Morningstar DBRS Upgrades Credit Ratings on Quarzo S.r.l. - Series 2023

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit ratings on the Series A1 and Series A2 Notes (together, the Series A Notes or the rated notes) issued by Quarzo S.r.l. (the Issuer) to AA (high) (sf) from AA (sf).

The credit ratings on the Series A Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal maturity date in December 2039.

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of the level of delinquencies, defaults, and losses as of the March 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- No revolving period termination events to date; and
-- Current available credit enhancement to the respective Series A Notes to cover the expected losses at their AA (high) (sf) credit rating level.

The transaction is a securitisation 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. The transaction included an initial 12-month revolving period, which is scheduled to end on the June 2024 payment date, during which the Issuer can purchase additional receivables subject to eligibility criteria and concentration limits designed to prevent the deterioration of the portfolio quality.

PORTFOLIO PERFORMANCE
As of the March 2024 payment date, loans that were one to two months and two to three months delinquent represented 0.6% and 0.3% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.5%. Gross cumulative defaults amounted to 0.6% of the aggregate original balance, 2.1% of which has been recovered so far.

PORTFOLIO ASSUMPTIONS AND KEY CREDIT RATING DRIVERS
Morningstar DBRS updated its base case PD assumptions to 4.5% from 4.9% and maintained its LGD assumption at 77.0% following the receipt of updated historical information in the context of a more recent transaction from the same originator. The updated assumptions prompted the upgrade on the rated notes.

CREDIT ENHANCEMENT
The unrated Series B Notes provide credit enhancement to the Series A Notes. As of the March 2024 payment date, the credit enhancement to the Series A Notes was 13.5%, stable since closing due to the revolving period.

The transaction benefit from a nonamortising liquidity reserve funded at closing through the proceeds of a subordinated loan. The reserve 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 6.1 million.

Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) has been appointed as the issuer account bank for the transaction while Citibank N.A./Milan branch (Citibank Milan) has been appointed as the account bank with respect to the payments account and the liquidity reserve account. Based on Morningstar DBRS’ private credit ratings on Mediobanca and Citibank Milan, 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 banks 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 (Santander) has been appointed as the swap counterparty. Morningstar DBRS’ Long Term Critical Obligations Rating on Santander is 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 transaction structure 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” (7 March 2024), https://dbrs.morningstar.com/research/429051.

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 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 continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the 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 Deutsche Bank AG, London Branch; servicer reports provided by Compass; and loan-level data provided by the European DataWarehouse GmbH. In the context of a more recent transaction from the same originator, Morningstar DBRS received 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 this transaction took place on 11 May 2023, when Morningstar DBRS finalised its provisional credit ratings on the rated notes at AA (sf).

The lead analyst responsibilities for this transaction have been transferred to Preben Cornelius Overas.

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 ratings, Morningstar DBRS considered the following stress scenarios, as compared with the parameters used to determine the credit ratings (the base case):

-- Morningstar DBRS expected a base case PD and LGD for the portfolio 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 4.5% and 77.0%, respectively. They are based on portfolio migration and Morningstar DBRS most constraining cash flow scenario.
-- 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.

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 (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (low) (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 (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: 26 April 2023

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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 (7 March 2024),
https://dbrs.morningstar.com/research/429051
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024), https://dbrs.morningstar.com/research/429054
-- Operational Risk Assessment for European Structured Finance Servicer (15 September 2023), https://dbrs.morningstar.com/research/420572
-- 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
-- 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://www.dbrsmorningstar.com/research/420754
-- 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].