DBRS Morningstar Confirms Ratings on Two Marzio Finance Series

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (low) (sf) ratings on the Class A Notes issued by Marzio Finance S.r.l. – Series 1-2017 (Series 1-2017) and Series 7-2019 (Series 7-2019).

The ratings address the timely payment of interest and the ultimate payment of principal on or before the notes’ respective legal final maturity dates (May 2042 for Series 1-2017 and June 2044 for Series 7-2019).

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performances, in terms of delinquencies, defaults, and losses as of the August 2020 payment date;
-- 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 AA (low) (sf) rating level;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Marzio Finance S.r.l. is a securitisation programme, of which the Series 1-2017 and Series 7-2019 notes are part. The notes are backed by pools of receivables 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 portfolios are serviced by IBL Servicing S.p.A. (a company fully owned by IBL) with IBL appointed as the subservicer and Zenith Service S.p.A. as the backup servicer.

The Series 1-2017 and Series 7-2019 receivables are segregated from each other and from other series’ receivables that may be assigned to back the issuance of further series. The Series 1-2017 was issued in September 2017, while the Series 7-2019 was issued in October 2019. In addition to a senior class of floating-rate notes (the Class A Notes), the special-purpose vehicle also issued one junior class of variable-return notes (the Class J Notes).

PORTFOLIO PERFORMANCE

Both portfolios are performing within DBRS Morningstar’s initial expectations.

For Series 1-2017, as of the August 2020 cut-off date, loans that were two to three months in arrears represented 0.9% of the outstanding portfolio balance, up from 0.4% as of the July 2019 cut-off date. The 90+ delinquency ratio was 1.7%, up from 1.1% in July 2019. The gross cumulative default ratio stood at 3.5% of the initial portfolio balance, increasing from 2.5% in July 2019.

For Series 7-2019, as of the August 2020 cut-off date, loans that were two to three months in arrears represented 0.7% of the outstanding portfolio balance, while the 90+ delinquency ratio was 1.0%. The gross cumulative default ratio stood at 0.8% of the initial portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions as follows:

-- Series 1-2017: 7.0% and 2.4%, respectively
-- Series 7-2019: 7.3% and 7.6%, respectively

CREDIT ENHANCEMENT

Overcollateralisation of the outstanding collateral portfolio provides credit enhancement and includes the additional reserve only in the case of Series 7-2019.

For Series 1-2017, as of the August 2020 payment date, credit enhancement to the Class A Notes was 11.4%, up from 9.2% as of the August 2019 payment date.

For Series 7-2019, as of the August 2020 payment date, credit enhancement to the Class A Notes was also 11.4%, up from 9.6% at transaction closing in October 2019.

The Series 1-2017 benefits from a cash reserve, available to cover shortfalls on senior fees, expenses, and interest on the Class A Notes. It is currently at its target level of EUR 6.0 million and will start amortising when the Class A Notes’ amortisation is greater than 50% of their initial balance, with a target equal to 1.5% of the rated notes’ outstanding balance. The reserve is floored at EUR 3.0 million.

The Series 7-2019 benefits from both a liquidity reserve, available to cover shortfalls on senior fees, expenses, and interest on the Class A Notes, and from an additional reserve, also available to top up the liquidity reserve and to repay principal on the Class A Notes. Both reserves are currently at their target levels of EUR 3.5 million (liquidity reserve) and EUR 5.0 million (additional reserve). The liquidity reserve will start amortising when the Class A Notes’ amortisation is greater than 50% of their initial balance, with a target equal to 2.0% of the rated notes’ outstanding balance (floored at EUR 1.8 million), while the additional reserve started amortising from the first payment date, with a target level equal to 1.5% of the collateral portfolio principal balance (floored at EUR 2.9 million).

Citibank NA, Milan Branch acts as the account bank for both transactions. Based on the private rating of the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For these transactions, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand potential payment holidays in the portfolio.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/ global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus is likely to affect the DBRS Morningstar-rated ABS transactions in Europe, for more details please see https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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.

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.

Notes:

All figures are in euros unless otherwise noted.

The principal methodology applicable to these ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

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

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at:
https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include payment, investor, and servicer reports provided by IBL and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial ratings, 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 purposes of providing these ratings 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 Series 1-2017 took place on 27 September 2019, when DBRS Morningstar confirmed its AA (low) (sf) rating on the Class A Notes. This is the first rating action on Series 7-2019 since the initial rating date in October 2019.
The lead analyst responsibilities for Series 7-2019 have been transferred to Daniele Canestrari.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (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.

-- For Series 1-2017, the base case PD and LGD of the current pool of loans for the Issuer are 7.0% and 2.4%, respectively.
-- For Series 7-2019, the base case PD and LGD of the current pool of loans for the Issuer are 7.3% and 7.6%, 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. Taking the Class A Notes of Series 1-2017 as an example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (low) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected fall to A (high) (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 A (high) (sf).

Series 1-2017 – Class 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 AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Series 7-2019 – Class 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)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Daniele Canestrari, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President

Initial Rating Dates: 28 September 2017 for Series 1-2017 and 9 October 2019 for Series 7-2019.

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- 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.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (21 July 2020),
https://www.dbrsmorningstar.com/research/364305/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 these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].