DBRS Morningstar Assigns Credit Rating to Quarzo S.r.l. - Series 2023-2

DBRS Ratings GmbH (DBRS Morningstar) assigned a credit rating of AA (sf) to the Series A Notes issued by Quarzo S.r.l. (the Issuer) under Series 2023-2.

The credit rating on the Series A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal maturity date in April 2042. DBRS Morningstar does not rate the Series B Notes (together with the Series A Notes, the Notes).

CREDIT RATING RATIONALE
The transaction represents the issuance of Notes backed by a portfolio of receivables related to unsecured consumer loan contracts granted by Compass Banca S.p.A. (Compass; the Originator or the Servicer) to private individuals residing in Italy. The initial portfolio of EUR 2.9 billion comprises standard amortising loans granted for the purchase of new and used vehicles, personal loans, and other-purpose loans. Compass services the collateral portfolio and Zenith Service S.p.A. acts as the backup servicer facilitator.

DBRS Morningstar based its credit rating on the following analytical considerations:
-- The transaction’s structure, including the form and sufficiency of available credit enhancement to withstand stressed cash flow assumptions and repay the Issuer’s financial obligations according to the terms under which the Notes are issued;
-- The credit quality of Compass’ portfolio, the diversification of the collateral, its historical performance and DBRS Morningstar projected behavior under various stress scenarios;
-- Compass’ capabilities with respect to originations, underwriting, servicing, and its position in the market and financial strength;
-- The operational risk review of Compass, which DBRS Morningstar deems to be an acceptable servicer;
-- The opinion on Zenith Service S.p.A. and its role in the transaction;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s "Legal Criteria for European Structured Finance Transactions" methodology;
-- The sovereign credit rating on the Republic of Italy, currently rated BBB (high) with a Stable trend by DBRS Morningstar;

TRANSACTION STRUCTURE
The transaction includes a 24-month revolving period during which the Issuer has the option to purchase additional receivables. During this period, the transaction will be subject to eligibility criteria and concentration limits designed to prevent the deterioration of the portfolio quality, with which the Issuer will have to comply. The revolving period may early terminate if certain events occur, such as but not limited to the Originator’s insolvency, the Servicer’s replacement, or the breach of performance triggers.

The transaction incorporates a single waterfall that facilitates the distribution of the available collections. The Series A Notes will amortise sequentially subject to a note-specific target principal redemption amount.

On the closing date, the Originator funded an amortising liquidity reserve for an amount equal to 1.15% of the Series A Notes’ initial principal balance through the proceeds of a subordinated loan. The reserve target amount is equal to 1.15% of the Series A Notes’ outstanding principal balance, subject to a floor of 0.25% of the Series A Notes’ initial principal balance. The reserve will provide liquidity support and will be available to pay senior transaction fees and interest payments on the Series A Notes.

TRANSACTION COUNTERPARTIES
Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) was appointed as the Issuer account bank for the transaction. Based on DBRS Morningstar’s private credit 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.

The transaction is exposed to the Mediobanca group as Mediobanca covers the role of Issuer account bank and Compass (which is a subsidiary of Mediobanca) covers the role of Servicer. As Mediobanca is considered a dominant counterparty in the transaction, DBRS Morningstar carried out further analysis to assess the magnitude of the exposure to the bank.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar elected to reduce its assumption of lifetime expected gross defaults to 4.4% from 4.9%, reflecting the long and improving historical data performance and the potential portfolio migration during the revolving period. DBRS Morningstar maintained its expected recovery rate at 23.0%, reflecting the potential portfolio migration during the revolving period.

DBRS Morningstar’s credit rating on the Series A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related principal amount outstanding and the related interest amounts.

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” 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: Rating European Consumer and Commercial Asset-Backed Securitisations (22 October 2023), https://www.dbrsmorningstar.com/research/422276/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.

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

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/421590/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.

The sources of data and information used for this credit rating include the Originator directly or through the arranger, Mediobanca.

DBRS Morningstar was provided with detailed loan-by-loan characteristics and stratification tables on the initial portfolio as of 8 October 2023 as well as the related stratification tables and amortisation schedule.

DBRS Morningstar used the following data and information split by product type (new autos, used autos, personal loans, and other-purpose loans):
-- Static quarterly default data from Q1 2009 to Q2 2023;
-- Static quarterly recovery data from Q1 2009 to Q2 2023;
-- Static quarterly prepayments data from Q1 2009 to Q2 2023;
-- Dynamic quarterly prepayment data from Q1 2009 to Q2 2023; and
-- Dynamic quarterly delinquency data from Q1 2009 to Q2 2023.

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 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.

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

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating:

-- Probability of default (PD) used: Expected PD of 4.4%, 15.6% at the AA (sf) credit rating level, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 23.0%.
-- Loss given default (LGD) used: Expected LGD of 77.0%, 83% at the AA (sf) credit rating level, a 25% and 50% increase on the applicable LGD.

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

DBRS Morningstar concludes that the expected credit ratings under the eight stress scenarios are:
-- Series A Notes: AA (sf), AA (low) (sf), AA (sf), AA (low) (sf), A (sf), AA (sf), AA (low) (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://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: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 31 October 2023

DBRS Ratings GmbH
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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.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (22 October 2023), https://www.dbrsmorningstar.com/research/422276/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (6 October 2023), https://www.dbrsmorningstar.com/research/421599/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structuredfinancetransactions
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-europeanstructured-finance-servicers
-- 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-approachtoenvironmental-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].