DBRS Finalises Provisional Ratings of Quarzo S.r.l. - Series 2018

DBRS Ratings Limited (DBRS) finalised its provisional ratings of the following notes issued by Quarzo S.r.l. – Series 2018 (the Issuer):

-- EUR 600,000,000 Series A1 Asset Backed Floating Rate Notes due April 2035: AA (sf)
-- EUR 147,000,000 Series A2 Asset Backed Floating Rate Notes due April 2035: AA (sf)

The ratings of the Class A1 and the Class A2 Notes address the timely payment of interest and ultimate repayment of principal on or before the Final Maturity Date falling in April 2035. The Class A1 and the Class A2 Notes rank pari passu and pro rata with respect to interest and principal repayment. The Issuer will also issue the EUR 153,000,000 Series B Asset Backed Fixed Rate Notes due April 2035, which are not rated by DBRS.

The notes are backed by approximately EUR 900 million of receivables related to unsecured consumer loan contracts initially granted by Compass Banca S.p.A. (Compass) to individual residents in Italy. DBRS reviewed the initial portfolio selected by Compass as at 3 October 2018 and that was assigned to the Issuer on or about the issue date. The initial portfolio comprises 17% loans originated to purchase new vehicles, 9% originated to purchase used vehicles, 14% originated for various purposes and 60% are personal loans.

The transaction envisages a six-month revolving period, starting in January 2019, during which the Compass may sell new receivables to the Issuer subject to certain conditions, limitations and performance triggers.

The ratings are based on the following analytical considerations:
-- The transaction’s capital structure and the form and sufficiency of available credit enhancement.
-- The credit enhancement in the form of subordination and liquidity reserve, which will be fully funded at issuance.
-- The ability of the transaction’s structure to withstand stressed cash flow assumptions in order to timely pay interest and ultimately repay principal under the Class A1 and Class A2 Notes on or before the legal maturity date according to the terms of the transaction documents.
-- Compass’s experience as an originator and underwriter.
-- Compass’s financial strength and its capacity as servicer with respect to the assigned receivables.
-- 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) with a Stable trend; and
-- The consistency of the transaction’s with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the assignment of the assets to the Issuer.

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.

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

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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include performance data relating to receivables, sourced by Compass directly or through its agent Mediobanca - Banca di Credito Finanziario S.p.A. as arranger. DBRS received historical static gross loss data relating to Compass’s originations by quarterly vintages dating back to 2009. Data was also provided relating to static recoveries from 2009, delinquencies and prepayments in addition to a loan-by-loan data set for the initial portfolio selected by Compass, which allowed DBRS to further assess the collateral. Data was further supplemented with performance analysis of the portfolio originated by Compass since 2002.

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 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.

These ratings concern a newly issued financial instrument. These are the first DBRS ratings 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 the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

-- Probability of Default (PD): Base Case of 8.0%, a 25% and 50% increase on the base case PD.
-- Loss Given Default (LGD): Base Case of 78.3%, a 25% and 50% increase in the base case LGD.

DBRS concludes that for the Class A1 Notes:
-- A hypothetical increase of the base case PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% would lead to a downgrade of the Class A1 Notes to A (low) (sf).
-- A hypothetical increase of the base case LGD by 50% would lead to a downgrade of the Class A1 Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BBB (sf).

DBRS concludes that for the Class A2 Notes:
-- A hypothetical increase of the base case PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% would lead to a downgrade of the Class A2 Notes to A (low) (sf).
-- A hypothetical increase of the base case LGD by 50% would lead to a downgrade of the Class A2 Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to 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: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Erin Stafford, Managing Director
Initial Rating Date: 22 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.