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

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the notes issued by Auto ABS Italian Rainbow Loans S.r.l. (Rainbow Loans 2020) and Auto ABS Italian Rainbow Loans S.r.l. (2022) (Rainbow Loans 2022; collectively, the Issuers):

Rainbow Loans 2022:
-- Class A Notes upgraded to AAA (sf) from AA (high) (sf)

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

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

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

The credit rating actions 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 January 2024 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 the AAA credit 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 SA 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 0.15% and 0.08% of the outstanding portfolio balance, respectively, while loans more than 90 days delinquent represented 0.08%. Gross cumulative defaults represented 0.3% of the aggregate original portfolio balance, with cumulative principal recoveries of 12.2% to date.

For Rainbow Loans 2022, loans 30 to 60 days and 60 to 90 days delinquent represented 0.12% and 0.04% of the outstanding portfolio balance, respectively, while loans more than 90 days delinquent represented 0.01%. Gross cumulative defaults represented 0.25% of the aggregate original portfolio balance, with cumulative principal recoveries of 14.0% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
For Rainbow Loans 2020, Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD to 1.76% and 80.94%, respectively, from 1.79% and 81.1% at the last annual review, respectively.

Morningstar DBRS received updated historical vintage data from the originator based on a default definition only in line with Rainbow Loans 2022. As such, Morningstar DBRS updated its base-case PD and LGD assumptions for this transaction. Morningstar DBRS also conducted a loan-by-loan analysis of the remaining pool of receivables and the final updated base case PD and LGD stood at 1.85% and 44.48%, respectively, from 2.4% and 51.2% at the last annual review, respectively. The assumptions continue to be based on the potential portfolio migration and the replenishment criteria set forth in the transaction legal documents. The updated assumptions, in combination with an updated sovereign methodology effective 6 October 2023 wherein Morningstar DBRS removed its stress scenarios for sovereigns rated in the “A” category or below, prompted the upgrade on the Class A Notes in both transactions.

Morningstar DBRS 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 January 2024 payment date, CE to the notes stood as follows:
-- Rainbow Loans 2020: CE to the Class A Notes increased to 21.5% from 14.3% 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 4.76 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 credit rating of A (high) on the Spanish account bank and the Long-Term Senior Debt 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, Morningstar DBRS considers the risk arising from the exposure to the account banks to be consistent with the credit rating assigned to the Class A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

For Rainbow Loans 2022, BNYM-MB acts as the transaction account bank. Based on the reference credit rating described above, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

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

Morningstar DBRS’ credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transactions structures in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148.

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

Morningstar DBRS 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 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include investor reports provided by Zenith Service S.p.A., additional information provided by Stellantis FSI, and loan-level data provided by the European DataWarehouse GmbH. Additionally, Morningstar DBRS received updated historical performance data as follows:
-- Dynamic delinquency, prepayment, and origination data from Q1 2012 to Q2 2023; and
-- Static default and recovery data from Q1 2012 to Q2 2023, for the total portfolio and split by new and used vehicles, standard and balloon loans, and private and commercial borrowers.

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

At the time of the initial credit ratings, Morningstar DBRS was supplied with third-party assessments for both transactions. However, this did not impact the credit rating analysis.

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

Morningstar DBRS 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 Rainbow Loans 2020 took place on 24 April 2023, when Morningstar DBRS confirmed its AAA (sf) credit rating on the Class A Notes.

The last credit rating action on Rainbow Loans 2022 took place on 24 April 2023, when Morningstar DBRS confirmed its AA (high) (sf) credit rating on the Class A Notes.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transactions’ parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Morningstar DBRS 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 80.9%, respectively, for Rainbow Loans 2020.
-- The base case PD and LGD are 1.9% and 44.5%, respectively, for Rainbow Loans 2022.
-- 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.

Rainbow Loans 2020
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)

Rainbow Loans 2022
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (sf)

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Preben Cornelius Overas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Date:
Rainbow Loans 2020: 23 July 2020
Rainbow Loans 2022: 27 April 2022

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

The credit rating methodologies used in the analysis of this transaction can be found at: http://dbrs.morningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425148
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),
https://dbrs.morningstar.com/research/420573
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].