DBRS Assigns Provisional Rating of AA (low) (sf) to the Class A Notes of Quarzo CQS 2018

DBRS Ratings Limited (DBRS) assigned a provisional rating of AA (low) (sf) to the EUR 598 million Class A Notes to be issued by Quarzo CQS S.r.l. (the Issuer).

The notes are backed by a static pool of approximately EUR 650 million of loan receivables related to salary, pension assignment loans and payment delegation loans originated by Futuro S.p.a. (Futuro), a subsidiary of Mediobanca - Banca di Credito Finanziario S.p.A. (Mediobanca).

The transaction structure includes two reserves: a non-amortising cash reserve and an amortising liquidity reserve. Both are available to cover senior fees and interest payments on the Class A Notes; however, the cash reserve is available to further cover gross losses to such extent that it can be applied toward the repayment of principal under the Class A Notes. These are expected to be funded at closing to EUR 9.7 million and EUR 2.4 million, respectively.

The rating of the Class A Notes addresses the timely payment of interest and ultimate repayment of principal before the legal final maturity date.

The rating will be finalised upon receipt of execution version of the governing transaction documents. To the extent that the documents and information provided to DBRS as of this date differ from the executed version of the governing transaction documents, DBRS may assign a different final rating to the Class A Notes.

The rating is based on DBRS’s review of the following analytical considerations:

-- The available credit enhancement in the form of subordination, reserves and excess spread;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- Futuro’s financial strength and its capabilities with respect to originations, underwriting and servicing;
-- The presence of Compass Banca S.p.a. as the appointed back-up servicer and of Finanziaria internazionale as back-up servicer facilitator and their respective capabilities;
-- The credit quality of the collateral as deduced from the available information and the ability of the servicer to perform collection activities on the collateral;
-- The sovereign rating of the Republic of Italy, which is currently rated by DBRS at BBB (high); and
--The transaction’s consistency of the legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that are expected to address the true sale of the assets to the Issuer and non-consolidation of the Issuer with the Seller.

The transaction’s cash flow structure was analysed in Intex DealMaker.

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”.

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.

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 Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include historical static and dynamic performance data and a loan by loan pool-cut of the final portfolio as at 24 February 2018, sourced by Futuro through the transaction arranger, Mediobanca.

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

DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS 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 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 the changing the transaction parameters on this rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating:

-- 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 the credit rating.

-- The base case PD and LGD of the current pool of assets of receivables are 40.6% and 57%, respectively considering the AA (low) (sf) rating level.

Class A Notes risk sensitivity:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).

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 and US regulations only.

Lead Analyst: Paolo Conti, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 March 2018

DBRS Ratings Limited
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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 Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.