Press Release

DBRS Morningstar Upgrades Credit Rating on Quarzo S.r.l. - Series 2017

Consumer Loans & Credit Cards

September 07, 2023

DBRS Ratings GmbH (DBRS Morningstar) upgraded its credit rating on the Series A Notes issued by Quarzo S.r.l. - Series 2017 (the Issuer) to AA (sf) from AA (low) (sf).

The credit rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in November 2033.

The upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of August 2023 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 Series A Notes to cover the expected losses at the AA (sf) credit rating level.

The transaction is a securitisation of unsecured Italian consumer loan receivables originated by Compass Banca S.p.A. (Compass), a subsidiary of Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca). The portfolio contains mostly personal loans, but also includes loans for the purchase of new and used vehicles and loans for other purposes. The transaction closed in February 2017 with a portfolio balance of EUR 1.5 billion. The transaction had an initial 42-month revolving period, which was extended by an additional 24 months in September 2019. As such, the amortisation of the Series A Notes started on the payment date falling in November 2022.

PORTFOLIO PERFORMANCE
As of the August 2023 payment date, loans that were one to two months and two to three months delinquent represented 0.8% and 0.5% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.8%. Gross cumulative defaults amounted to 2.9% of the aggregate original and subsequent portfolios, 18.5% of which have been recovered to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar received updated historical vintage data and updated its base case PD assumptions to 5.0% and LGD assumptions to 77.0% from 5.6% and 78.8%, respectively, as of the last annual review.

CREDIT ENHANCEMENT
The subordination of the Series B Notes provides credit enhancement to the Series A Notes. As of the August 2023 payment date, credit enhancement to the Series A Notes was 42.3%, up from 19.0% at the last annual review.

The transaction benefits from a nonamortising liquidity reserve, funded at closing using the proceeds from the issuance of the Series B Notes, which is available to cover senior expenses and interest payments on the Series A Notes. The liquidity reserve is currently at its target level of EUR 5.9 million.

The structure also includes a flexible and liberata loans cash reserve, which mitigates the liquidity risk arising from these loans. These loans can represent up to 5.0% of the outstanding balance of the portfolio and currently amount to 0.03% of the portfolio. Under these loan agreements, borrowers have the option to skip one monthly instalment per year (up to a maximum of five times during the life of the loan) or to modify the amount of the monthly instalments. This reserve will only be funded if, for three consecutive calculation dates, the outstanding balance of the flexible and liberata loans in relation to which the debtors have exercised the contractual right to postpone the payments is higher than 2.0% of the portfolio balance. As of the August 2023 payment date, this condition had not been breached.

Mediobanca acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on 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 credit rating assigned to the Series A Notes, as described in DBRS Morningstar’s "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address non-payment 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
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” (4 July 2023) 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 rating 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/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 credit rating include investor reports provided by Deutsche Bank S.p.A. (the Calculation Agent), servicer reports provided by Compass, and loan-level data provided by European DataWarehouse GmbH. In the context of a newer transaction from the same originator, DBRS Morningstar was provided with updated historical performance data as follows:
-- Static quarterly default data from Q1 2009 to Q4 2022;
-- Static quarterly recovery data from Q1 2009 to Q4 2022;
-- Static quarterly prepayments data from Q1 2009 to Q4 2022;
-- Dynamic quarterly prepayment data from Q1 2009 to Q4 2022; and
-- Dynamic quarterly 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 credit rating, 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 this credit rating 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 9 September 2022, when DBRS Morningstar confirmed its credit rating on the Series A Notes at AA (low) (sf).

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 transaction parameters on the credit rating, 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 pool of loans for the Issuer are 5.0% and 77.80%, 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 of the Series A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the credit rating of the Series A Notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the credit rating of the Series A Notes would be expected to remain at AA (sf).

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

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

Lead Analyst: Preben Cornelius Overas, Assistant Vice President
Credit Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit rating Date: 15 February 2017

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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Amtsgericht Frankfurt am Main, HRB 110259

The credit rating methodologies used in the analysis of this transaction can be found at: http://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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