DBRS Morningstar Upgrades Rating on Cars Alliance Auto Loans Italy 2015 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class A Notes issued by Cars Alliance Auto Loans Italy 2015 S.r.l. (the Issuer) to AAA (sf) from AA (sf).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the Legal Final Maturity Date in December 2031.

The upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Correction of a misapplication of cash flow in previous rating actions.
-- Portfolio performance, in terms of delinquencies, defaults, and losses.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.
-- No revolving termination events have occurred.

The Issuer is a securitisation of Italian auto loan receivables originated by RCI Banque S.A., Italian Branch (RCI Banque-Italy). As of the March 2020 payment date, the EUR 1,574.3 million portfolio consisted of loans granted to both private (93.8% of the discounted collateral balance) and corporate (6.3%) clients for the purchase of new (94.8%) and used (5.2%) vehicles. Most of the receivables have equal monthly instalments; however, 13.7% of loans include a final balloon payment.

The transaction was established in July 2015. In May 2018, an amendment to the transaction was executed, including: a renewal of the revolving period for 30 additional months until November 2020; an increase in the portfolio size partially financed by new Class A Notes issuance, an increase in the cash reserve amount, and some adjustments to the concentration limits to allow loans with a balloon instalment to make up a greater proportion of the pool.

A key driver of the upgrade is the correction made to the implementation of the priority of payments in DBRS Morningstar’s cash flow analysis. At the time of the DBRS Morningstar initial rating and successive rating reviews, the provisioning for losses upon loan defaults by using excess interest income has been underestimated, resulting in too conservative cash flow assumptions in the respective rating stresses.
At the time of the 2018 and 2019 rating actions, the Class A Notes were rated at AA (sf) due to that misinterpretation of the transaction structure, which resulted in the rating being too conservative.

REVOLVING PERIOD & CONCENTRATION LIMITS
The first revolving period finished on the February 2018 payment date and subsequently the Class A Notes were partially amortised by EUR 111.4 million. As part of the May 2018 renewal of the revolving period, this amortised amount was replenished, and the notional balance of the Class A Notes was increased to EUR 1,357.4 million from EUR 955.0 million.

The revolving period will end prematurely if certain performance triggers are breached. To further mitigate the deterioration of the pool, the transaction permits certain concentration limits on the additional portfolios purchased on each payment date. To date, the concentration limits and performance triggers in place have been satisfied. DBRS Morningstar considered a worst-case portfolio composition in its cash flow analysis.

PORTFOLIO PERFORMANCE
As of the February 2020 payment date, one- to two month and two- to three-month delinquencies were 0.4% and 0.1% of the portfolio net discounted balance, respectively, while delinquencies greater than three months were 0.2%. Gross cumulative defaults, as a percentage of the original portfolio and cumulative transferred receivables, were 0.7%, with cumulative recoveries of 49.2%.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has maintained its base case probability of default (PD) and loss given default (LGD) assumptions at 2.8% and 90.5% respectively.

CREDIT ENHANCEMENT
The portion of the Class J Notes not used to fund the cash reserve provides credit enhancement to the Class A Notes.
Credit enhancement has been stable at 14.0%, since the restructuring in May 2018, because of the revolving period.

The transaction benefits from a cash reserve funded through part of the proceeds from the Class J Notes, which is available to cover senior fees and the interest due on the Class A Notes. This reserve has an amortising target equal to 1.0% of the aggregate Class A and Class J Notes balance floored at EUR 1.0 million. The reserve is currently at its target amount of EUR 16.0 million.

Crédit Agricole Corporate and Investment Bank, Milan Branch (CACIB-Milan) acts as the Account Bank for the transaction. Based on the DBRS Morningstar private rating of CACIB-Milan, the downgrade provisions outlined in the transaction documents, and structural mitigants DBRS Morningstar consider the risk arising from the exposure to CACIB-Milan to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the Master European Structured Finance Surveillance Methodology (December 2019).

DBRS Morningstar 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 at: http://www.dbrsmorningstar.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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include investor reports provided by Zenith Service S.p.A., and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial rating and in April 2018, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purpose of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 9 May 2019, when DBRS Morningstar confirmed the ratings of the Class A Notes at AA (sf).

The lead analyst responsibilities for this transaction have been transferred to Petter Wettestad.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies is available at www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar 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 of loans for the Issuer are 2.8% and 90.7%, respectively.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption.
For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to fall to AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to AA (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf).
-- 50% increase in LGD, expected rating of AAA (sf).
-- 25% increase in PD, expected rating of AA (high) (sf).
-- 50% increase in PD, expected rating of AA (sf).
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf).
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf).
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf).
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf).

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Petter Wettestad, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 July 2015

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (13 December 2019).
https://www.dbrsmorningstar.com/research/354616/master-european-structured-finance-surveillance-methodology
-- Legal Criteria for European Structured Finance Transactions (11 September 2019).
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020).
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020).
https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020).
https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Rating European Structured Finance Transactions Methodology (28 February 2020).
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].