DBRS Morningstar Upgrades and Confirms Ratings on Two Quarzo Transactions

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by two Italian ABS transactions:

Quarzo S.r.l. – Series 2020 (Quarzo 2020):
-- Series A Notes upgraded to AAA (sf) from AA (sf)

Quarzo S.r.l. – Series 2022 (Quarzo 2022):
-- Series A Notes confirmed at AA (sf)

The ratings on the respective Series A Notes address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in June 2037 for Quarzo 2020 and November 2038 for Quarzo 2022.

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the March 2023 and February 2023 payment dates for Quarzo 2020 and Quarzo 2022, respectively.
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the respective Series A Notes to cover the expected losses at their respective rating levels.

The two transactions are securitisations of unsecured Italian consumer loan receivables originated and serviced by Compass Banca S.p.A. (Compass). The portfolios contain mostly personal loans but also include loans for the purchase of new and used vehicles and loans for other purposes. Quarzo 2020 included an initial 18-month revolving period, which ended in October 2021, while Quarzo 2022 includes a 12-month revolving period, which is scheduled to end on the April 2023 payment date.

PORTFOLIO PERFORMANCE
Quarzo 2020
As of the March 2023 payment date, loans that were one to two months and two to three months delinquent represented 0.9% and 0.5% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.8%. Gross cumulative defaults amounted to 2.1% of the aggregate original balance.

Quarzo 2022
As of the February 2023 payment date, loans that were one to two months and two to three months delinquent represented 0.6% and 0.3% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.5%. Gross cumulative defaults amounted to 0.6% 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 for the transactions as follows:
-- Quarzo 2020, DBRS Morningstar updated its PD and LGD assumptions to 4.9% and 77.0%, respectively.
-- Quarzo 2022, DBRS Morningstar updated its PD and LGD assumptions to 4.7% and 77.0%, respectively.

CREDIT ENHANCEMENT
The unrated Series B Notes provide credit enhancement to the Series A Notes. As of the March 2023 and February 2023 payment dates, the credit enhancement (CE) was as follows:
-- Quarzo 2020, CE to the Series A Notes was 25.4%, up from 14.7% at the last annual review.
-- Quarzo 2022, CE to the Series A Notes was 12.0%, stable since the DBRS Morningstar initial rating because of the transaction revolving period, which is scheduled to end in April 2023.

The transactions benefit from nonamortising liquidity reserves. For Quarzo 2020, the liquidity reserve was funded at closing with part of the proceeds from the issuance of the Series B Notes, and is available to cover senior fees, swap payments, and the interest due on the Series A Notes. The liquidity reserve is currently at its target of EUR 8.8 million. For Quarzo 2022, the liquidity reserve was funded at closing with part of the proceeds from the issuance of a subordinated loan, and 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 2.1 million.

Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) acts as the account bank for the transactions. 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 ratings assigned to the Series A Notes, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

Banco Santander S.A. has been appointed as the swap counterparty for Quarzo 2022. 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 swap documentation, are consistent with the thresholds defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact 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 analysed the transactions structures in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in these transactions are listed at the end of this press release.

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

A review of the transactions’ 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 investor reports provided by The Bank of New York Mellon SA/NV – Milan Branch for Quarzo 2020 and Citibank N.A., Milan Branch for Quarzo 2022, servicer reports provided by Compass, and loan-level data provided by the European DataWarehouse GmbH. Additionally, DBRS Morningstar was provided with updated historical performance data as follows:
-- Quarterly static default data from Q1 2009 to Q4 2022;
-- Quarterly static recovery data from Q1 2009 to Q4 2022;
-- Quarterly static and dynamic prepayment data from Q1 2009 to Q4 2022; and
-- Quarterly dynamic delinquency data from Q1 2009 to Q4 2022.

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 purpose 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 Quarzo S.r.l. - Series 2020 took place on 4 April 2022, when DBRS Morningstar confirmed its rating on the Class A notes at AA (sf).

-- This is the first rating action for Quarzo S.r.l. - Series 2022 since the Initial Rating Date.

The lead analyst responsibilities for Quarzo S.r.l. - Series 2022 have been transferred to Preben Cornelius Overas.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on 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):
-- For Quarzo 2020, the base case PD and LGD of the current pool of loans are 4.9% and 77.0%, respectively.
-- For Quarzo 2022, the base case PD and LGD of the current pool of loans are 4.7% and 77.0%, respectively.

-- 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 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 Quarzo 2020 Series A Notes would be expected to remain at AAA (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 AA (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 AA (sf).

Quarzo 2020, Series A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

Quarzo 2022, 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 (low) (sf)
-- 50% increase in PD, expected rating of A (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 (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Preben Cornelius Overas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
Quarzo 2020: 17 April 2020
Quarzo 2022: 24 March 2022

DBRS Ratings GmbH
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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: http://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (7 February 2023),
https://www.dbrsmorningstar.com/research/409485/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
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/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.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.

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].