DBRS Confirms Rating on Class A Notes Issued By Quarzo S.r.l. 2015

DBRS Ratings Limited (DBRS) confirmed its A (high) (sf) rating on the Series 2015, Class A Notes (the Class A Notes) issued by Quarzo S.r.l. 2015.

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;
-- No purchase termination events have occurred;
-- The current levels of credit enhancement (CE) available to the Class A Notes to cover expected losses assumed in line with the A (high) (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 February 2032.

Quarzo S.r.l. 2015 is a securitisation consisting of unsecured Italian consumer loan receivables granted to retail clients and originated by Compass Banca S.p.A. (Compass). The EUR 2,199.9 million portfolio, as of the May 2018 payment date, consisted of personal loans (98.3% by outstanding loan balance), auto loans (1.4%) and purpose loans (0.3%).

PORTFOLIO PERFORMANCE
As of the May 2018 payment date, loans more than 90-days delinquent represented 0.8% of the outstanding principal balance. As a ratio of the aggregated original portfolios, gross cumulative defaults were 2.2%, of which 8.3% have been recovered so far.

REVOLVING PERIOD
The transaction structure allows for additional portfolios to be purchased during a revolving period of 3.5 years, which is due to mature in January 2019. There are concentration limits and purchase termination events in place to mitigate potential portfolio performance deterioration during the revolving period, allowing for amortisation to begin earlier than scheduled. To date, all tests have been passed.

CREDIT ENHANCEMENT
CE is provided to the Class A Notes solely by the subordination of the unrated Class B Notes; this has remained at 23.0% since closing.

The transaction benefits from a non-amortising liquidity reserve funded at closing through part of the proceeds from the issuance of the Class B Notes, which are available to cover senior expenses and missed interest payments on the Class A Notes. This account has been at its target of EUR 11.0 million since closing.

The structure also includes an additional cash reserve to mitigate the potential liquidity risk arising from flexible and LibeRata loans. These loans can represent up to 20.0% of the outstanding balance of the portfolio and are currently at the level of 1.2%. Under these agreements, borrowers have the option to skip one monthly instalment per year (up to a maximum of five times during the life of the loan) or to modify the amount of the monthly instalments. This reserve is only funded if, for three consecutive calculation dates, the outstanding balance of the flexible and LibeRata loans, which the debtors have exercised the contractual right to postpone, is higher than 5.0% of the portfolio balance. As of the May 2018 payment date, this condition had not been breached.

Mediobanca S.p.A. is the account bank for the transaction. DBRS’s private rating of Mediobanca S.p.A. is consistent with the minimum institution rating given the rating assigned to the Class A 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 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 investor reports provided by Deutsche Bank S.p.A., servicer reports provided by Compass 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 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 12 July 2017, when DBRS confirmed its rating on the Class A Notes at A (high) (sf).

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, excluding sovereign stress, are 10.0% and 86.8%, respectively.

For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to decrease to A (low) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A Notes would be expected to decrease to BBB (high) (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 BBB (sf), ceteris paribus.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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 Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 22 July 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 Originators
-- 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.

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