Morningstar DBRS Confirms Credit Rating on Quarzo S.r.l. - Series 2023-2

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (sf) credit rating on the Series A Notes issued by Quarzo S.r.l. (the issuer) under Series 2023-2.

The credit rating addresses the timely payment of scheduled interest and the ultimate payment of principal by the legal maturity date in April 2042.

CREDIT RATING RATIONALE
The confirmation 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 the October 2024 payment date;
-- Updated 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 AA (sf) credit rating level.

The transaction is a securitisation of unsecured consumer loan receivables originated and serviced by Compass Banca S.p.A. (Compass or the Originator) granted to private individuals residing in Italy. The transaction closed in October 2023 and represents the issuance of the Series A and Series B Notes backed by a portfolio that comprises standard amortising loans granted for the purchase of new and used vehicles, personal loans, and other-purpose loans. The transaction is structured with a 24-month revolving period until the October 2025 payment date (included), during which the Issuer has the option to purchase additional receivables, provided that certain conditions set out in the transaction documents are satisfied.

PORTFOLIO PERFORMANCE
As of the September 2024 cut-off date, loans that were one to two months and two to three months in arrears represented 0.7% and 0.4% of the outstanding portfolio balance, respectively, while loans that were more than three months in arrears represented 0.8%. Gross cumulative defaults amounted to 0.7% of the total purchased receivables since closing.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS received updated historical vintage data from the Originator and conducted a loan-by-loan analysis of the remaining pool of receivables. Morningstar DBRS maintained its base case PD assumption at 4.4%, while updating the LGD assumption to 75.0%.

Morningstar DBRS continues to base its analysis on the worst-case portfolio constructed to address potential migration towards the riskiest products during the ramp-up period.

CREDIT ENHANCEMENT
The subordination of the Series B Notes provides credit enhancement to the Series A Notes in the transaction.As of the October 2024 payment date, credit enhancement to the Series A Notes was 12.5%, unchanged since Morningstar DBRS' initial credit rating due to the revolving period.

The transaction benefits from an amortising liquidity reserve, funded at closing in an amount equal to 1.15% of the Series A Notes' initial principal balance through the proceeds of a subordinated loan. The reserve is available to cover senior fees and expenses and interest payments on the Series A Notes. After the end of the revolving period, it amortises subject to a target amount, which is the higher of 1.15% of the Series A Notes' outstanding principal balance and the floor level of 0.25% of the Series A Notes' initial principal balance.
As of the October 2024 payment date, the reserve was at its target balance of EUR 29.2 million.

Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) acts as the account bank for the transaction. Based on Morningstar DBRS's private credit rating on Mediobanca, 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 Series A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit ratings on the Series A Notes addresses 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 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 Factors in Credit Ratings" at: 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers 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 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 payment and investor reports provided by Credit Agricole Corporate & Investment Bank, servicer reports provided by Compass, and loan-level data provided by the European DataWarehouse GmbH. Additionally, Morningstar DBRS was provided with updated historical performance data from the Originator as follows:
-- Quarterly static default data from Q1 2009 to Q4 2023,
-- Quarterly static recovery data from Q1 2009 to Q4 2023
-- Quarterly static prepayments data from Q1 2009 to Q1 2024, and
-- Quarterly dynamic delinquency and prepayment 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 impact 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.

This is the first credit rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Alice Comastri.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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 rating.
-- The base case PD and LGD of the current pool of loans for the Issuer are 4.4% and 75.0%, respectively.

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 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.

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

Lead Analyst: Alice Comastri, Senior Analyst
Rating Committee Chair: Paolo Conti, Associate Managing Director
Initial Rating Date: 31 October 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 (6 August 2024),
https://dbrs.morningstar.com/research/437540
-- Legal Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435165
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024),
https://dbrs.morningstar.com/research/439571
-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024),
https://dbrs.morningstar.com/research/439583
-- Rating European Structured Finance Transactions Methodology (18 September 2024),
https://dbrs.morningstar.com/research/439581
-- 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/439604.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com/ or contact us at info-DBRS@morningstar.com.