Press Release

DBRS Upgrades Ratings on Towers CQ S.r.l.

Consumer Loans & Credit Cards
June 29, 2018

DBRS Ratings Limited (DBRS) upgraded the following ratings on the bonds issued by Towers CQ S.r.l. (the Issuer):

-- Class A Asset Backed Floating Rate Notes (Class A Notes): upgraded to AA (low) (sf) from A (sf)
-- Class B Asset Backed Floating Rate Notes (Class B Notes): upgraded to A (sf) from A (low) (sf)

The ratings on the Class A Notes and Class B Notes (together, the Rated Notes) address the timely payment of interest and ultimate payment of principal on or before the Final Maturity Date in December 2033.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- The overall portfolio performance as of the June 2018 payment date, particularly with regard to delinquencies and net losses;
-- The updated probability of default (PD), loss given default (LGD) and expected loss assumptions on the outstanding portfolio; and
-- The current available credit enhancement (CE) to the Rated Notes to cover the expected losses assumed at their respective rating levels.

The Issuer is an Italian securitisation of salary assignment and payment delegation loans granted to both private and public employees, as well as pension assignment receivables. The securitised contracts were granted by Accedo S.p.A. (Accedo), a fully owned subsidiary of Intesa Sanpaolo S.p.A. (Intesa), and are serviced by Zenith Service S.p.A.

The transaction closed in June 2016 and its structure originally consisted of three tranches of notes, the Rated Notes and Class C Notes, with an aggregated balance of EUR 1,471.1 million. In March 2018, the Issuer redeemed the Class C Notes and issued new Class M Notes and Class J Notes instead.

As at 28 June 2018, the Class A Notes balance was EUR 452.7 million, the Class B Notes balance was EUR 87.1 million, the Class M Notes balance was 56.8 million and the Class J Notes balance was EUR 60.0 million.

PORTFOLIO PERFORMANCE
As at the June 2018 payment date, loans delinquent by one, two and three months represented 4.3%, 1.8% and 0.5% of the outstanding portfolio balance, respectively, while delinquencies greater than three months were 0.6%. Gross cumulative defaults were 2.8% of the original portfolio balance, with cumulative recoveries of 53.6%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its base case PD and LGD assumptions to 8.3% and 55.5%, respectively.

CREDIT ENHANCEMENT
CE is provided by the subordination of the junior obligations and the Cash Reserve Account. As at the June 2018 payment date, the Class A Notes’ CE was 32.2% and the Class B Notes’ CE was 18.6%, up from 16.3% and 10.5%, respectively, at closing.

A cash reserve account, currently funded with EUR 18.9 million, is available to cover senior expenses and missed interest payments on the Rated Notes. The required level of the cash reserve is set at 3.0% of the Rated Notes balance, subject to a EUR 10.1 million floor.

Additionally, a prepayment reserve will be funded if Intesa is downgraded below BBB. This account will be available to cover prepayment losses related to capitalised fees that may be retained upon prepayment, and its target amount will be equal to 1.5% of the portfolio balance.

Citibank N.A., Milan branch (Citibank Milan) is the Italian Account Bank for the transaction and Citibank N.A., London branch (Citibank London) is the English Account Bank. On the basis of the DBRS private ratings of both Citibank Milan and Citibank London and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to the account banks to be consistent with the rating assigned to the Rated Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The Issuer entered into an interest rate cap agreement with J.P. Morgan Securities plc (JP Morgan) and Citibank London to mitigate the interest rate mismatch between the Rated Notes, indexed to three-month Euribor, and the fixed interest rate payments on the securitised portfolio. On the basis of the DBRS private ratings of both JP Morgan and Citibank London and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to the cap counterparties to be consistent with the rating assigned to the Rated Notes, as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions”.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings 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.

DBRS reviewed the legal documents related to the issuance of the Class M and Class J Notes in March 2018. A review of the remaining transaction legal documents was not conducted as they 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 these ratings include investor reports provided by Citibank London and loan-by-loan data from the European DataWarehouse GmbH.

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

At the time of the initial rating, 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 these ratings 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 confirmed the Class A Notes rating at A (sf), upgraded the rating on Class B Notes to A (low) (sf) from BBB (sf) and resolved the Under Review with Developing Implications status following the finalisation of the new methodology for salary assignment loan-backed transactions.

Information regarding DBRS ratings, including definitions, policies and methodologies is available at 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 lifetime base case PD and LGD for the pool 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 are 8.3% and 55.5%, respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected for the Rated Notes if the PD and LGD increase by certain percentages over the base case assumptions. For example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at AA (low) (sf) and the rating on the Class B Notes would be expected to remain at A (sf), all else being equal. If the PD increases by 50%, the rating on the Class A Notes would be expected to decrease to A (high) (sf) and the rating on the Class B Notes would be expected to remain at A (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected decrease to A (sf) and the rating on the Class B Notes would be expected to decrease to A (low) (sf), all else being equal.

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 A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class B 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 (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 A (low) (sf)

For further information on DBRS historic 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: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 2 June 2016

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY, United Kingdom
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.

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

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.

Ratings

Towers CQ S.r.l.
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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