DBRS Assigns Ratings to Marzio Finance S.r.l. - Series 4-2018

DBRS Ratings Limited (DBRS) assigned the following new ratings to the notes issued by Marzio Finance S.r.l. (the Issuer) under Series 4-2018, in the context of the securitisation programme established in 2017 (the Programme):

-- EUR 305,900,000 Series 4-2018 Class A Asset-Backed Floating Rate Notes due 2043, rated AA (sf)
-- EUR 54,200,000 Series 4-2018 Class B Asset-Backed Fixed Rate Notes due 2043, rated A (high) (sf)

The rating on the Class A Notes addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date falling in August 2043. The rating on the Class B Notes addresses the ultimate payment of interest and principal on or before the final maturity date, in accordance with the transaction documentation. The Issuer, under its Series 4-2018, also issued EUR 27,140,000 Series 4-2018 Class J Asset-Backed Notes due 2043, which are not rated by DBRS.

In the context of the Programme, which was established in August 2017 and amended in November 2018, DBRS assigned a rating of A (high) (sf) to the Class A Series 1-2017 on 28 September 2017, which was upgraded to AA (low) (sf) on 28 September 2018. DBRS also assigned a rating of AA (low) (sf) to the Class A Series 2-2018 on 29 January 2018, and a rating of AA (low) (sf) to the Class A Series 3-2018 on 24 May 2018.

Further series may be issued under the Programme by the Issuer, but each series and the portfolio backing it are segregated from the others. As such, although DBRS may assign ratings to notes from the other series, the ratings may be different and different rating actions may be taken on different series. In fact, although all series rely upon the same template documents, each series is regulated by a specific set of documents and is backed by its own segregated estate of the Programme as typically permitted under Italian securitisation law; however, most of the counterparties and some of the series features are identical since they are based on the same Programme template documents.

During the execution of Series 4-2018 documents, some features of the Programme template were modified, including the cash trapping mechanism and the cash reserve that is made available to cover the defaults during the life of the transaction. DBRS understands that the amendments to the templates do not impact the series previously issued as they continue to be governed by the templates in use at the time of their respective issuance.

The notes issued from Series 4-2018 are backed by Italian consumer loan contracts related to salary and pension assignment loans as well as payment delegation loans granted by IBL – Istituto Bancario del Lavoro S.p.A. (IBL) to Italian employees and pensioners. The proceeds of subscription from the Series 4-2018 notes financed the purchase of the portfolio backing the Series 4-2018 notes. The Series 4-2018 receivables are segregated from the Series 1-2017, the Series 2-2018, the Series 3-2018 and the other series’ receivables that may be assigned to back the issuance of further series. The Series 4-2018 receivables and the other receivables that may be assigned in the context of the Programme are serviced by IBL Servicing S.p.A., a company fully owned by IBL, with IBL appointed as sub-servicer. Zenith is the backup servicer for this transaction.

As of 30 September 2018, the Series 4-2018 portfolio consisted of 19,397 loan contracts with a total balance of approximately EUR 377 million. The portfolio is composed of salary assignment (45.5% of the outstanding balance), pension assignment (36.8%) and payment delegation (17.7%) loans. It is mainly distributed in the southern central provinces of Italy, with the highest concentrations in the regions of Lazio (18.9% of the outstanding balance), Sicily (12.9%) and Lombardy (12.9%).

In the context of the Series 4-2018, Credit Agricole Corporate and Investment Bank was appointed as Swap Counterparty. The swap arrangement is consistent with the DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The ratings are 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’s structure to withstand stressed cash flow assumptions in order to pay interest on a timely basis and ultimately repay the principal of the Class A Notes and the principal and interest of the Class B Notes on or before the legal maturity date, in accordance with the transaction documentation;
-- IBL’s financial situation and its capabilities with respect to originations, underwriting and servicing;
-- The role of Zenith Service S.p.A. as the appointed backup servicer and its capabilities in that respect;
-- 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 legal structure and legal opinions that address the assignment of the assets to the Issuer and the other features, that, more generally, are consistent with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The transaction structure was analysed in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings 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 data and information used for the ratings include static gross loss analysis by quarterly vintage from 2008; static recovery analysis by quarterly vintage from 2008; and dynamic prepayment analysis by quarterly vintage from 2008. All information used for this rating was sourced from IBL directly or indirectly through the transaction co-arranger, UniCredit Bank AG, London branch.

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

At the time of the rating, and with respect to the portfolio 4-2018, 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 changing the transaction parameters on the rating, DBRS considered a 25% and 50% increase to the default rate and loss-given-default, as compared to the parameters used to determine the rating (the base case parameters). The base case values are:

Probability of Default Rates (PD): 48.3% for an AA (sf) scenario and 22.1% for an A (high) (sf) scenario.
Recovery Rates Used: 43.1% for an AA (sf) scenario and 40.1% for an A (high) (sf) scenario.
Loss Given Defaults (LGD): 56.9% for an AA (sf) scenario and 59.9% for an A (high) (sf) scenario.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase of the base case PD or LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (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 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (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 (high) (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 (high) (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 (high) (sf).

DBRS concludes that for the Class B Notes:
-- A hypothetical increase of the base case PD or LGD by 25%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase of the base case PD or 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 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 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: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 21 November 2018

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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.