DBRS Morningstar Assigns AAA (sf) Rating to Auto ABS Italian Rainbow Loans 2020-1

DBRS Ratings GmbH (DBRS Morningstar) assigned a AAA (sf) rating to the Class A Notes issued by Auto ABS Italian Rainbow Loans 2020-1 (the issuer). DBRS Morningstar does not rate the Class Z Notes issued in this transaction.

The rating on the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date in September 2035.

DBRS Morningstar based its rating on the following analytical considerations:

-- The transaction’s capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes.
-- Banca PSA Italia S.p.A.’s (BPSA or the originator) financial strength and capabilities with respect to originations, underwriting, and servicing.
-- DBRS Morningstar’s operational risk review on BPSA, which is deemed to be an acceptable servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral, and historical and projected performance of the originator’s portfolio.
-- DBRS Morningstar’s sovereign rating of the Republic of Italy at BBB (high) with a Negative trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE

The transaction represents the issuance of Class A and Class Z notes (collectively, the notes) backed by a portfolio of approximately EUR 490 million of fixed-rate receivables related to standard auto loan and balloon auto loan contracts granted by BPSA to individual private and commercial debtors residing in Italy. BPSA, a joint venture equally owned by Banque PSA Finance and Santander Consumer Bank S.p.A., will also act as the servicer for the transaction.

The transaction includes a two-year revolving and ramp-up period during which time the issuer will purchase new receivables that the originator may offer through additional subscription payments under the notes provided that certain conditions set out in the transaction documents are satisfied. The amount of the additional subscription payment is calculated pro rata based on its relevant percentage and the pro rata share (88.5% for Class A and 11.5% for Class Z notes). The pro rata share equals the notes’ initial percentage of the outstanding receivables balance as of closing. Additional subscription payments are requested by the issuer and will be carried out on the respective interest payment date subject to the consent of all Class A and Class Z noteholders. The Class A and Class Z notes can be increased up to the notes’ maximum amount of EUR 850 million.

The transaction benefits from a EUR 4.9 million general reserve funded by the originator through a subordinated loan that can be used to cover shortfalls in senior expenses and interest under the Class A Notes. During the revolving and ramp-up period, the general reserve will be flat at 1.0% of the issued notes as of closing with a floor at EUR 500,000. The Class A Notes and the receivables pay fixed interest.

At the end of the revolving period, the notes will be repaid on a fully sequential basis. The transactions’ available funds are distributed through a combined interest and principal waterfall.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

COUNTERPARTIES

The Bank of New York Mellon SA/NV – Milan branch is the Italian Account Bank for the transaction, holding the Payment Account and Expenses Account. Banco Santander SA, in turn, has been appointed as the Spanish Account Bank, holding the remaining issuer accounts, including the collection account, the general reserve account, and the securities account.

DBRS Morningstar’s Long-Term Issuer Rating for Bank of New York Mellon – Milan branch is AA (high) with a Stable trend and its Short-Term Issuer Rating is R-1 (high) with a Stable trend. In addition, Santander’s Long Term Critical Obligations Rating is AA (low) and its Short Term Critical Obligations Rating is R-1 (middle), both with Stable trends. DBRS Morningstar has concluded that both entities meet its criteria to act as account banks. The transaction documents contain downgrade provisions related to both the Italian Account Bank and the Spanish Account Bank consistent with DBRS Morningstar’s criteria given the rating assigned to the Class A Notes. If the DBRS Morningstar rating of any of these entities falls below “A”, the relevant account bank shall be replaced within 30 calendar days.

COVID-19

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 ratings are 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 increased the expected default rate for commercial borrowers in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus.

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 last updated on 22 July 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.

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 rating is “Rating European Consumer and Commercial Asset-Backed Securitisations” (13 January 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 is based on the worst-case replenishment criteria set forth in the transaction legal documents.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: https://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 data and information relevant for the rating includes data and information sourced by the originator and provided through the arranger, Banco Santander S.A.

DBRS Morningstar received quarterly static default and recovery data from Q1 2010 to Q4 2019 and quarterly dynamic delinquency, prepayment, and origination data from Q1 2010 to Q4 2019. DBRS Morningstar also received a set of stratification tables for the loan pool as of 6 July 2020 and its related contractual amortisation profile.

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

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 rating concern a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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

PORTFOLIO ASSUMPTIONS

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.

-- Probability of default (PD) used: Expected PD of 2.3%
-- Loss given default (LGD) used: Expected LGD of 68.7%

Scenario 1: A 25% increase in the expected PD.
Scenario 2: A 50% increase in the expected PD.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected PD and a 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected PD and a 25% increase in the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected PD and a 50% increase in the expected LGD.
Scenario 8: A 50% increase in the expected PD and a 50% increase in the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight hypothetic scenarios are
-- Class A Notes: AA (high) (sf), AA (sf), AA (high) (sf), AA (sf), AA (low) (sf), AA (high) (sf), AA (sf), A (high) (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 July 2020

DBRS Ratings GmbH
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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: https://www.dbrsmorningstar.com/about/methodologies.

--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.
--Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
--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.
--Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
--Rating European Structured Finance Transactions Methodology (21 July 2020)
https://www.dbrsmorningstar.com/research/364305/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: https://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.