisation and enhancing collateralisation.
Interest Component: The interest component as a percentage of available funds is affected by the speed of collections and the amortisation profile. The interest rate cap agreement structure might widen the gap between well-performing transactions and those with poorer recovery profiles. Transactions with strong performance will likely amortize faster than the cap notional schedule, benefiting from higher than expected net payoffs from the interest rate cap agreement. Conversely, transactions performing below initial expectations will likely amortize slower than the cap notional schedule, exposing them to increased interest rate risk, which could add liquidity pressure on timely interest payments and final note repayments.
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Relevant Links:
https://dbrs.morningstar.com/research/432486/italian-npl-securitisations-business-plans-evolution
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