Press Release

DBRS Morningstar Assigns Provisional Rating to Quarzo S.r.l. – Series 2022

Consumer Loans & Credit Cards

March 24, 2022

DBRS Ratings GmbH (DBRS Morningstar) assigned a provisional rating of AA (sf) to the Series A Notes to be issued by Quarzo S.r.l. (the Issuer), under Series 2022.

DBRS Morningstar did not assign a provisional rating to the Series B Notes expected to be issued in this transaction.

The rating on the Series A Notes addresses the timely payment of scheduled interest and ultimate repayment of principal by the legal final maturity date in November 2038.

This rating is provisional and based on the information and data available to this date. This rating will be finalised upon review of the final version of the transaction documents and of the relevant opinions.

The transaction represents the issuance of Notes backed by a portfolio of receivables related to unsecured consumer loan contracts granted by Compass Banca S.p.A. (Compass or the Seller) to private individuals residing in Italy. The initial portfolio of EUR 600 million will comprise of standard amortising loans granted for the purchase of new and used vehicles, personal loans, and other purpose loans. The collateral portfolio will be serviced by Compass.

DBRS Morningstar based its rating on a review of the following analytical considerations:
-- The transaction's capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, reserve funds, and excess spread;
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected cumulative net losses under various stressed cash flow assumptions for the Series A Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
--Compass’ capabilities with regard to origination, underwriting, servicing, and its financial strength;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the Seller’s portfolio;
-- DBRS Morningstar’s sovereign rating on Italy, currently rated BBB (high) with a Stable trend; and
-- The expected consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that are expected to address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction includes a 12-month revolving period during which the Issuer shall purchase additional collateral. During this period, the transaction will be subject to receivables eligibility criteria and concentration limits designed to prevent the deterioration of the portfolio quality, which will have to be complied with.

The transaction incorporates a single waterfall that facilitates the distribution of the available distribution amount. The Notes will amortise sequentially subject to a note-specific target principal redemption amount.

A nonamortising liquidity reserve account equal to 0.40% of the outstanding Series A Notes principal balance will be funded by the Seller through the proceeds of a subordinated loan on the closing date and available to the structure. The liquidity reserve provides liquidity support to the Notes, available to pay senior transaction fees, swap payments, and interest payments on the Series A Notes, while also ultimately providing credit enhancement to the Notes.

All underlying contracts pay fixed rates while floating-rate Series A Notes have been issued, indexed to three-month Euribor. The resulting interest rate risk is mitigated through an interest rate swap agreement, expected to be entered into by the Issuer prior to the closing date.

TRANSACTION COUNTERPARTIES
Mediobanca – Banca di Credito Finanziario S.p.A. (Mediobanca) has been appointed as the issuer account bank for the transaction, while Citibank N.A., Milan branch (Citibank Milan) has been appointed as the account bank with respect to the payments account and the liquidity reserve account. Based on the DBRS Morningstar private ratings on Mediobanca and Citibank Milan, 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 banks to be consistent with the rating assigned to the Series A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Banco Santander S.A. is expected to be appointed as the swap counterparty for the transaction. DBRS Morningstar rates Banco Santander S.A. publicly with a Long Term Critical Obligations Rating of AA (low). The downgrade and collateral posting provisions as defined in the draft swap documentation are expected to be consistent with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The transaction structure was analysed in Intex DealMaker.

CORONAVIRUS CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for borrowers.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 ratings is: Rating European Consumer and Commercial Asset-Backed Securitisations (29 October 2021).

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.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include performance data relating to the receivables provided by the originator directly or through the arranger, Mediobanca.

DBRS Morningstar received historical performance data from Q1 2009 to Q4 2021 relating to quarterly static default, delinquency, recovery and prepayments data, and dynamic delinquency and prepayment data. DBRS Morningstar also received a set of stratification tables in relation to the loan pool as of 24 February 2022 and its related contractual amortisation profile.

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

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.

These ratings concern expected-to-be-issued new financial instruments. This is the first DBRS Morningstar rating on this financial instrument.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on 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:

-- Probability of Default (PD) Used: Expected PD of 5.1%, 20.4% at the AA (sf) rating level.
-- Recovery Rate Used: Expected recovery rate of 23.0%.
-- Loss Given Default (LGD) Used: Expected LGD of 77.0%, 83.0% at the AA (sf) rating level.

Scenario 1: 25% increase in LGD
Scenario 2: 50% increase in LGD
Scenario 3: 25% increase in PD
Scenario 4: 50% increase in PD
Scenario 5: 25% increase in PD and 25% increase in LGD
Scenario 6: 25% increase in PD and 50% increase in LGD
Scenario 7: 50% increase in PD and 25% increase in LGD
Scenario 8: 50% increase in PD and 50% increase in LGD

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios would be, respectively:
-- Series A Notes: A (high) (sf), A (high) (sf), A (high) (sf), A (sf), A (low) (sf), A (low) (sf), BBB (high) (sf), and BBB (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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 March 2022

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

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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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