DBRS Morningstar Assigns Ratings to ARTS Consumer S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to the following classes of notes (collectively, the Rated Notes) issued by ARTS Consumer S.r.l. (the Issuer):

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

DBRS Morningstar did not rate the Class E, Class F, and Class Z Notes also issued in the transaction.

The ratings of the Class A and Class B Notes address the timely payment of scheduled interest and the ultimate repayment of principal on or before the legal final maturity date. The ratings of the Class C and Class D Notes address the ultimate payment of interest but the timely payment of scheduled interest when they become the most senior tranche, and the ultimate repayment of principal on or before the legal final maturity date.

The transaction is a securitisation of two types of fixed-rate, general purpose consumer loans (CreditExpress Dynamic and other) granted by UniCredit S.p.A. (UniCredit or the originator) to private individuals residing in Italy.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure, including the 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.
-- The originator’s financial strength and capabilities with respect to originations, underwriting, and servicing.
-- DBRS Morningstar’s operational risk review of the originator, 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 on the Republic of Italy, currently at BBB (high) with a Stable 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 includes a 12-month revolving period. During the revolving period, the originator may offer additional receivables that the Issuer will purchase, provided that the eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, the originator’s insolvency, or the servicer’s replacement.

The transaction allocates collections in separate interest and principal priorities of payments and benefits from an initial cash reserve of EUR 12,200,000 at closing funded with the proceeds of the Class Z Notes (equal to the target amount of 1.6% of the Rated Notes amount). The cash reserve will amortise during the amortisation period, subject to a floor of EUR 500,000, and can be used to cover senior expenses, swap costs, and interest payments due on the Class A Notes, and if not deferred, the Class B, Class C, and Class D Notes if the interest and principal collections are not sufficient to cover the shortfall.

At the end of the revolving period, the Rated Notes together with the Class E Notes, will be redeemed pro rata based on the tranche percentages at closing until a sequential amortisation event occurs, after which the non-reversible, fully sequential redemption of the notes will commence.

COUNTERPARTIES
BNP Paribas Italian Branch (BNP Paribas) is the Issuer’s account bank. Based on DBRS Morningstar’s Long-Term Issuer Rating of AA (low) on BNP Paribas , the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Rated Notes.

UniCredit also acted as the swap counterparty for the transaction, which meets the criteria to act in such capacity, based on DBRS Morningstar’s private rating. The transaction documents contain downgrade provisions consistent with DBRS Morningstar’s criteria with respect to a swap provider.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
As the historical data provided is relatively long, DBRS Morningstar considers the performance data to be meaningful for detailed vintage analysis. DBRS Morningstar elected to use a lifetime portfolio expected gross default of 5%, reflecting the long and improving historical data, the composition of loan types, and the potential portfolio migration during the revolving period. DBRS Morningstar also set the portfolio expected recovery at 15%, reflecting the less granular historical data and benchmarking of similar consumer loan portfolios in Italy.

ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (17 May 2022).

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating European Consumer and Commercial Asset-Backed Securitisations” (19 October 2022).

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.

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 the 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/401817/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 performance data relating to the receivables that provided by the originator or by the arranger, UniCredit Bank AG.

DBRS Morningstar received quarterly static default data from Q1 2009 to Q2 2022, monthly dynamic arrears and prepayment data from January 2009 to June 2022, and recoveries by annual vintages from 2015 to 2021. DBRS Morningstar also received a set of stratification tables for the loan pool as of 31 October 2022 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 these ratings 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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings:

-- Probability of default (PD) used: expected PD of 5%, a 25% and 50% increase on the expected PD.
-- Loss given default (LGD) used: expected LGD of 85%, a 25% increase on the expected LGD.

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 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected PD and 25% increase in the expected LGD.

DBRS Morningstar concludes that the expected ratings under the five stress scenarios are:
-- Class A Notes: A (high) (sf), A (sf), AA (low) (sf), A (sf), A (low) (sf)
-- Class B Notes: A (sf), A (low) (sf), A (high) (sf), A (low) (sf), BBB (high) (sf)
-- Class C Notes: BBB (sf), BBB (low) (sf), BBB (high) (sf), BBB (low) (sf), BB (sf)
-- Class D Notes: BB (high) (sf), BB (sf), BBB (sf), BB (sf), B (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. 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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Kevin Chiang, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 24 November 2022

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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 (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022, https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.