DBRS Morningstar Confirms Ratings of Quarzo S.r.l. - Series 2018

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (sf) ratings on the Class A1 Notes and the Class A2 Notes (together, the Class A Notes) issued by Quarzo S.r.l. - Series 2018 (the Issuer).

The ratings on the Class A Notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in April 2035.

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

-- The portfolio performance, in terms of delinquencies, defaults, and losses as of the October 2020 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- The current levels of credit enhancement available to the Class A Notes to cover expected losses at the AA (sf) rating level; and
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Quarzo S.r.l. - Series 2018 is a securitisation of unsecured Italian consumer loan receivables originated and serviced by Compass Banca S.p.A. (Compass), which closed in November 2018. The portfolio contains mostly personal loans but also includes other purpose loans and loans for the purchase of new and used vehicles. The transaction had an initial revolving period of six months, which ended in June 2019.

PORTFOLIO PERFORMANCE
As of the October 2020 payment date, loans that were one- to two-month and two- to three-month delinquent represented 1.1% and 0.6% of the portfolio balance, respectively, while loans more than three-month delinquent represented 1.1%. Gross cumulative defaults amounted to 2.6% of which 6.5% have been recovered so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan review of the remaining pool of receivables and updated its base case PD and LGD assumptions to 5.5% and 78.8%, respectively.

CREDIT ENHANCEMENT
The unrated Class B Notes provide credit enhancement to the Class A Notes. As of the October 2020 payment date, credit enhancement to the Class A Notes was 31.2%, up from 19.8% at the last annual review.

The transaction benefits from a nonamortising liquidity reserve, funded at closing using the proceeds from the issuance of the Class B Notes, which is available to cover senior expenses and interest payments on the Class A Notes. The liquidity reserve is currently at its target level of EUR 3.7 million.

Mediobanca Banca di Credito Finanziario S.p.A. acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Mediobanca Banca di Credito Finanziario S.p.A., the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank 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.

Credit Agricole Corporate & Investment Bank acts as the swap counterparty for the transaction. DBRS Morningstar's private rating of Credit Agricole Corporate & Investment Bank is above the First Rating Threshold as described in DBRS Morningstar's "Derivative 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 continue to increase in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. As of the October 2020 payment date, 10.2% of the outstanding principal amount of receivables had a payment moratorium.

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 crisis is likely to affect 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 the 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 transaction in accordance with the principal methodology.

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: 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 investor reports provided by Citibank N.A./London Branch, servicer reports provided by Mediobanca Banca di Credito Finanziario 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 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 this transaction took place on 5 December 2019, when DBRS Morningstar confirmed its ratings on the Class A Notes at AA (sf).

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.
-- The base case PD and LGD of the current pool of loans for the Issuer are 5.5% and 78.8%, 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 ratings of the Class A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the ratings of the Class A Notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the ratings of the Class A Notes would be expected to remain at AA (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected ratings of AA (sf)
-- 50% increase in LGD, expected ratings of AA (sf)
-- 25% increase in PD, expected ratings of AA (sf)
-- 50% increase in PD, expected ratings of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected ratings of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected ratings of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected ratings of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected ratings of AA (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: Petter Wettestad, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 22 November 2018

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 this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020), https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- 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.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://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].

This press release was modified shortly after publication to reflect that the recovery rate is 6.5% not 5.7%.