DBRS Morningstar Assigns Rating to Marzio Finance S.r.l. - Series 11-2023

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of AA (low) (sf) to the Series 11-2023 Class A Asset-Backed Fixed Rate Notes (the Class A Notes) issued by Marzio Finance S.r.l. (the Issuer) under Series 11-2023 in the context of a securitisation programme (the programme).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal maturity date. DBRS Morningstar does not rate the Series 11-2023 Class J Asset-Backed Notes (the Class J Notes) also issued in this transaction.

In the context of the programme, which was established in August 2017 and amended in November 2018, March 2020, and June 2022, DBRS Morningstar currently rates the following outstanding notes:
-- Series 4-2018 Class B Notes at AA (sf) (upgraded from AA (low) (sf) in December 2022),
-- Series 5-2019 Class A Notes at AA (sf) (upgraded from AA (low) (sf) in January 2022),
-- Series 7-2019 Class A Notes at AA (sf) (upgraded from AA (low) (sf) in December 2022),
-- Series 8-2020 Class A Notes at AA (low) (sf),
-- Series 9-2022 Class A Notes at AA (low) (sf), and
-- Series 10-2022 Class A Notes at AA (low) (sf).

The Issuer may issue further series under the programme, but each new series and the portfolio backing it would be segregated from the others. As such, although DBRS Morningstar may assign ratings to notes from other series, the ratings may be different and different rating actions may be taken on different series at different points in time. Although all series rely on the same template documents, each series is regulated by a specific set of documents and is backed by its own segregated assets as typically permitted under Italian securitisation law; however, most of the counterparties and some of the series features are identical since they are based on the programme template documents.

The Series 11-2023 Class A Notes are backed by Italian consumer loan contracts related to salary and pension assignment loans as well as payment delegation loans granted by Istituto Bancario del Lavoro S.p.A. (IBL Banca or the originator) to Italian employees and pensioners, which were purchased with the issuance proceeds of the Series 11-2023 Class A and Class J Notes. The Series 11-2023 receivables are segregated from the other series’ receivables that were assigned and may be assigned to back the issuance of additional series. IBL Banca services the Series 11-2023 receivables and the other receivables that may be assigned in the context of the programme, with IBL Servicing S.p.A., a company fully owned by IBL Banca, appointed as master servicer. Zenith Service S.p.A. is the backup servicer for this transaction.

As of 30 April 2023, the Series 11-2023 portfolio consisted of 18,796 loan contracts with a total balance of approximately EUR 308.93 million. The portfolio is composed of salary assignment (42.2% of the outstanding balance), pension assignment (41.4%), and payment delegation (16.4%) loans. It is well distributed across Italy, with the highest concentrations in the regions of Lazio (21.2% of the outstanding balance), Sicily (14.9%), and Lombardy (12.0%).

DBRS Morningstar based its rating on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested.
-- IBL Banca’s capabilities with respect to originations, underwriting, servicing, and financial strength.
-- The appointment of a backup servicer upon closing.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral, and historical and projected performance of the seller’s portfolio.
-- The sovereign rating on the Republic of Italy, currently rated BBB (high) with a Stable trend by DBRS Morningstar.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s "Legal Criteria for European Structured Finance Transactions" methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction envisages a combined waterfall for the payment of interest and principal on the notes. Principal on the Class A Notes is paid based on a formula redemption amount.

The transaction benefits from a liquidity reserve of EUR 1.97 million and an additional reserve of EUR 5.42 million funded with part of the proceeds of subscription to the Class J Notes. The Issuer can use the reserves to cover shortfalls in senior expenses and interest on the Class A Notes. The additional reserve also provides credit enhancement and covers any principal shortfall on the Class A Notes.

The Class A Notes and the receivables in the portfolio pay a fixed interest rate.

COUNTERPARTIES
IBL Banca is the collection account bank for the transaction. DBRS Morningstar considered the impact and likelihood of a commingling loss in accordance with its criteria.

Citibank N.A./Milan branch and Citibank N.A./London branch are the transaction account bank and investment account bank for the transaction, respectively. DBRS Morningstar privately rates both entities, which meet DBRS Morningstar’s criteria to act in such capacities. Based on DBRS Morningstar’s private ratings on the account banks, 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 notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations

Social (S) 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 IMF Word Economic Outlook, Italy’s GDP per capita of USD 34,113 in 2022 was relatively low compared with its euro area peers. At the same time, according to the World Bank, Italy ranked for Governance Effectiveness at 64.9th percentile in 2021. 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 rating. 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.

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: “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.

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

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

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 the originator directly or through the co-arranger, UniCredit Bank AG.

DBRS Morningstar received the following data and information, split by employer type (pensioners, public, state, post office, railways, private) and further split by salary or pension assignment and payment delegations:
-- Static quarterly default data from Q1 2011 to Q1 2023,
-- Static quarterly recovery data from Q1 2011 to Q1 2023,
-- Static quarterly prepayment data from Q1 2011 to Q1 2023,
-- Dynamic quarterly prepayment data from Q1 2008 to Q1 2023, and
-- Dynamic quarterly delinquency data from Q1 2008 to Q1 2023.

DBRS Morningstar was also provided with detailed loan-by-loan characteristics and stratification tables of the outstanding portfolio as of 30 April 2023 as well as the related amortisation schedule.

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

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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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):
-- Probability of default (PD) used: Expected PD of 27.9% for the AA (low) (sf) scenario, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 46.6% for the AA (low) (sf) scenario.
-- Loss given default (LGD) used: Expected LGD of 53.4% for the AA (low) (sf) scenario, a 25% and 50% increase on the applicable LGD.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Class A Notes: A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Ilaria Maschietto, Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 30 May 2023

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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- 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.
-- 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.
-- 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].