DBRS Morningstar Takes Rating Actions on Quinto Sistema Sec. 2017 S.r.l. Following Amendment

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings on the Class A and Class B1 Notes issued by Quinto Sistema Sec. 2017 S.r.l. (the Issuer) to AA (low) (sf) and A (sf), respectively, from AA (sf) and AA (low) (sf), respectively, following a transaction amendment (the Amendment).

The ratings address the timely payment of interest and the ultimate payment of principal by the final maturity date in December 2034.

The downgrades are based on the following analytical considerations:
-- The changes to the transaction, which took effect on 1 September 2022 as a result of the Amendment;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the August 2022 payment date;
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions for the aggregate collateral pool, considering the updated quarterly vintage performance data received in the context of the Amendment; and
-- Current available credit enhancement to rated notes to cover the expected losses at their respective rating levels.

The transaction is a securitisation of a pool of receivables related to salary and pension assignment loans as well as payment delegation loans granted by multiple original lenders to Italian employees and pensioners. The major originators are Sigla S.p.A., Figenpa S.p.A., ADV Finance S.p.A., Banca Sistema S.p.A. (Banca Sistema), and Pitagora S.p.A. The portfolios were transferred to Banca Sistema before being sold to the Issuer. Banca Sistema services the portfolio, with Banca Finanziaria Internazionale S.p.A. (Banca Finint) appointed as backup servicer. The transaction had an initial ramp-up period, which terminated in February 2019, during which the Issuer purchased additional portfolios. The notes were issued in a partially paid form. An amendment to the notes’ amortisation mechanism took place on July 2018 after DBRS Morningstar’s initial rating date (14 June 2018).

AMENDMENT
The following amendments to the transaction took effect on 1 September 2022:

(1) Purchase of an additional pool originated by multiple lenders that were not part of the previous pools. The additional pool of EUR 386.3 million constitutes 80.6% of the aggregate pool balance;

(2) Updated eligible institution required rating of at least “A” instead of BBB (low);

(3) The Issuer sold loans to Banca Sistema amounting to EUR 11.5 million; and

(4) Further instalments of all the outstanding notes, as follows:
-- Class A Notes to EUR 423.4 million from EUR 34.7 million;
-- Class B1 Notes to EUR 50.4 million from EUR 47.4 million;
-- Class B2 Notes to EUR 57.7 million from EUR 14.2 million; and
-- Class J Notes to EUR 2.5 million from EUR 2.4 million.

PORTFOLIO PERFORMANCE
As of the June 2022 cut-off date, loans that were two to three months in arrears represented 2.5% of the outstanding portfolio balance, up from 1.8% as of the December 2021 cut-off date. The 90+-day delinquency ratio was also 2.5%, up from 1.9% as of December 2021. The gross cumulative default ratio was equal to 9.3% of the initial portfolio balance (including additional receivables) as of June 2022, up from 8.7% as of December 2021.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its base case PD and LGD assumptions to 10.4% and 18.3%, respectively, based on the aggregate pool composition that includes new originators, and the updated historical data received for the Banca Sistema originations.

CREDIT ENHANCEMENT
Overcollateralisation of the performing outstanding collateral portfolio provides credit enhancement. As of the Amendment, credit enhancement to the Class A and Class B1 Notes was 11.7% and 1.2%, respectively, down from 66.8% and 21.4%, respectively, as of the August 2022 payment date.

The transaction benefits from an amortising cash reserve, available to cover senior fees, expenses, and missed interest payments on the rated notes. The reserve target remains at 1.2% of the collateral portfolio outstanding principal or EUR 5.9 million as of the Amendment.

The transaction also features a prepayment reserve, available to cover losses arising from the set-off of capitalised fees. The reserve is target remains at 1.5% of the collateral portfolio outstanding principal or EUR 7.4 million as of the Amendment.

BNP Paribas Securities Services, Milan branch continues to act as the account bank for the transaction. Based on DBRS Morningstar’s private rating on the account bank, 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 bank to be consistent with the rating assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors and Governance (G) Factors
The high exposure to public-sector employees, pensioners, and civil servants makes the transaction dependent on the creditworthiness of the Italian sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Italy – namely Human Capital and Human Rights (S) and Institutional Strength, Governance & Transparency (G) – to be significant rating factors. According to the International Monetary Fund World Economic Outlook, Italy’s GDP per capita of USD 35,473 in 2021 was low compared with its euro area peers. At the same time, Italy ranked in the 60.6 and 67.3 percentiles for Rule of Law and Government effectiveness, respectively, in 2020 according to the World Bank indicators. DBRS Morningstar took these factors into account in the “Economic Structure and Performance”, “Fiscal Management and Policy”, and “Political Environment” building blocks of its “Global Methodology for Rating Sovereign Governments”.

Credit rating actions on the Republic of Italy are likely to have an impact on this credit analysis. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://www.dbrsmorningstar.com/issuers/17689.

There were no Environmental factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are the “Master European Structured Finance Surveillance Methodology” (19 May 2022) and “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: https://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

DBRS Morningstar has conducted a review of the transaction’s legal documents provided in the context of the Amendment. A review of any other transaction’s legal documents was not conducted as the 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/401817/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 payment and investor reports provided by Banca Finint, and servicer reports, additional information, loan-level data, and historical performance data provided by Banca Sistema. DBRS Morningstar received the following data and information, split by type of borrower (public, pensioner, parapublic, and private) and covering different periods:
-- Static and dynamic quarterly default data;
-- Static quarterly recovery data;
-- Static and dynamic quarterly prepayment data; and
-- Dynamic quarterly delinquency data.

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

At the time of the initial rating and at the time of the Amendment, 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 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 January 2022, when DBRS Morningstar upgraded its ratings on the Class A and Class B1 Notes to AA (sf) and AA (low) (sf), respectively, from AA (low) (sf) and A (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at www.dbrsmorningstar.com.

Sensitivity Analysis: 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 10.4% and 18.3%, 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 Class A Notes would be expected to fall to A (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 A (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 A (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (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)

Class B1 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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: 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.

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

Lead Analyst: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 14 June 2018

DBRS Ratings GmbH
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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 (19 May 2022), https://www.dbrsmorningstar.com/research/397033/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021),
https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- 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 (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].