DBRS Upgrades Rating on Class A Notes Issued By Quarzo CQS S.r.l.

DBRS Ratings Limited (DBRS) upgraded its rating on the Class A Notes issued by Quarzo CQS S.r.l. (the issuer) to AA (low) (sf) from A (high) (sf).

The rating action follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and cumulative net losses, as of the May 2018 payment date;
-- The probability of default (PD), loss given default (LGD) and expected loss assumptions on the collateral pool;
-- The current levels of credit enhancement (CE) available to the Class A Notes to cover expected losses assumed in line with the AA (low) (sf) rating level.

The rating on the Class A Notes addresses the timely payment of interest and ultimate repayment of principal by the legal maturity in November 2033.

Quarzo CQS S.r.l. is a securitisation of Italian consumer loan receivables originated and serviced by Futuro SpA (Futuro) – a specialised lending department of Compass Banca SpA. The portfolio includes consumer loans secured by salary or pension assignment and payment delegation. The transaction closed on 1 April 2015 and has been amortising since.

PORTFOLIO PERFORMANCE
As of the May 2018 payment date, loans more than 90-days delinquent represented 4.1% of the outstanding principal balance. As a ratio of the original portfolio, gross cumulative defaults were 3.8%, of which 69.6% have been recovered so far.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its base case PD and LGD assumptions on the outstanding portfolio to 8.2% and 38.6%, respectively, from 7.3% and 59.1% at the last review.

CREDIT ENHANCEMENT
CE is provided to the Class A Notes by the subordination of the Class A Notes and the cash reserve; this increased to 33.1% in May 2018, from 11.7% at closing.

BNP Paribas Securities Services S.C.A., Milan Branch (BNP Paribas SS-Milan) is the account bank for the transaction. DBRS’s private rating of BNP Paribas SS-Milan is consistent with the minimum institution rating given the ratings assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Crédit Agricole Corporate & Investment Bank S.A. (CACIB) is the swap counterparty for this transaction. DBRS’s private rating of CACIB is consistent with the Second Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating 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 legal documents was not conducted as the legal 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.

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 information provided by Futuro and loan-level data from the European DataWarehouse GmbH.

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

At the time of the initial rating, DBRS was not 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.

The last rating action on this transaction took place on 29 June 2017, when DBRS upgraded its rating on the Class A Notes to A (high) (sf) from A (sf) and resolved its Under Review with Developing implications status following the finalisation of the new methodology for salary assignment loans-backed transactions.

The lead analyst responsibilities for this transaction have been transferred to Matt Albin.

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 this rating, DBRS considered the following stress scenarios, as compared to 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 8.2% and 38.6%, respectively.

For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (low) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (low) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (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: Matt Albin, Senior Finance Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 9 March 2015

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.

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