DBRS Confirms Rating on Quarzo CQS S.r.l.

DBRS Ratings Limited (DBRS) has today confirmed its A (sf) rating on the EUR 574,926,796.80 Class A notes issued by Quarzo CQS S.r.l. (the Issuer).

The rating action reflects an annual review of the transaction, based upon the following analytical considerations:
-- Portfolio Performance, in terms of delinquencies and defaults, as of the February 2016 payment date, in line with DBRS’s initial expectations.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested.
-- The current available credit enhancement to the notes to cover expected losses assumed in line with the A (sf) rating level for the Class A notes.

The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the Final Legal Maturity Date in November 2030.

The Issuer is an Italian securitisation collateralised by a static pool of salary assignment loans and payment delegation receivables, granted by Futuro SpA (Futuro) to both private and public employees, as well as pension assignment receivables. The transaction follows the standard structure under the Italian securitisation law and closed on 1 April 2015.

Most loans are disbursed to private individuals working for governmental or quasi-governmental organisations and pensioners (75.09%, as of February payment date); as a result, the performance of the notes is assumed to be highly correlated with the sovereign rating.

The portfolio is performing in line with DBRS’s expectations. As of the February 2016 payment date, total delinquencies were 3.48% of the portfolio principal balance. The cumulative gross default ratio was 0.92% of the original balance, with cumulative recoveries of 50.81%.

Credit enhancement for the Class A notes is provided by the subordination of the Class B notes and the Cash Reserve. Current credit enhancement of the Class A notes is equal to 14.19%.

The transaction structure includes a Cash Reserve and a Liquidity Reserve, both funded at closing with the proceeds of a Subordinated Loan granted by Futuro.
-- The Cash Reserve is available to cover senior expenses and missed payments on the Class A notes (interest and principal), and its target balance is defined as 1.70% of the outstanding balance of the portfolio (including defaults), with a floor at EUR 5.00 million. After the full redemption of the Class A notes, the Target Cash Reserve Amount will be zero.
-- The Liquidity Reserve is available to cover senior expenses and missed interest payments on the Class A notes, and its target balance is EUR 16.40 million.

The balance of the reserve accounts have been at their target level since the closing date.

A swap structure is in place to hedge the interest rate mismatch between the Class A notes, indexed to 3-month Euribor, and the fixed interest rate payments from the collateral portfolio. Crédit Agricole Corporate & Investment Bank SA is the Counterparty of the Swap Agreement; the DBRS private rating of Crédit Agricole Corporate & Investment Bank SA complies with the Second Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

BNP Paribas Securities Services SCA/Milan is the Account Bank for this transaction. The DBRS private rating of BNP Paribas Securities Services SCA/Milan complies with the Minimum Institution Rating given the rating assigned to the 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 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.

A review of the transaction’s legal documents was not conducted, as the 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. This may be found at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

The sources of information used for this rating include information provided by Futuro (the Servicer) and loan level data from the European DataWarehouse GmbH.

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 considers the information available to it for the purposes of providing these ratings was of satisfactory quality.

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.

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

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of changing transaction parameters on the rating, at closing DBRS considered the following stress scenarios 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 portfolio 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 receivables are 9.84% and 54.20%, respectively (excluding sovereign stress).

-- The Risk Sensitivity below illustrates the ratings expected for each series of Class A notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating of Class A notes would be maintained at A (sf), all else being equal. If the PD increases by 50%, the rating of Class A notes would be maintained at A (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of Class A notes would be expected to fall to BBB (sf), all else being equal.

Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of A (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 BBB (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) 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: Paolo Conti
Initial Rating Date: 9 March 2015
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Joana Seara da Costa
Rating Committee Chair: Chuck Weilamann

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

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- 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.