DBRS Ratings GmbH (DBRS) upgraded its rating on the Series A Notes issued by Quarzo S.r.l. - Series 2017 (the Issuer) to AA (low) (sf) from A (high) (sf).
The rating on the Series A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in November 2033.
The upgrade follows a review of the transaction upon the execution of an amendment agreement that includes:
-- A 24-month extension of the revoling period through to August 2022;
-- A change in the definition of Eligible Institution, as described in the legal documentation, increasing the relevant DBRS replacement trigger by one notch;
-- An increase to the cumulative default trigger to 5.5% of the aggregated original principal balance, from 5.0% previously.
The Issuer is a securitisation of unsecured Italian consumer loan receivables originated by Compass Banca S.p.A. (Compass), a subsidiary of Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca). The portfolio contains mostly personal loans but also includes loans for the purchase of new and used vehicles and loans for other purposes. The transaction closed in February 2017 with a portfolio balance of EUR 1.5 billion and initially had a revolving period of 42 months.
The rating is based on DBRS’s review of the following analytical considerations:
-- An amendment to the transaction signed on 24 September 2019.
-- Portfolio performance, in terms of delinquencies, defaults and losses as of the August 2019 payment date;
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement (CE) to the Series A Notes to cover the expected losses at the AA (low) (sf) rating level;
-- No revolving termination events have occurred.
The transaction originally had a 42-month revolving period, which has been extended by 24 months. As such, the amortisation of the Series A Notes is expected to start on the payment date falling in November 2022, provided that certain conditions are not breached beforehand. There are eligibility criteria, concentration limits and performance triggers in place to mitigate any potential portfolio deterioration during the revolving period; all conditions have been met to date.
As of the August 2019 payment date, loans that were one to two months and two to three months delinquent represented 1.0% and 0.5% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.8%. Gross cumulative defaults amounted to 1.9% of the aggregate original and subsequent portfolios, 7.0% of which have been recovered to date.
DBRS conducted a loan-by-loan review of the remaining pool of receivables and has maintained its base case PD and LGD assumptions at 8.2% and 79.2%, respectively, given the updated vintage data received earlier this year, and based on the worst-case portfolio composition as the transaction is still in its revolving period.
CE is provided by the subordination of the Series B Notes. As of the August 2019 payment date, CE to the Series A Notes was 19.0%, which has remained stable since DBRS’s initial rating because of the inclusion of the revolving period.
The transaction benefits from a non-amortising liquidity reserve, funded at closing using the proceeds from the issuance of the Series B Notes, which is available to cover senior expenses and interest payments on the Series A Notes. The liquidity reserve is currently at its target level of EUR 5.9 million.
The structure also includes a Flexible and LibeRata loans Cash Reserve, which mitigates the liquidity risk arising from Flexible and LibeRata Loans. These loans can represent up to 5.0% of the outstanding balance of the portfolio and currently amount to 0.2% of the portfolio. Under these loan agreements, borrowers have the option to skip one monthly instalment per year (up to a maximum of five times during the life of the loan) or to modify the amount of the monthly instalments. This reserve will only be funded if, for three consecutive calculation dates, the outstanding balance of the Flexible and LibeRata Loans in relation to which the debtors have exercised the contractual right to postpone the payments is higher than 2.0% of the portfolio balance. As of the August 2019 payment date, this condition had not been breached.
Mediobanca acts as the account bank for the transaction. Based on the DBRS private rating of Mediobanca, the updated downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Series A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.
The transaction structure was analysed in Intex DealMaker.
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.
An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.
DBRS has conducted a review of the transaction legal documents provided in the context of the aforementioned amendment. The other transaction legal documents have remained unchanged since the most recent rating action and as such, a review has not been conducted.
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 Global Methodology for Rating Sovereign Governments at: http://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include investor reports provided by Deutsche Bank S.p.A. (the Calculation Agent), servicer reports provided by Compass, loan-level data provided by the European DataWarehouse GmbH and the related amendment documentation provided by Mediobanca.
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 purpose 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 4 February 2019, when DBRS confirmed the rating of the Series A Notes at A (high) (sf).
The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.
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 lifetime base case PD and LGD for the pool 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 loans for the Issuer are 8.2% and 79.2%, respectively.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Series A Notes would be expected to be downgraded to A (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Series A Notes would be expected to be upgraded to A (low) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Series A Notes would be expected to be downgraded to BBB (high) (sf).
Series 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)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (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: Daniel Rakhamimov, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 15 February 2017
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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
-- Operational Risk Assessment for European Structured Finance Originators
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.