DBRS Ratings GmbH (DBRS) confirmed its AA (low) (sf) rating on the Class A Notes issued by Quarzo CQS 2018 (the Issuer).
The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.
The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement (CE) to the Class A Notes to cover the expected losses at the AA (low) (sf) rating level.
Quarzo CQS 2018 is a securitisation of Italian consumer loan receivables originated and serviced by Futuro SpA (Futuro), a specialised lending department of Compass Banca S.p.A. The portfolio includes consumer loans secured by salary or pension assignment and payment delegation. The transaction closed on 27 March 2018 and has been amortising since.
As of the February 2019 payment date, loans more than 90 days delinquent represented 0.5% of the outstanding principal balance. Gross cumulative defaults were 1.1% of the original portfolio, of which 60.5% have been recovered so far.
DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has maintained its base case PD assumption at 7.4% and updated its base case LGD assumption to 8.4%.
CE is provided to the Class A Notes by the subordination of the Class B Notes and the cash reserve; this increased to 10.7%, from 9.5% at closing.
The transaction structure includes two reserves: a non-amortising cash reserve and an amortising liquidity reserve. Both are available to cover senior fees and interest payments on the Class A Notes; however, the cash reserve is available to further cover gross losses to such extent that it can be applied towards the repayment of principal under the Class A Notes. These were funded at closing to EUR 9.7 million and EUR 2.4 million, respectively and have been at their target since closing, currently EUR 8.5 million and EUR 2.4 million, respectively.
Citibank N.A., Milan Branch (Citibank) acts as the account bank for the transaction. Based on DBRS’s private rating of Citibank, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS consider the risk arising from the exposure to Citibank to be consitent with the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.
Banco Santander SA acts as the swap counterparty for the transaction. DBRS’s Long Term Critical Obligations Rating of Banco Santander SA at AA (low) is consistent with the first rating threshold as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/333487/rating-sovereign-governments.pdf.
The sources of data and information used for this rating includes loan by loan data sourced by European DataWarehouse GmbH and investor and servicer reports provided by Futuro.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 27 March 2018, when DBRS finalised its provisional rating on the Class A Notes at AA (low) (sf).
The lead analyst responsibilities for this transaction have been transferred to Alfonso Candelas.
Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):
-- DBRS expected a base case PD and LGD for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of receivables are 7.4% and 8.4%, respectively.
For example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus. If the PD increases by 50%, the rating on the Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to decrease to A (sf), ceteris paribus.
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)
For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.
Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Vito Natale, Managing Director
Initial Rating Date: 8 March 2018
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.