Morningstar DBRS Upgrades and Confirms Credit Ratings on Two Quarzo Transactions

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the notes issued by two Italian asset-backed securities transactions:

Quarzo S.r.l. – Series 2020 (Quarzo 2020):
-- Series A Notes confirmed at AAA (sf)

Quarzo S.r.l. – Series 2022 (Quarzo 2022):
-- Series A Notes upgraded to AAA (sf) from AA (sf)

The credit ratings on the respective Series A Notes address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in June 2037 for Quarzo 2020 and November 2038 for Quarzo 2022.

The credit rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the December 2023 and February 2024 payment dates for Quarzo 2020 and Quarzo 2022, respectively.
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement (CE) to the respective Series A Notes to cover the expected losses at their AAA (sf) credit rating level.

The two transactions are securitisations of unsecured Italian consumer loan receivables originated and serviced by Compass Banca S.p.A. (Compass). The portfolios contain mostly personal loans but also include loans for the purchase of new and used vehicles and loans for other purposes. Quarzo 2020 included an initial 18-month revolving period, which ended in October 2021, while Quarzo 2022 included a 12-month revolving period, which ended on the April 2023 payment date.

PORTFOLIO PERFORMANCE
Quarzo 2020
As of the December 2023 payment date, loans that were one to two months and two to three months delinquent represented 1.1% and 0.7% of the portfolio balance, respectively, while loans more than three months delinquent represented 1.0%. Gross cumulative defaults amounted to 2.5% of the aggregate original balance, where 8.9% has been recovered so far.

Quarzo 2022
As of the February 2024 payment date, loans that were one to two months and two to three months delinquent represented 0.9% and 0.6% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.9%. Gross cumulative defaults amounted to 1.7% of the aggregate original balance, where 3.5% has been recovered so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS updated its base-case PD and LGD assumptions for the transactions following updated historical information received in the context of a more recent transaction from the same originator, as follows:
-- Quarzo 2020: Morningstar DBRS updated its PD and LGD assumptions to 4.5% and 77.0%, respectively.
-- Quarzo 2022: Morningstar DBRS updated its PD and LGD assumptions to 4.2% and 77.0%, respectively.

CREDIT ENHANCEMENT
The unrated Series B Notes provide CE to the Series A Notes. As of the December 2023 and February 2024 payment dates, the CE was as follows:
-- Quarzo 2020: CE to the Series A Notes was 40.7%, up from 25.4% at the last annual review.
-- Quarzo 2022: CE to the Series A Notes was 19.7%, up from 12.0% at the last annual review. The increased CE prompted the upgrade on the Series A Notes.

The transactions benefit from nonamortising liquidity reserves. For Quarzo 2020, the liquidity reserve was funded at closing with part of the proceeds from the issuance of the Series B Notes and is available to cover senior fees, swap payments, and the interest due on the Series A Notes. The liquidity reserve is currently at its target of EUR 8.8 million. For Quarzo 2022, the liquidity reserve was funded at closing with part of the proceeds from the issuance of a subordinated loan and is available to cover senior fees and the interest due on the Series A Notes. The liquidity reserve is currently at its target of EUR 2.1 million.

Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) acts as the account bank for the transactions. Based on Morningstar DBRS’ private credit rating on Mediobanca, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit ratings assigned to the Series A Notes, as described in Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology.

Banco Santander SA has been appointed as the swap counterparty for Quarzo 2022. Morningstar DBRS rates Banco Santander SA publicly with a Long Term Critical Obligations Rating of AA (low). The downgrade and collateral posting provisions, as defined in the swap documentation, are consistent with the thresholds defined in Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions” methodology.

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

Morningstar DBRS’ credit rating does not address nonpayment 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 this transaction 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.

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 The Bank of New York Mellon SA/NV – Milan Branch for Quarzo 2020 and Citibank N.A., Milan Branch for Quarzo 2022, servicer reports provided by Compass, and loan-level data provided by the European DataWarehouse GmbH. In the context of a newer transaction from the same originator, Morningstar DBRS was provided with updated historical performance data as follows:
-- 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.

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. However, this did not affect 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 Quarzo 2020 took place on 3 April 2023, when Morningstar DBRS upgraded its credit rating on the Series A Notes to AAA (sf) from AA (sf). The last credit rating action on Quarzo 2022 took place on 3 April 2023, when Morningstar DBRS confirmed its credit rating on the Series A Notes at AA (sf).

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 transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):
-- For Quarzo 2020, the base-case PD and LGD of the current pool of loans are 4.5% and 77.0%, respectively.
-- For Quarzo 2022, the base-case PD and LGD of the current pool of loans are 4.2% and 77.0%, respectively.

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 risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base-case assumption.

Quarzo 2020 Series 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)

Quarzo 2022 Series 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 AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (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 (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
Credit Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Dates:
Quarzo 2020: 17 April 2020
Quarzo 2022: 24 March 2022

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
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: https://dbrs.morningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425148
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),https://dbrs.morningstar.com/research/420573
-- 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
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),https://dbrs.morningstar.com/research/427030
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754

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].