DBRS Morningstar Confirms Rating on Quarzo S.r.l. - Series 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (sf) rating of the Series A Notes issued by Quarzo S.r.l. - Series 2020 (the Issuer).

The rating on the Series A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in June 2037.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the March 2022 payment date.
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the Series A Notes to cover the expected losses at the AA (sf) rating level.

The Issuer is a securitisation of unsecured Italian consumer loan receivables originated and serviced by Compass Banca S.p.A. (Compass). The portfolio contains mostly personal loans but also includes loans for the purchase of new and used vehicles and loans for other purposes. The transaction included an initial 18-month revolving period, which ended in October 2021.

PORTFOLIO PERFORMANCE
As of the March 2022 payment date, loans that were one to two months and two to three months delinquent represented 0.6% and 0.4% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.6%. Gross cumulative defaults amounted to 1.3% of the aggregate original balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar received updated historical vintage data and updated its base case PD and LGD assumptions to 5.1% and 77.0% from 5.6% and 79.0%, respectively, at the time of the last rating action on the transaction.

CREDIT ENHANCEMENT
The unrated Series B Notes provide credit enhancement to the Series A Notes. As of the March 2022 payment date, credit enhancement to the Series A Notes was 14.7%, up from 12.0% at the DBRS Morningstar initial rating.

The transaction benefits from a nonamortising liquidity reserve, funded at closing with part of the proceeds from the issuance of the Series B Notes, which is available to cover senior fees and the interest due on the Series A Notes. The liquidity reserve is currently at its target of EUR 8.8 million.

Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Mediobanca, 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 Series 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 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.

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” (8 February 2022).

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.

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

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 investor reports provided by The Bank of New York Mellon SA/NV - Milan Branch, servicer reports provided by Compass and loan-level data provided by the European DataWarehouse GmbH. In the context of a newer transaction from the same originator, DBRS Morningstar was provided with updated historical performance data as follows:
-- Quarterly static default data from Q1 2009 to Q4 2021;
-- Quarterly static recovery data from Q1 2009 to Q4 2021;
-- Quarterly static and dynamic prepayment data from Q1 2009 to Q4 2021; and
-- Quarterly static and dynamic delinquency data from Q1 2009 to Q4 2021.

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 8 April 2021, when DBRS Morningstar confirmed its rating on the Class A notes at AA (sf).

The lead analyst responsibilities for this transaction have been transferred to Preben Cornelius Overas.

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 (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 5.1% and 77.0%, 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 Series A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Series A Notes would be expected to 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 Series A Notes would be expected to fall to A (sf).

Series A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (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 (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: 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: Preben Cornelius Overas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 17 April 2020

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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 (29 July 2021),
https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (8 February 2022), https://www.dbrsmorningstar.com/research/392000/master-european-structured-finance-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (29 October 2021), https://www.dbrsmorningstar.com/research/387042/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (30 July 2021),
https://www.dbrsmorningstar.com/research/382486/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 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].