SCOPE on Italian NPL securizations
Performance to remain subdued in 2023
Scope Ratings published a detailed analysis of the performance of Italian NPL securitizations (inclusive of non-performing lease transactions) with at least one interest payment date as of 1 December 2022.
The performance of Italian NPL portfolios has been mixed. In terms of timing of collections (net of expenses), almost 22 out of 451 transactions exceeded servicers' projections by an average of 109%, while 23 fell short of business-plan expectations by a significantly lower delta (25%). In terms of profitability, 39 out of 452 transactions (87%) exceeded business-plan expectations in terms of specific Net Present Value Profitability Ratios (NPVPRs).
Scope expects the pace of collections in 2023 will be similar to 2022, with about half of the transactions lagging servicers’ projections by roughly 30% and the remainder out-performing by an average of 70%. Profitability wise (against NPVPRs) Scope expects that servicers will close positions above their business-plan expectations for about 80%-90% of transactions.
Performance metrics relating to business-plan projections have certain limitations and should be interpreted with caution. For example, recent transactions typically have more conservative business plans reflecting post-pandemic assumptions, so performance metrics are not directly comparable across transactions. Furthermore, discount rates to compute the NPVPRs may diverge substantially across transactions, so this metric is not consistent in its definition across transactions .
Scope's profitability metrics show a less rosy picture. Servicers calculate profitability after the effects of discounting, but Scope does not calculate it this way in order to ensure comparability across transactions.Profitability on closed borrowers computed without discounting effects is below our B case assumptions for about 80% of transactions (33 out of 413) with an average shortfall of 10% . As transactions age, the risk of servicers closing more profitable positions earlier and less profitable positions later might further squeeze profitability.
Scope´s Dynamic Coverage Index shows that the expected number of years it will take for transactions to amortise has gradually been increasing over time , as we expect this trend to continue in 2023. . Scope has rated 47 Italian NPL transactions to-date for a value of EUR 112.3bn. The number and magnitude of all rating actions taken by Scope reflects substantial under-performance of NPLs as an asset class relative to our initial expectations.
NPL under-performance has been largely driven by the backlog of judicial proceedings, which built up because of the Covid crisis. Extra-judicial agreements and note sales have helped collection inflows but this has come at the expense of very high discounts, which explains why overall performance relative to Scope´s initial expectations has been net negative.
Another significant factor driving collection volumes has been proceeds from cash-in-court positions or interim collections that had not yet been distributed to noteholders at closing. But since this is a one-off performance driver concentrated in a few payment dates after closing, we observe that as transactions age, the average annual collections tend to slow down substantially.
Scope expects that the backlog in judicial proceedings to be resolved gradually. But macroeconomic and geopolitical risks remain high and we expect financial conditions to tighten. As a result, our base case is that performance of NPL securitisations will remain subdued for the foreseeable future.
Link to the report:
https://scoperatings.com/ratings-and-research/research/EN/174185
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