Morningstar DBRS Upgrades Credit Rating on Quarzo S.r.l. - Series 2017

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit rating on the Series A Notes issued by Quarzo S.r.l. - Series 2017 (the Issuer) from AA (sf) to AAA (sf).

The credit rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in November 2033.

CREDIT RATING RATIONALE
The upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of May 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Series A Notes to cover the expected losses at the AAA (sf) credit rating level.

The transaction is a securitisation of unsecured Italian consumer loan receivables originated by Compass Banca S.p.A. (Compass), a subsidiary of Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca). The portfolio contains mostly personal loans, but also includes loans for the purchase of new and used vehicles and loans for other purposes. The transaction closed in February 2017 with a portfolio balance of EUR 1.5 billion. The transaction had an initial 42-month revolving period, which was extended by an additional 24 months in September 2019. As such, the amortisation of the Series A Notes started on the payment date falling in November 2022.

PORTFOLIO PERFORMANCE
As of the May 2024 payment date, loans that were one to two months and two to three months delinquent represented 1.0% and 0.5% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.9%. Gross cumulative defaults amounted to 3.2% of the aggregate original and subsequent portfolios, 20.3% of which have been recovered to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS received updated historical vintage data and updated its base case PD and LGD assumptions to 4.7% and 75.0%, respectively, from 5.0% and 77.0%, respectively, at the time of the last annual review.

CREDIT ENHANCEMENT
The subordination of the Series B Notes provides credit enhancement to the Series A Notes. As of the May 2024 payment date, credit enhancement to the Series A Notes was 72.3%, up from 42.3% at the last annual review.

The transaction benefits from a non-amortizing liquidity reserve, funded at closing using the proceeds from the issuance of the Series B Notes, which is available to cover senior expenses and interest payments on the Series A Notes. The liquidity reserve is currently at its target level of EUR 5.9 million.

The structure also includes a flexible and liberata loans cash reserve, which mitigates the liquidity risk arising from these loans. These loans can represent up to 5.0% of the outstanding balance of the portfolio and currently amount to 0.05% of the portfolio. Under these loan agreements, borrowers have the option to skip one monthly instalment per year (up to a maximum of five times during the life of the loan) or to modify the amount of the monthly instalments. This reserve will only be funded if, for three consecutive calculation dates, the outstanding balance of the flexible and liberata loans in relation to which the debtors have exercised the contractual right to postpone the payments is higher than 2.0% of the portfolio balance. As of the May 2024 payment date, this condition had not been breached.

Mediobanca acts as the account bank for the transaction. Based on Morningstar DBRS' private 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 rating assigned to the Series A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 factor(s) 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 Factors in Credit Ratings https://dbrs.morningstar.com/research/437781.

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 rating is the Master European Structured Finance Surveillance Methodology (6 August 2024) https://dbrs.morningstar.com/research/437540.

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.

A review of the transaction 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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at https://dbrs.morningstar.com/research/436000.

The sources of data and information used for this credit rating include investor reports provided by Deutsche Bank S.p.A. (the Calculation Agent), servicer reports provided by Compass, and loan-level data provided by 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 Q4 2023;
-- Static quarterly recovery data from Q1 2009 to Q4 2023;
-- Static quarterly prepayments data from Q1 2009 to Q1 2024;
-- Dynamic quarterly prepayment data from Q1 2009 to Q1 2024; and
-- Dynamic quarterly delinquency data from Q1 2009 to Q1 2024.

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

At the time of the initial credit rating, 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 purposes of providing this credit rating 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 issuer took place on 7 September 2023, when Morningstar DBRS upgraded its credit rating on the Series A Notes to AA (sf) from AA (low) (sf).

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

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):

-- 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 of the pool of loans for the Issuer are 4.7% and 75.0%, 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.

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)

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.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Helvia Meana, Assistant Vice President,
Rating Committee Chair: Mark Wilder, Senior Vice President,
Initial Rating Date: February 15, 2017

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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.

-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- Master European Structured Finance Surveillance Methodology (6 August 2024), https://dbrs.morningstar.com/research/437540
-- Operational Risk Assessment for European Structured Finance Servicers (6 August 2024),
https://dbrs.morningstar.com/research/437543
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- Rating European Structured Finance Transactions Methodology (25 June 2024), https://dbrs.morningstar.com/research/434970
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024),
https://dbrs.morningstar.com/research/437781

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 info-DBRS@morningstar.com.