DBRS Morningstar Assigns AA (sf) Rating to Quarzo S.r.l. – Series 2020

DBRS Ratings GmbH (DBRS Morningstar) assigned a AA (sf) rating to the Series A Notes issued by Quarzo S.r.l. (the Issuer), under Series 2020. DBRS Morningstar does not rate the Series B Notes issued in this transaction.

The transaction represents the issuance of the Series A and Series B Notes backed by a portfolio of approximately EUR 2.00 billion of receivables related to unsecured consumer loan contracts granted by Compass Banca S.p.A. (the originator) to individual residents in Italy. The originator will also service the portfolio.

The transaction includes an 18-month revolving period, during which time the originator may offer additional receivables that the Issuer can purchase provided that eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur such as the breach of performance triggers, insolvency of the originator, or replacement of the servicer.

The transaction allocates payments on a combined interest and principal priority and benefits from a EUR 8.80 million liquidity reserve funded on the issue date with part of proceeds of subscription of Series B Notes. The liquidity reserve can be used to cover senior costs and interest on Series A Notes but cannot be used to offset losses.

At the end of revolving period, the notes will pay on fully sequential basis with senior notes paid first. Both the portfolio and the Series A Notes pay a fixed interest rate and as such the Issuer is not exposed to interest rate or basis
risks.

The rating addresses the timely payment of interest and ultimate repayment of principal by the legal final maturity date, in accordance with Issuer’s default definition provided in the transaction documents.

DBRS Morningstar based its rating on a review of the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes.
-- The seller, originator, and servicer’s financial strength and capabilities with respect to originations, underwriting, and servicing.
-- DBRS Morningstar’s operational risk review of Compass Banca S.p.A.’s premises where it deemed it to be an acceptable servicer.
-- The appointment upon closing of a backup servicer and its capabilities with respect to servicing.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral and historical and projected performance of the seller’s portfolio.
-- DBRS Morningstar’s sovereign rating of the Republic of Italy at BBB (high) with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, the presence of legal opinions that address the true sale of the assets to the Issuer, and nonconsolidation of the Issuer with the seller.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the Series A Notes did not return all specified cash flows.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Consumer and Commercial Asset-Backed Securitisations” (13 January 2020).

DBRS Morningstar 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 is based on the worst-case replenishment criteria set forth in the transaction legal documents.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include performance data relating to the receivables provided by the originator directly or through the arranger, Mediobanca – Banca di Credito Finanziario S.p.A.

DBRS Morningstar received data from Q1 2009 to Q4 2019 relating to quarterly static default and delinquency rates, quarterly static recovery data, quarterly static prepayment data, and dynamic delinquency and prepayment data. DBRS Morningstar also received a set of stratification tables in relation to the loan pool as of 6 April 2020 and its related contractual amortisation profile.

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- Probability of Default (PD) Used: Expected PD of 5.7%, 23.3% for an AA (sf) scenario, a 25% and 50% increase on the applicable PD.
-- Recovery Rate Used: Expected recovery rate of 21.0%.
-- Loss Given Default (LGD) Used: Expected LGD of 79.0%, 84.5% for an AA scenario, a 25% and 50% increase on the applicable LGD.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected default and 25% increase in the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and 50% increase in the expected LGD.
Scenario 8: A 50% increase in the expected default and 50% increase in the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Series A Notes: A (sf), A (low) (sf), A (high) (sf), A (low) (sf), BBB (high) (sf), A (high) (sf), A (low) (sf), BBB (high) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 17 April 2020

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020) https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Legal Criteria for European Structured Finance Transactions (11 September 2019) https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020) https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020) https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.