DBRS Confirms Rating on Quarzo S.r.l. – Series 2013

DBRS Ratings Limited (DBRS) has today confirmed its rating on the Series 2013, Class A (the Class A Notes) of Quarzo S.r.l. (the Issuer) at A (high) (sf).

The confirmation of the rating on the Class A Notes is based on the following analytical considerations, as described more fully below:
-- Portfolio performance, in terms of defaults and level of delinquencies, as of the February 2015 payment date.
-- Actual gross default rate, recovery rate and expected losses are within DBRS’s expectations.
-- Current available credit enhancement for the Class A Notes to cover the expected losses at the A (high) (sf) rating level.

Quarzo S.r.l. – Series 2013 is a securitisation of a portfolio of consumer loans granted to retail clients. The portfolio was originated and is serviced by Compass S.p.A. (Compass), a wholly-owned subsidiary of Mediobanca S.p.A. The transaction envisages a 30-month revolving period scheduled to end in December 2015, during which Compass could replenish amortised assets with new receivables. There are eligibility criteria, concentration limits and purchase termination events to mitigate the potential portfolio performance deterioration. To date, all tests have been passed.

The pool is moderately seasoned (approximately two years) and mainly concentrated in the North (29.12%) and South (46.39%) of Italy. The weighted-average remaining maturity is just under four years. All debtors pay on a monthly basis.

The portfolio is performing in line with DBRS’s expectations. The gross cumulative default ratio (as a percentage of the initial portfolio) increased over the year reaching 3.74% in February 2015, but it is still below DBRS’s base case gross loss rate of 9.43%. Compass reports delinquencies as an aggregate figure and does not provide any breakdown by bucket of arrears. The delinquency ratio ranged between 0.39%-1.68% since rating and it is currently at 1.60%.

Credit enhancement to the Class A Notes is mainly provided by subordination of the Class B Notes. The credit enhancement for the Class A Notes (as a percentage of the performing balance of the portfolio) has been stable at 15.42% since issuance in June 2013, but the transaction is still in the replenishment period.
The deal is exposed to set-off risk as debtors may open accounts with Compass. As mitigants to the set-off risk, the transaction benefits from a Set-Off Reserve of EUR 35 million as well as an unconditional guarantee provided by Mediobanca S.p.A.

Deutsche Bank S.p.A. and Deutsche Bank AG, London branch are the Italian and English Account Bank, respectively. The DBRS private ratings of each Deutsche Bank S.p.A. and Deutsche Bank AG, London branch are at least equal to the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable 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. 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.

Due to the inclusion of a revolving period in the transaction, the collateral was initially modelled based on the worst-case replenishment criteria set forth in the transaction’s legal documents. These assumptions have not changed and consequently an updated cash flow analysis was not conducted.

The sources of information used for this rating include investor reports provided by Deutsche Bank S.p.A. and servicer reports provided by Compass. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 10 June 2014, when DBRS confirmed the rating on the Class A Notes at A (high) (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies are available on 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 base case probability of default (PD) and loss given default (LGD) for the pool based on a review of the transaction performance. 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 receivables are 9.43% and 86.55%, respectively.
-- The Risk Sensitivity overview below illustrates the ratings expected for the Class A Notes 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 for the Class A Notes would be expected to fall to BBB (high) (sf), all else being equal. If the PD increases by 50%, the rating for the Class A Notes would be expected to fall to BBB (high) (sf), all else being equal. If both the LGD and PD increase by 50%, the rating of the Class A Notes would be expected to fall to BB (sf), all else being equal.

Class A Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf).
-- 50% increase in LGD, expected rating of BBB (high) (sf).
-- 25% increase in PD, expected rating of A (low) (sf).
-- 50% increase in PD, expected rating of BBB (high) (sf).
-- 25% increase in LGD and 25% increase in PD, expected rating of BBB (sf).
-- 25% increase in LGD and 50% increase in PD, expected rating of BBB (low) (sf).
-- 50% increase in LGD and 25% increase in PD, expected rating of BBB (low) (sf).
-- 50% increase in LGD and 50% increase in PD, expected rating of BB (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Alessio Pignataro
Initial Rating Date: 5 June 2013
Initial Rating Committee Chair: Chuck Weilamann

Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Diana Turner

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960.

The rating methodologies and criteria used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies and are as follows:

-- Legal Criteria for European Structured Finance Transactions.
-- Master European Structured Finance Surveillance Methodology.
-- Operational Risk Assessment for European Structured Finance Servicers.
-- Unified Interest Rate Model for European Securitisations.
-- Rating European Consumer and Commercial Asset-Backed Securitisations.

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.