Press Release

DBRS Morningstar Finalises Provisional Ratings on Brignole CQ 2022 S.r.l.

Consumer Loans & Credit Cards

March 24, 2022

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Brignole CQ 2022 S.r.l. (the Issuer):

-- Class A Notes at AA (low) (sf)
-- Class B Notes at A (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BB (low) (sf)
-- Class X Notes at B (low) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal maturity date. The ratings on the Class B and Class C Notes address the ultimate payment of interest and the ultimate repayment of principal by the legal maturity date while junior to other outstanding classes of notes, but the timely payment of interest when they are the senior-most tranche, in accordance with the Issuer’s default definition (liquidation) provided in the transaction documents. The ratings on the Class D and Class X Notes address the ultimate payment of interest and the ultimate repayment of principal by the legal maturity date. DBRS Morningstar does not rate the Class R Notes also issued in this transaction.

The transaction represents the issuance of Class A, Class B, Class C, Class D, and Class X Notes (collectively, the Rated Notes), as well as the Class R Notes (together with the Rated Notes, the Notes) backed by a pool of approximately EUR 164.48 million of fixed-rate receivables related to Italian salary- and pension-assignment loans as well as payment delegation loans granted by Creditis Servizi Finanziari S.p.A. (Creditis; the Originator and Servicer) to individuals residing in Italy. The transaction envisages a six-month revolving period lasting from closing to the payment date in September 2022 (included), during which time the Issuer will purchase new receivables that the Originator may offer provided that certain conditions set out in the transaction documents are satisfied.

The Class X Notes are not collateralised by receivables and entirely rely on excess spread to pay interest and repay principal. Their amortisation with interest funds is expected to be completed in 18 instalments, starting during the revolving period.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels that are 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 under which they have invested.
-- Creditis’ capabilities with respect to originations, underwriting, servicing, and financial strength.
-- The appointment of a backup servicer facilitator upon closing.
-- 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 seller’s portfolio.
-- The sovereign rating on the Republic of Italy, currently rated BBB (high) with a Stable trend by DBRS Morningstar.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s "Legal Criteria for European Structured Finance Transactions" methodology, the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION’S STRUCTURE
The transaction envisages that principal on the Class A to Class D Notes will be repaid on a fully sequential basis during the amortisation period. The Class X Notes’ principal can only be repaid with interest funds, junior to interest payments on the Class A to Class D Notes and the respective principal deficiency ledgers.

The transaction benefits from a cash reserve of EUR 1.63 million funded with part of the proceeds of subscription to the Class X Notes that the Issuer can use to cover shortfalls in senior expenses and interest on the Class A to Class C Notes.

The Rated Notes pay interest indexed to one-month Euribor plus a margin and the interest rate risk arising from the mismatch between the floating-rate notes and the fixed-rate collateral is hedged through an interest rate cap with an eligible counterparty up to the clean-up option date.

COUNTERPARTIES
BNP Paribas Securities Services SCA/Milan (BNPSS Milan) is the account bank for the transaction. DBRS Morningstar has a private rating on BNPSS Milan, which meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade provisions consistent with DBRS Morningstar’s criteria with respect to BNPSS Milan’s role as account bank.

The transaction is exposed to interest rate risk due to the mismatch between the fixed-rate assets and the floating-rate liabilities. The risk is mitigated by an interest rate cap with an eligible counterparty set on a fixed amortisation schedule of the loans up to the clean-up option date, derived assuming a 8.0% constant prepayment rate. Natixis S.A. (Natixis) is the cap counterparty for the transaction. DBRS Morningstar does not publicly rate Natixis, but maintains a private rating on the entity and concluded that, despite the interest rate cap documentation not being fully in line with its published Derivative Criteria for European Structured Finance Transactions methodology, this does not affect its analysis of the cap or the ratings assigned to the Rated Notes.

DBRS Morningstar analysed the transaction’s structure in Intex DealMaker.

CORONAVIRUS DISEASE (COVID-19) CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many ABS transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect 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.

ESG CONSIDERATIONS
The high exposure to public-sector employees, pensioners, and civil servants makes the transaction dependent on the creditworthiness of the Italian sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Italy – namely Human Capital and Human Rights (S) and Institutional Strength, Governance & Transparency (G) – to be significant rating factors. According to the International Monetary Fund World Economic Outlook, Italy’s GDP per capita of USD 31,604 in 2020 was low compared with its euro area peers. At the same time, Italy ranked in the 60.6 and 67.3 percentiles for Rule of Law and Government effectiveness, respectively, in 2020 according to the World Bank indicators. DBRS Morningstar took these factors into account in the “Economic Structure and Performance”, “Fiscal Management and Policy”, and “Political Environment” building blocks of its “Global Methodology for Rating Sovereign Governments”.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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” (29 October 2021).

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.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include the Originator directly or through the arranger, Citigroup Global Markets Limited.

DBRS Morningstar received the following data and information, split by product type (pension and salary assignments) and salary assignments furtherly split by public employees, parapublic employees, private employees, and payment delegations:
-- Static quarterly default data from Q1 2010 to Q3 2021.
-- Static quarterly recovery data from Q3 2010 to Q3 2021.
-- Static quarterly prepayment data from Q1 2010 to Q3 2021.
-- Dynamic monthly prepayment data from March 2010 to September 2021.
-- Dynamic monthly delinquency data from March 2010 to September 2021.

DBRS Morningstar was also provided with detailed loan-by-loan characteristics and stratification tables of the outstanding portfolio as at 18 February 2022 as well as the related amortisation schedule.

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

This is the first rating action since the Initial Rating Date.

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

Sensitivity Analysis: 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):
-- Probability of default (PD) used: Expected PD of 40.4%, 16.1%, 13.0%, 9.6% and 8.4% for the AA (low) (sf), A (sf), A (low) (sf), BB (low) (sf) and B (low) (sf) scenario, respectively, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 42.6%, 58.3%, 68.1%, 92.6% and 96.5% for the AA (low) (sf), A (sf), A (low) (sf), BB (low) (sf) and B (low) (sf) scenario, respectively.
-- Loss given default (LGD) used: Expected LGD of 57.4%, 41.7%, 31.9%, 7.4% and 3.5% for the AA (low) (sf), A (sf), A (low) (sf), BB (low) (sf) and B (low) (sf) scenario, respectively, a 25% and 50% increase on the applicable LGD.

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

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Class A Notes: A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (sf), A (high) (sf), A (sf), A (sf).
-- Class B Notes: A (sf), A (sf), A (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf).
-- Class C Notes: A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), BBB (sf).
-- Class D Notes: BB (low) (sf), BB (low) (sf), BB (low) (sf), BB (low) (sf), BB (low) (sf), BB (low) (sf), BB (low) (sf), BB (low) (sf).
-- Class X Notes: Below B (low) (sf), below B (low) (sf), below B (low) (sf), below B (low) (sf), below B (low) (sf), below B (low) (sf), below B (low) (sf), below B (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Ilaria Maschietto, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 11 March 2022

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

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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