DBRS Morningstar Confirms Rating on Auto ABS Italian Rainbow Loans S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes issued by Auto ABS Italian Rainbow Loans S.r.l. (formerly, Auto ABS Italian Rainbow Loans 2020-1) (the Issuer).

The rating addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date in September 2035.

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; and
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.

The transaction is a securitisation of fixed-rate receivables related to balloon auto loans granted by Banca PSA Italia S.p.A. (Banca PSA) to private and commercial debtors residing in Italy. Banca PSA services the portfolio, with Santander Consumer Finance S.A. appointed as backup servicer facilitator. The transaction has a two-year revolving period scheduled to end on the August 2022 payment date. During the two-year revolving period and following a request by the seller, the Issuer can purchase additional receivables exclusively through additional subscription payments under the notes by the balance that exceeds the target collateral amount. The Class A and Class Z Notes can be increased up to the notes’ maximum amount of EUR 752.2 million and EUR 97.8 million, respectively; however, all purchases are subject to eligibility criteria and there are concentration limits and performance triggers in place to mitigate any potential portfolio deterioration.

PORTFOLIO PERFORMANCE
As of the March 2022 payment date, loans that were 30 to 60 days and 60 to 90 days delinquent represented 0.04% and 0.03% of the outstanding portfolio balance, respectively, while loans more than 90 days delinquent also represented 0.03%. Gross cumulative gross defaults represented 0.1% of the aggregate original portfolio balance, with cumulative principal recoveries of 8.4% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar received updated historical vintage data and updated its base case PD and LGD to 2.0% and 82.4% from 1.9% and 68.7%, respectively. Given the revolving period, the assumptions are based on the potential portfolio migration and the replenishment criteria set forth in the transaction legal documents.

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 rated notes. As of the March 2022 payment date, credit enhancement to the Class A Notes remained at 11.5% because of the revolving period.

The transaction benefits from an amortising general reserve, which is available to cover shortfalls on senior fees, expenses, and interest payments on the Class A Notes. The general reserve was initially set to meet the required amount corresponding with 1.0% of the Class A and Class Z Notes’ balance, but may fall in relative terms due to the ramp-up of the notes to about 0.6% of the Class A and Class Z Notes. The reserve is currently at its target level of EUR 4.9 million, or 1.0% of the initial Class A and Class Z Notes’ balance.

Banco Santander SA and The Bank of New York Mellon SA/NV, Milan branch act as the transaction’s Spanish and Italian account banks (together, the Account Banks), respectively. Based on the reference rating of the Spanish account bank at A (high) (one notch below DBRS Morningstar’s Long Term Critical Obligation Rating of AA (low)), the reference rating of the Italian account bank at AA (high), 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 Banks 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.

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.

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

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 Zenith Service S.p.A., additional information provided by Banca PSA, and loan-level data provided by the European DataWarehouse GmbH. Additionally, DBRS Morningstar was also provided by the originator with updated historical performance data, as follows:
-- Quarterly static default data from Q4 2011 to Q4 2021;
-- Quarterly static recovery data from Q4 2011 to Q4 2021; and
-- Dynamic monthly prepayment and delinquency data from Q4 2011 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 12 July 2021, when DBRS Morningstar confirmed its AAA (sf) rating on the Class A Notes.

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 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 2.0% and 82.4%, 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 fall to AA (high) (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 (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 (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (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. 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: 23 July 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 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].