DBRS Morningstar Confirms Rating on Cars Alliance Auto Loans Italy 2015 S.r.l. Following Amendment

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A Notes issued by Cars Alliance Auto Loans Italy 2015 S.r.l. (the Issuer) at AAA (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 confirmation follows an entire review of the transaction and is based on the following analytical considerations:
-- An amendment to the transaction executed on 4 March 2021 (the Amendment);
-- The portfolio performance, in terms of level of delinquencies and cumulative net losses, as of the February 2021 payment date;
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions for the remaining collateral pool, considering the updated quarterly vintage performance data received in the context of the Amendment;
-- The levels of credit enhancement (after taking into consideration the Amendment) to the Class A Notes to cover the expected losses at the AAA (sf) rating level;
-- Current economic environment and an assessment of sustainable performance, in the context of the Coronavirus Disease (COVID-19) pandemic.

The transaction 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.

AMENDMENT
The following amendments to the transaction were executed on 4 March and are expected to be effective from 8 March 2021:
-- A renewal of the revolving period; lasting 36 months and finishing in March 2024 (included);
-- A reduction of the coupon for the Class A Notes to 0.75% from 1.0%;
-- An increase in the portfolio size to EUR 2,108.95 million, financed by issuing EUR 722.0 million and EUR 57.4 million of new Class A and J Notes, respectively (including replenishment of the amortised portion);
-- An increase of the cash reserve to EUR 21.3 million – maintaining the target balance equal to 1% of the Class A and J Notes;
-- An increase of the concentration limits for balloon loans to 25% from 15% and reduce the concentration limit for commercial borrowers and non-direct debit payments to 5% and 4%, from 15% and 10%, respectively;
-- The introduction of an Optional Redemption by the Class A Noteholders if the excess cash trigger is breached. The excess cash trigger will be breached during the revolving period if the balance of the Payment Account exceeds 5% of the outstanding balance of the Notes. If the balance is above 15%, a purchase termination event will occur.

PORTFOLIO PERFORMANCE
As of February 2021 payment date, loans that were 30 to 60 days delinquent and 60 to 90 days delinquent represented 0.2% and 0.1% of the outstanding portfolio amount, respectively, while loans more than 90 days delinquent amounted to 0.1%. The cumulative gross default ratio was 0.9% of the aggregate original portfolio, with cumulative principal recoveries of 52.1% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its base case PD and LGD assumptions to 1.8% and 83.7%, respectively, based on updated historical gross loss and net loss data ranging from Q1 2010 to Q2 2020 that DBRS Morningstar received in relation to the Amendment. The worst case portfolio composition was considered due to the extension of the revolving period.

DBRS Morningstar opted to elect mid-range core multiples. The inclusion of incremental balloon stresses means the derived adjusted multiple is above the higher range used at a AAA (sf) level.

CREDIT ENHANCEMENT
The subordination of the junior notes provides credit enhancement to the Class A Notes. As of the February 2021 payment date, credit enhancement to the Class A Notes was 16.9%, up from 14.0%, one year ago. The credit enhancement in our cash flow analysis was estimated to be 13.0% as per the Amendment.

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. The reserve is being increased to EUR 21.3 million following the Amendment.

Crédit Agricole CIB - Italian branch acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Crédit Agricole CIB - Italian branch, 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.

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, when 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.

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 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology” (8 February 2021). 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.

DBRS Morningstar has conducted a review of the Master Definition Agreement, Cash Allocation Management and Payments Agreement, Third Supplemental Deed of Pledge, Warranty and Indemnity Agreement, Increase Further Additional Portfolio Transfer Agreement, Intercreditor Agreement, Servicing Agreement, Terms and conditions of the Senior Notes, Terms and conditions of the Junior Notes, the Master Amendment Agreement, Intercreditor Agreement, and the Master Receivables Transfer Agreement provided in the context of the aforementioned Amendment. The other transaction legal documents have remained unchanged since the most recent rating action and as such, a review has not been conducted.

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 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 this rating include investor reports provided by Zenith Service S.p.A., loan-level data provided by the European DataWarehouse GmbH, and the following historical information received from the Seller:
-- Static quarterly origination and cumulative default and recovery data from Q1 2010 to Q2 2020.
-- Dynamic monthly delinquency data from January 2010 to September 2020.
-- Monthly prepayment data from January 2010 to September 2020.

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

At the time of the initial rating, 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 27 March 2020, when DBRS Morningstar upgraded the rating of the Class A Notes to AAA (sf) from 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 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 1.8% and 83.7%, 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 on 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 on the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to fall to AA (high) (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 AAA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Petter Wettestad, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 23 July 2015

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The rating methodologies used in the analysis of this transaction can be found at: http://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 (8 February 2021),
https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.
-- 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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].