DBRS Assigns Ratings to Quinto Sistema Sec. 2016 S.r.l.

DBRS Ratings Limited (DBRS) has today assigned the following ratings to the Class A and B Notes, issued by Quinto Sistema Sec. 2016 S.r.l.:

-- Class A Notes at A (sf) Under Review with Negative Implications;
-- Class B Notes at BBB (sf).

DBRS does not rate the Class C Notes issued by Quinto Sistema Sec. 2016 S.r.l.. The rating assigned to the Class A Notes was placed Under Review with Negative Implications (UR-Neg) amid the sensitivity to the credit risk of the Republic of Italy whose sovereign rating is currently UR-Neg (http://www.dbrs.com/research/297987/dbrs-places-italy-a-low-under-review-with-negative-implications-on-heightened-risks.html). In DBRS’s view, the UR-Neg status of the Class A Notes’ rating can be resolved once the UR-Neg status of the sovereign rating of the Republic of Italy has been resolved.

The Class A Notes are backed by a pool of receivables related to Italian salary- and pension-backed loans and payment delegation loans granted to private individuals resident in Italy by Sigla S.r.l, Pitagora S.p.A., Terfinance S.p.A., Spefin Finanziaria S.p.A. and Conafi Prestitò S.p.A. (the Originators) and that were subsequently purchased by Banca Sistema S.p.A (the Seller). The majority of loans was disbursed to state pensioners or employees of public entities, local authorities, governmental or quasi-governmental organisations, hence the aforementioned sensitivity to the sovereign credit risk.

As at 1 September 2016, the underlying portfolio was approximately EUR 164 million. However, during the ramp-up period, ending in February 2017, the Issuer may purchase additional receivables that the Seller may offer, to replace the amortised portfolio or to increase the portfolio balance up to EUR 300 million, subject to provisions of the transaction documents. The purchase of the accretive collateral portfolio will be funded through the issuance of further instalments on the issued Notes.

The ratings are predominantly based on the following analytical considerations:

-- Transaction capital structure, form and sufficiency of available credit enhancement.
-- Relevant credit enhancement in the form of subordination and a fully funded Cash Reserve.
-- Credit enhancement levels are sufficient to support the expected cumulative net loss assumption projected under various stress scenarios at A (sf) for the Class A notes and BBB (sf) for the Class B notes issued by Quinto Sistema Sec. 2016 S.r.l.
-- The sensitivity to the credit risk of the Republic of Italy. Reflecting this sensitivity and considering the UR-Neg status of the Republic of Italy’s sovereign rating, the rating assigned to the Class A Notes were placed on UR-Neg status.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the issuance terms.
-- The Originators’ capabilities with respect to origination, underwriting, servicing and financial strength.
-- The credit quality of the collateral and ability of the Servicers and Master Servicer to perform collection activities on the collateral. DBRS conduced an operational risk review of Banca Sistema and the Originators, and deems them to be acceptable Master Servicer and Servicers, respectively.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Consumer and Commercial Asset-Backed Securitisations”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

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

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

The sources of information used for this rating include performance and portfolio data relating to the receivables sourced by the Originators through the transaction arranger, Banca IMI S.p.A. DBRS received historical performance default and recovery data relating to Sigla S.r.l., Pitagora S.p.A. and Terfinance S.p.A.’s originations by quarterly vintage on a cumulative basis going back to 2007 and up to Q2 2016. In addition, DBRS received portfolio stratification tables and loan-level data related to a final portfolio selected by Banca Sistema as at September 2016.

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

DBRS has not yet been 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 this rating to be 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 rating concerns a newly issued financial instrument.This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 to the parameters used to determine the rating (the “Base Case”):

-- Probability of Default Rates Used: Base Case PD of 12.05% (including sovereign stress), a 25% and 50% increase on the base case PD.
-- Recovery Rates Used: Base case Recovery Rate of 66.20% (including sovereign stress).
-- Loss Given Default (LGD): Base Case LGD of 33.8%: a 25% and 50% increase of the Base Case LGD.

DBRS concludes that a hypothetical increase of the base case PD by 25% or a hypothetical decrease of the Recovery Rate by 25%, ceteris paribus, would not each lead a change of the rating on Class A notes. A scenario combining both an increase in the PD by 25% and a decrease in the Recovery Rate by 25% would lead to a downgrade of the Class A notes to A (low) (sf).

DBRS concludes that for the Class A notes,

-- A hypothetical increase of the Base Case PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would not lead to a change of the rating of the Class A notes.
-- A hypothetical increase of the Base Case PD by 50% or a hypothetical increase of the LGD by 50%, ceteris paribus, would not lead to a change of the rating of the Class A notes.
-- A hypothetical increase of the Base Case PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the rating of the Class A notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (high) (sf).
-- A hypothetical increase of the Base Case PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (high) (sf).
-- A hypothetical increase of the Base Case PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (low) (sf).

DBRS concludes that for the Class B notes,

-- A hypothetical increase of the Base Case PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would not lead to a change of the rating of the Class B notes.
-- A hypothetical increase of the Base Case PD by 50% or a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the rating of the Class B notes to BBB (low) (sf).
-- A hypothetical increase of the Base Case PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the rating of the Class B notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to BB (low) (sf).
-- A hypothetical increase of the Base Case PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to BB (low) (sf).
-- A hypothetical increase of the Base Case PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to B (low) (sf).

This rating is Under Review with the Negative Implications designation. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

For further information on DBRS 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.

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

Initial Lead Analyst: Antonio Di Marco, Senior Financial Analyst
Initial Rating Date: 19 October 2016
Initial Rating Committee Chair: Chuck Weilamann, Managing Director
Lead Surveillance Analyst: Antonio Di Marco, Senior Financial Analyst

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

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

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