Press Release

DBRS Morningstar Confirms Ratings on Red & Black Auto Italy S.r.l.

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November 09, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Class A, Class B, Class C, and Class D notes (the rated notes) issued by Red & Black Auto Italy S.r.l. as follows:

-- Class A Notes at AA (high) (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at BBB (high) (sf)
-- Class D Notes at BB (high) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal by the legal final maturity date. The ratings on the Class B, Class C, and Class D notes address the timely payment of interest when most senior outstanding notes otherwise ultimate payment of interest and ultimate payment of principal by the legal final maturity date.

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the September 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 rated notes to cover the expected losses at their respective rating levels.

The transaction is a securitisation of a portfolio of auto loans to individual borrowers in Italy, for the purchase of new and used vehicles. The receivables are originated and serviced by Fiditalia S.p.A., whose ultimate parent is Société Générale, S.A. The transaction is static and is not subject to residual value risk. The receivables include insurance premia.

The transaction features a mixed pro rata/sequential amortisation mechanism, whereby the rated notes initially amortise sequentially until the Class A Notes’ support ratio reaches a target level. Thereafter, the rated notes will start to amortise pro rata. However, certain events could cause this feature to stop indefinitely, resulting in the rated notes amortising on a sequential basis.

The transaction closed in November 2021 and its legal final maturity date is at the December 2031 payment date.

PORTFOLIO PERFORMANCE
Delinquencies have been low since closing. As of the September 2022 payment date, two- to three-month arrears and 90+-day arrears were at 0.1% and 0.2% of the outstanding portfolio balance, respectively. As of the September 2022 payment date, the cumulative gross default ratio and cumulative net default ratio were both at 0.1%.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and maintained its base case PD and LGD assumptions at 2.2% and 75.0%, respectively.

CREDIT ENHANCEMENT
Credit enhancement (CE) to the rated notes consists of their subordination (excluding the unrated Class J Notes) and the cash reserve. As of the September 2022 payment date, CE to the rated notes had slightly increased since closing as follows:
-- CE to the Class A Notes to 8.7% from 6.0%
-- CE to the Class B Notes to 6.5% from 4.5%
-- CE to the Class C Notes to 3.6% from 2.6%

The CE to the Class D Notes was stable at 0.5%.

As of the September 2022 payment date, amortisation on the rated notes was sequential. The Class A Notes’ support ratio stood at 8.2%, below the pro rata amortisation trigger level of 12.0%. Interest deferral on Class B, Class C, and Class D Notes depends on these classes of notes not being the most senior notes as well as on the cumulative gross default ratio exceeding certain limits (15.0%, 4.0%, 3.1%, respectively). As of the September 2022 payment date, no interest was deferred on these notes as the cumulative gross default ratio was 0.1% and the Class A Notes were outstanding.

The transaction benefits from a cash reserve funded via the Class J Notes issuance. The cash reserve is available to cover senior fees, swap payments, and interest on the rated notes. It is amortising and set at 0.5% of the outstanding balance of the rated notes and floored at EUR 2.5 million. As of the September 2022 payment date, it was at its target balance of approximatively EUR 3.5 million.

The Bank of New York Mellon SA/NV, Milan branch (BNYM Milan) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on BNYM 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 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.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank) acts as the swap counterparty for the transaction. DBRS Morningstar's public Long Term Critical Obligations Rating on DZ Bank of AA is above the first rating threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (17 May 2022).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

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 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/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 these ratings include loan-level data provided by European DataWarehouse GmbH and investor reports provided by Banca Finanziaria Internazionale S.p.A.

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

At the time of the initial ratings, 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.

The last rating action on this transaction took place on 9 November 2021, when DBRS Morningstar finalised its provisional ratings on the rated notes.

The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.

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 are 2.2% and 75.0%, 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 on the Class A Notes would be expected to decrease to AA (low) (sf), ceteris paribus. If the PD increases by 50%, the rating on the Class A Notes would be expected to decrease to AA (low) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to decrease to BBB (high) (sf), ceteris paribus.

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

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

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (sf)

Class D Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating below B (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.

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

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 28 September 2021

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://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: 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].

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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