Morningstar DBRS Upgrades Credit Ratings on Two Series of the Marzio Finance S.r.l. Securitisation Programme

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit ratings on two series of notes issued by Marzio Finance S.r.l. (the Issuer) in the context of a securitisation programme (the programme) as follows:

-- Series 9-2022 (M9): Class A Notes upgraded to AA (sf) from AA (low) (sf)
-- Series 10-2022 (M10): Class A Notes upgraded to AA (sf) from AA (low) (sf)

Additionally, Morningstar DBRS removed the Under Review with Positive Implications (UR-Pos.) status on the rated notes of the Issuer. These credit ratings were placed UR-Pos. following the release of an updated Rating European Consumer and Commercial ABS methodology which introduced a revision of the application of stresses to salary-assignment loans. For more information, please see: https://dbrs.morningstar.com/research/426219.

The credit ratings address the timely payment of interest and the ultimate payment of principal on or before the final maturity dates of August 2046 for M9 and November 2047 for M10.

CREDIT RATING RATIONALE
The credit rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performances, in terms of delinquencies, defaults, and losses, as of the February 2024 payment dates;
-- Updated portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the rated notes to cover the expected losses at the AA (sf) credit rating level; and
--The updated “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology.

Marzio Finance S.r.l. is a EUR 10,000,000,000 programme established in August 2017 and amended in November 2018, March 2020, June 2022 and September 2023, designed to follow the standard structure under the Italian securitisation law. The programme represents the issuance of notes under various series backed by pools of receivables related to salary- and pension-assignment loans as well as payment-delegation loans granted by IBL Istituto Bancario del Lavoro S.p.A. (IBL) to Italian employees and pensioners. IBL Servicing S.p.A. (fully owned by IBL) services the portfolios while IBL acts as subservicer and Zenith Service S.p.A. acts as backup servicer.

PORTFOLIO PERFORMANCE
For M9, as of the January 2024 cut-off date, loans that were one to two months and two to three months in arrears represented 0.9% and 0.4% of the outstanding portfolio balance, respectively, while loans more than three months in arrears represented 0.8%. The gross cumulative default ratio stood at 1.5% of the initial portfolio.

For M10, as of the January 2024 cut-off date, loans that were one to two months and two to three months in arrears represented 1.2% and 0.5% of the outstanding portfolio balance, respectively, while loans more than three months in arrears represented 1.3%. The gross cumulative default ratio stood at 2.0% of the initial portfolio.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the outstanding pool of receivables and updated its base case annualised PD and LGD assumptions as follows:
-- M9: 7.5% and 4.5%, respectively, and
-- M10: 7.6% and 4.5%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolios and the additional reserve provide credit enhancement to the Class A Notes in the two transactions. As of the February 2024 payment dates, credit enhancement levels were as follows:
-- M9: 22.3%, up from 18.7% as of the June 2023 payment date, and
-- M10: 22.2%, up from 19.6% as of the June 2023 payment date.

The two series benefit from amortising cash reserves available to cover senior fees and expenses, swap payments (only for M9), and interest payments on the Class A Notes as well as from additional reserves that provide actual credit enhancement to the rated notes on top of liquidity support. As of the February 2024 payment dates, both the cash reserves and additional reserves were at their respective target levels.

Cash trapping conditions are in place to trap the excess spread upon the breach of certain triggers if the cumulative net default ratio rises above a certain threshold.

Each series also benefits from a prepayment reserve, available to cover losses arising from the set-off of capitalised fees.

Citibank N.A./Milan Branch acts as the account bank for the transactions. Based on Morningstar DBRS’ private credit rating on the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structures, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit ratings assigned to the notes, as described in Morningstar DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

M10 is naturally hedged. Crédit Agricole CIB, Milan Branch is the swap counterparty for M9. Morningstar DBRS’ private credit rating on the swap counterparty is consistent with the first rating threshold as defined in Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions” methodology. The swap documents are compliant with the same methodology.

Morningstar DBRS’ credit ratings on both Class A 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 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
Social (S) and Governance (G) Factors
The high exposure to public-sector employees, pensioners, and civil servants makes the transaction dependent on the creditworthiness of the Italian sovereign. Morningstar DBRS considers some of the key drivers behind the latest rating action on Italy – namely Human Capital and Human Rights (S) and Institutional Strength, Governance & Transparency (G) – to be significant rating factors. According to the IMF World Economic Outlook, Italy’s GDP per capita of USD 34,085 in 2022 was relatively low compared with its euro area peers. According to the World Bank, Italy ranked for Governance Effectiveness at 67th percentile in 2022. Morningstar DBRS took these factors into account in the “Economic Structure and Performance”, “Fiscal Management and Policy”, and “Political Environment” building blocks of its “Global Methodology for Rating Sovereign Governments”.

Credit rating actions on the Republic of Italy are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://dbrs.morningstar.com/research/422494.

There were no Environmental 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 structures in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to these credit ratings are: “Master European Structured Finance Surveillance Methodology” (7 March 2024), https://dbrs.morningstar.com/research/429051, and the “Rating European Consumer and Commercial Asset-Backed Securitisations” (8 January 2024), https://dbrs.morningstar.com/research/426219.

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 transaction 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 actions.

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 servicer reports, investor reports, and additional performance information provided by IBL and loan-level data provided by the European DataWarehouse GmbH.

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 impact the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes 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 actions on these transactions took place on took place on 24 January 2024, when Morningstar DBRS placed the credit ratings on the rated notes UR-Pos. Prior to that, on 27 July 2023, Morningstar DBRS confirmed its credit ratings on the Class A Notes in both transactions at AA (low) (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 transactions 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 lifetime base case PD and LGD for the pools 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 current pool of loans for M9 and M10 are as follows:
-- M9: 7.5% and 4.5%, respectively, and
-- M10: 7.6% and 4.5%, 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.

M9:
Class 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 (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (low) (sf)

M10:
Class 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 AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (low) (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: Pascale Kallas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Dates:
-- M9: 22 September 2022
-- M10: 28 November 2022

DBRS Ratings GmbH
Neue Mainzer Straße 75
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 these transactions 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
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- 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].