DBRS Takes Rating Actions on Quarzo S.r.l. 2016 and Quarzo S.r.l. 2017

DBRS Ratings Limited (DBRS) took the following rating actions on bonds issued by two Quarzo transactions:
Quarzo S.r.l. 2016 (Quarzo 2016)
-- Series A Notes upgraded to AA (low) (sf) from A (high) (sf)

Quarzo S.r.l. - Series 2017 (Quarzo 2017)
-- Series A Notes confirmed at A (high) (sf)

The ratings of the Quarzo 2016 and Quarzo 2017, Series A Notes address the timely payment of interest and ultimate repayment of principal by the Final Maturity Dates in November 2032 and November 2033, respectively.

These rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- The portfolios’ overall performance as of the November 2018 payment date, particularly regarding low levels of cumulative net loss and delinquencies;
-- Updated Probability of default (PD), loss given default (LGD) and expected loss assumptions.
-- No Purchase Termination Events have occurred;
-- The current levels of credit enhancement (CE) available to the Series A Notes to cover expected losses.

Quarzo 2016 and Quarzo 2017 are securitisations of unsecured Italian consumer loan receivables originated by Compass Banca S.p.A. (Compass), a subsidiary of Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca). The portfolios contain mostly personal loans but also include other purpose loans and loans for the purchase of new and used vehicles. Quarzo 2016 closed in February 2016 while Quarzo 2017 closed in February 2017. Both transactions include a 42-month revolving period.

PORTFOLIO PERFORMANCE & PORTFOLIO ASSUMPTIONS
As of the November 2018 payment date, loans more than 90 days delinquent in the Quarzo 2016 portfolio were at 0.8% of the outstanding principal balance. Gross cumulative defaults stood at 1.9% of the initial portfolio balance plus all subsequent portfolios, of which 8.6% were recovered. Based on updated vintage data received, DBRS updated its base case PD and LGD assumptions to 8.7% and 79.4%, respectively, based on a worst-case portfolio composition.

The Quarzo 2017 portfolio had 0.7% loans more than 90 days delinquent; gross cumulative defaults were 1.4%, of which 5.1% were recovered. Based on updated vintage data received, DBRS updated its base case PD and LGD assumptions to 8.2% and 79.2%, respectively, based on a worst-case portfolio composition.

REVOLVING PERIOD
Both transaction structures allow for additional portfolios to be purchased during a revolving period, which are due to mature in August 2019 and August 2020 for Quarzo 2016 and Quarzo 2017, respectively. There are concentration limits and Purchase Termination Events in place to mitigate potential portfolio performance deterioration during the revolving periods, allowing for amortisation to begin earlier than scheduled. To date, all tests have been passed.

CREDIT ENHANCEMENT
CE for the Quarzo 2016 Series A Notes is provided by the subordination of the unrated EUR 660.0 million Series B notes and has remained at 20.0% since closing. CE for the Quarzo 2017, Series A Notes is provided by the subordination of the unrated EUR 285.0 million Series B Notes and has remained at 19.0% since closing.

The transactions include non-amortising liquidity reserves, funded at closing with the proceeds from the issuance of the Series B Notes, which are available to cover senior expenses and missed interest payments on the respective Series A Notes. The liquidity reserves are currently at their target levels of EUR 12.0 million and EUR 5.9 million for Quarzo 2016 and Quarzo 2017, respectively.

The structures also include a Flexible and LibeRata Loans Cash Reserve, which mitigate the liquidity risk arising from Flexible and LibeRata Loans. In Quarzo 2016, these loans can represent up to 10.0% of the outstanding balance of the portfolio and are currently at the level of 0.6%. In Quarzo 2017, these loans can represent up to 5.0% of the outstanding balance of the portfolio and are currently at the level of 0.3%. 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 in relation to which the debtors have exercised the contractual right to postpone the payments is higher than 2.0% of the portfolio balance. As of the November 2018 payment date, this condition had not been breached.

Mediobanca acts as the account bank for the transactions. Based on DBRS’s private rating of Mediobanca, the downgrade provisions outlined in the transactions’ documents, and structural mitigants, DBRS considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Series A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology. The ratings of the Series A Notes consider each transaction-specific account bank replacement trigger; given the exposure to Mediobanca, the ratings of the Series A Notes are not fully delinked from the creditworthiness of the account bank.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transactions 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 transactions, the analysis continues to be based on the worst-case replenishment criteria set forth in the transactions’ legal documents.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions 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/333487/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include quarterly investor reports provided by Deutsche Bank S.p.A. (the Calculation Agent) and monthly servicing data provided by Compass.

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

At the time of the initial rating of Quarzo 2016, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

At the time of the initial rating of Quarzo 2017, 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 actions on Quarzo 2016 and 2017 took place on 7 February 2018, when DBRS confirmed its ratings on the Series A Notes of both transactions at A (high) (sf).

The lead analyst responsibilities for these transactions have been transferred to Joana Seara da Costa.

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 ratings, DBRS considered the following stress scenarios as compared with the parameters used to determine the ratings (the “Base Case”):

-- DBRS expected a Base Case PD rate and LGD rate for the portfolios 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 Quarzo 2016 pool of assets of receivables, including sovereign stress, are 8.7% and 79.4%, respectively.
-- The Base Case PD and LGD of the current Quarzo 2017 pool of assets of receivables, including sovereign stress, are 8.2% and 79.2%, respectively.

For example, if the LGD increases by 50%, the rating of the Quarzo 2016, Series A Notes would be expected to stay at AA (low) (sf) while the rating of the Quarzo 2017, Series A Notes would be expected to stay at A (high) (sf), ceteris paribus. If the PD increases by 50%, the ratings of Quarzo 2016, Series A Notes would be expected to decrease to A (sf) while the rating of the Quarzo 2017, Series A Notes would be expected to decrease to A (low) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the ratings of both the Quarzo 2016, Series A Notes and Quarzo 2017, Series A Notes would be expected to decrease to BBB (high) (sf), ceteris paribus.

Quarzo 2016, Series 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 A (high) (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 BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Quarzo 2017, Series A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (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 A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (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 de Costa, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 25 February 2016 (Quarzo 2016); 15 February 2017 (Quarzo 2017)

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
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Rating European Consumer and Commercial Asset-Backed Securitisation

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.