DBRS Morningstar Confirms Ratings on Two Auto ABS Italian Rainbow Loans Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the notes issued by Auto ABS Italian Rainbow Loans S.r.l. (2020) (Rainbow Loans 2020) and Auto ABS Italian Rainbow Loans S.r.l. (2022) (Rainbow Loans 2022) (collectively, the Issuers) as follows:

Rainbow Loans 2020:
-- Class A Notes at AAA (sf)

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

Rainbow Loans 2022:
-- Class A Notes at AA (high) (sf)

The rating addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date in June 2038.

The confirmations follow annual reviews 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 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- No revolving termination events to date; and
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels.

The transactions are securitisations of fixed-rate receivables related to balloon auto loans granted by Stellantis Financial Services Italia S.p.A. (Stellantis FSI or the seller; formerly Banca PSA Italia S.p.A.) to private and commercial debtors residing in Italy. Stellantis FSI services the portfolios and Santander Consumer Finance S.A. is appointed as the backup servicer facilitator.

Both transactions include an initial two-year revolving period. For Rainbow Loans 2020, the revolving period ended on the August 2022 payment date while, for Rainbow Loans 2022, the revolving period is expected to end on the payment date in May 2024. During the two-year revolving period and following the seller’s request, the Issuers can purchase additional receivables exclusively through additional subscription payments under the notes provided that certain conditions set out in the transaction documents are satisfied. The notes can be increased up to the notes’ maximum amount of EUR 800 million; the amount of the additional subscription payment is calculated pro rata based on its relevant percentage and the applicable pro rata share (90% for the Class A Notes and 10% for the Class Z Notes); however, all purchases are subject to eligibility criteria, and there are concentration limits and performance triggers in place to mitigate any potential portfolio deterioration. To date, all limits and triggers are being met.

PORTFOLIO PERFORMANCE
For Rainbow Loans 2020, loans 30 to 60 days and 60 to 90 days delinquent represented 0.08% and 0.06% of the outstanding portfolio balance, respectively, while loans more than 90 days delinquent represented 0.04%. Gross cumulative defaults represented 0.2% of the aggregate original portfolio balance, with cumulative principal recoveries of 10.8% to date.

For Rainbow Loans 2022, loans 30 to 60 days and 60 to 90 days delinquent represented 0.05% and 0.03% of the outstanding portfolio balance, respectively, while loans more than 90 days delinquent represented 0.02%. Gross cumulative defaults represented 0.15% of the aggregate original portfolio balance, with cumulative principal recoveries of 8.7% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
For Rainbow Loans 2020, DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD to 1.8% and 81.1%, respectively, from 2.0% and 82.4% at the last annual review, respectively.

For Rainbow Loans 2022, DBRS Morningstar maintained its base case PD and LGD at 2.4% and 51.2%, respectively. Given the revolving period, the assumptions continue to be 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 the AAA (sf) level.

CREDIT ENHANCEMENT
The subordination of the junior notes provides credit enhancement (CE) to the rated notes. As of the March 2022 payment date, CE to the notes stood as follows:
-- Rainbow Loans 2020: CE to the Class A Notes increased to 14.3% from 11.5% at closing.
-- Rainbow Loans 2022: CE to the Class A Notes remained at 10.0% due to the revolving period.

Both transactions benefit from an amortising general reserve, available to cover shortfalls on senior fees, expenses, and interest payments on the Class A Notes.
-- For Rainbow Loans 2020, the general reserve was initially set to meet the required amount corresponding with 1.0% of the Class A and Class Z Notes’ balance. 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.
-- For Rainbow Loans 2022, the general reserve was initially set to meet the required amount corresponding with 1.5% of the Class A and Class Z Notes’ balance, but may fall in relative terms due to the ramp-up of the notes. The reserve is currently at its target level of EUR 4.8 million, or 1.5% of the initial Class A and Class Z Notes’ balance.

For Rainbow Loans 2020, Banco Santander SA and The Bank of New York Mellon SA/NV - Milan branch (BNYM-MB) act as the transaction’s Spanish and Italian account banks (together, the account banks), respectively. Based on the reference rating of A (high) on the Spanish account bank (which is one notch below its DBRS Morningstar’s Long Term Critical Obligation Rating of AA (low)) and the reference rating of AA (high) on the Italian 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 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.

-- For Rainbow Loans 2022, BNYM-MB act as the transaction account bank. Based on the reference rating as described above, 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 Class A Notes, as described in DBRS Morningstar's "Legal 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period for Rainbow Loans 2022, the analysis for this transaction continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 Zenith Service S.p.A., additional information provided by Banca PSA, and loan-level data provided by the European DataWarehouse GmbH.

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 for both transactions. 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 Rainbow Loans 2020 took place on 27 April 2022, when DBRS Morningstar confirmed its AAA (sf) rating on the Class A Notes.

This is the first rating action on Rainbow Loans 2022 since the Initial Rating Date.

The lead analyst responsibilities for Rainbow Loans 2022 have been transferred to Preben Cornelius Overas.

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 transactions’ parameters on the ratings, 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 are 1.8% and 81.1%, respectively, for Rainbow Loans 2020
-- The base case PD and LGD are 2.4% and 51.2%, respectively, for Rainbow Loans 2022.
-- 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, in Rainbow Loans 2020, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at AAA (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 (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 AA (sf).

Rainbow Loans 2020
Class 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 (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (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)

Rainbow Loans 2022
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (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 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 (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 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. 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
Rainbow Loans 2020: Initial Rating Date: 23 July 2020
Rainbow Loans 2022: Initial Rating Date: 27 April 2022

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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 Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- 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.
-- 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-socialand 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].