DBRS Morningstar Confirms Rating on Auto ABS Italian Balloon 2019-1 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A Notes issued by Auto ABS Italian Balloon 2019-1 S.r.l. (the Issuer) at AA (high) (sf).

The rating addresses the timely payment of interest and ultimate payment of principal by the legal final maturity date in September 2034.

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 as of the June 2020 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (high) (sf) rating level;
-- No amortisation or accelerated amortisation events have occurred so far;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Auto ABS Italian Balloon 2019-1 S.r.l. is a securitisation of fixed-rate receivables related to balloon auto loans granted by Banca PSA Italia S.p.A. (Banca PSA) to private and commercial debtors residing in Italy. Banca PSA services the portfolio, with Santander Consumer Finance S.A. appointed as backup servicer facilitator. The transaction has a two-year revolving period scheduled to end on the August 2021 payment date. During the revolving period, the Issuer has the option to purchase additional receivables; however, all purchases are subject to eligibility criteria and there are concentration limits and performance triggers in place to mitigate any potential portfolio deterioration. The transaction closed in July 2019, when the special-purpose vehicle issued one senior class of fixed-rate notes (i.e., the Class A Notes) and one junior class of additional return notes (i.e., the Class B Notes).

PORTFOLIO PERFORMANCE

The portfolio is performing within DBRS Morningstar’s initial expectations. As of the May 2020 cut-off, loans that were two to three months in arrears represented 0.1% of the outstanding portfolio balance, while the 90+ delinquency ratio was 0.05%. At the same cut-off, around 2.2% of the outstanding portfolio balance was granted a payment suspension, 1.9% of which extends until 30 September 2020. The gross cumulative default ratio stood at 0.1% of the initial portfolio balance, including additional receivables. As of the June 2020 payment date, all concentration limits and performance triggers in place are satisfied.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has maintained its base case PD assumption at 2.9%, and updated its LGD assumption to 77.7%.

CREDIT ENHANCEMENT

Overcollateralisation of the outstanding collateral portfolio provides credit enhancement. As of the June 2020 payment date, credit enhancement to the Class A Notes was 16.0%, unchanged from the closing date, given that the transaction is still in its revolving period.

The transaction benefits from an amortising general reserve, which is available to cover shortfalls on senior fees, expenses, and interest payments on the Class A Notes. The reserve is currently at its target level of EUR 6.6 million, or 1.0% of the Class A Notes outstanding balance, and will start amortising after the end of the revolving period, with a floor of EUR 500,000.

Banco Santander S.A. and The Bank of New York Mellon SA/NV, Milan branch act as the transaction’s Spanish and Italian account bank (together, the Account Banks), respectively. Based on the reference rating of the Spanish account bank at A (high), one notch below the DBRS Morningstar’s Long-Term Critical Obligation Rating of AA (low), the reference rating of the Italian account bank at AA (high), the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the Account Banks to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many ABS transactions, some meaningfully. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar applied a haircut to its base case recovery rate and conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand payment holidays in the portfolio.

The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus is likely to affect the DBRS Morningstar-rated ABS transactions in Europe, for more details please see https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:

All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar 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.

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 at: http://www.dbrsmorningstar.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:
https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include investor reports provided by Zenith Service S.p.A., additional information provided by Banca PSA, and loan-level data provided by the European DataWarehouse GmbH.

DBRS Morningstar did not rely upon third-party due diligence to conduct its analysis.

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action on this transaction since the initial rating date in July 2019.

The lead analyst responsibilities for this transaction have been transferred to Daniele Canestrari.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies is available at www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar 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 2.9% and 77.7%, 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 Class A Notes would be expected to fall to AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected fall to A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to A (low) (sf).

Class A Notes Risk Sensitivity:

-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% 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 (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

For further information on DBRS Morningstar 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 U.S. regulations only.

Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 18 July 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020),
https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Rating European Structured Finance Transactions Methodology (28 February 2020),
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.