DBRS Morningstar Confirms Credit Ratings on Quinto Sistema Sec. 2017 S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit ratings on the Class A and Class B1 Notes issued by Quinto Sistema Sec. 2017 S.r.l. (the Issuer) at AA (low) (sf) and A (sf), respectively.

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

CREDIT RATING RATIONALE
The confirmations are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the August 2023 payment date;
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions for the aggregate collateral pool; and
-- Current available credit enhancement to rated notes to cover the expected losses at their respective credit 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 ended 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 credit rating date (14 June 2018). In September 2022, an additional portfolio was purchased through further instalments on all the outstanding notes, following a transaction amendment.

PORTFOLIO PERFORMANCE
As of the June 2023 cut-off date, loans that were one to two months and two to three months in arrears represented 5.3% and 0.9% of the outstanding portfolio balance, respectively, while loans more than three months in arrears represented 0.6%. The gross cumulative default ratio stood at 5.9% of the initial portfolio.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its base-case PD and LGD assumptions to 10.4% and 18.6%, respectively, based on the current pool composition.

CREDIT ENHANCEMENT
Overcollateralisation of the performing outstanding collateral portfolio provides credit enhancement. As of the August 2023 payment date, credit enhancement to the Class A and Class B1 Notes was 17.7% and 3.6%, respectively, up from 11.2% and 1.2%, respectively, as of the amendment date in September 2022.

The transaction benefits from an amortising cash reserve, available to cover senior fees, expenses, and missed interest payments on the rated notes. The reserve’s target is 1.2% of the collateral portfolio outstanding principal or EUR 4.4 million as of the August 2023 payment date.

The transaction also features a prepayment reserve, available to cover losses arising from the set-off of capitalised fees. The reserve’s target is 1.5% of the collateral portfolio outstanding principal or EUR 5.5 million as of the August 2023 payment date.

BNP Paribas Succursale Italia acts 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 credit ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit ratings on the rated notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE 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 the Republic of 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 34,113 in 2022 was low compared with its euro-area peers. At the same time, according to the World Bank, Italy ranked in the 64.9th percentile for Governance Effectiveness 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 Italy are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Italy are discussed separately at https://www.dbrsmorningstar.com/research/413261/dbrs-morningstar-confirms-republic-of-italy-at-bbb-high-stable-trend.

There were no Environmental 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/416784/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 credit ratings is the “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 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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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.

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.

The sources of data and information used for these credit ratings include payment and investor reports provided by Banca Finint, servicer reports provided by Banca Sistema, 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 credit rating and at the time of the amendment in 2022, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 2 September 2022, when DBRS Morningstar downgraded its credit ratings on the Class A and Class B1 Notes to AA (low) (sf) and A (sf), respectively, from AA (sf) and AA (low) (sf), respectively, following a transaction amendment.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit 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 18.6%, respectively.
-- The risk sensitivity overview below illustrates the credit 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 credit rating on 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 credit 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 credit rating on the Class A Notes would be expected to fall to A (high) (sf).

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

Class B1 Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of A (sf)
-- 50% increase in LGD, expected credit rating of A (sf)
-- 25% increase in PD, expected credit rating of A (sf)
-- 50% increase in PD, expected credit rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit 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://registers.esma.europa.eu/cerep-publication. 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 credit 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 Credit Rating Date: 14 June 2018

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The credit 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 (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- 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 (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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].