Press Release

DBRS Morningstar Finalises Provisional Rating on Progetto Quinto S.r.l.

Consumer Loans & Credit Cards

May 06, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional rating of AA (low) (sf) on the Class A Notes issued by Progetto Quinto S.r.l. (the Issuer).

DBRS Morningstar does not rate the Class J Notes also issued in this transaction.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal maturity date.

DBRS Morningstar based its rating on the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels 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.
-- Banca Progetto S.p.A.’s (Banca Progetto or the Originator) financial strength and capabilities with respect to originations, underwriting, and servicing.
-- DBRS Morningstar’s operational risk review on Banca Progetto, which is deemed to be an acceptable servicer.
-- 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 Originator’s portfolio.
-- DBRS Morningstar’s sovereign rating of BBB (high) with a Negative trend on the Republic of Italy (Italy).
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

The transaction represents the issuance of Class A and Class J Notes (collectively, the Notes) backed by a pool of approximately EUR 363 million of Italian consumer loan contracts related to salary and pension assignment loans as well as payment delegation loans granted to Italian employees and pensioners. The Originator will also service the portfolio.

The receivables were initially assigned to the Issuer in July 2019 in the context of the warehouse phase of the transaction, the purchase price of which the Issuer funded with the proceeds from the issuance of the initial notes. During the warehouse phase, the Issuer purchased additional portfolios with further draws on the initial notes and the Issuer's collections available for such purpose. On the issue date, the warehouse phase ended and the Issuer used the net proceeds of the Notes to fully redeem the initial notes; fund the cash reserve; pay upfront fees, costs, and expenses; and discharge any of its outstanding liabilities arising from the warehouse phase.

TRANSACTION STRUCTURE
The transaction allocates payments in a combined interest and principal priority of payments, and benefits from an amortising EUR 6.53 million cash reserve funded on the issue date with part of the proceeds from the Class J Notes. The cash reserve can be used to cover shortfalls in senior expenses, senior swap payments, and interest on the Class A Notes.

The repayment of the Notes begins on the first payment date falling in May 2021 on a fully sequential basis with the senior notes paid first.

The Class A Notes pay interest indexed to one-month Euribor plus a margin. The interest rate risk arising from the mismatch between the floating-rate notes and the fixed-rate collateral is expected to be hedged through an interest rate swap with an eligible counterparty.

COUNTERPARTIES
BNP Paribas Securities Services, Milan Branch (BNPSS, Milan) is the account bank for the transaction. Based on DBRS Morningstar’s private ratings on BNPSS, Milan and downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank to be commensurate with the rating assigned.

BNP Paribas SA acts as the swap counterparty for the transaction. DBRS Morningstar's Long-Term Critical Obligations Rating of AA (high) on BNP Paribas SA is consistent with the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

INFORMATION ON THE CORONAVIRUS DISEASE (COVID-19)
The coronavirus and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many asset-backed security (ABS) transactions, some meaningfully. The rating is based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
The high exposure to public-sector employees, pensioners, and civil servants makes the transaction dependent on the credit worthiness of the Italian sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Italy—namely Institutional Strength, Governance & Transparency, and Human Capital and Human Rights—to be material rating factors. According to the International Monetary Fund’s World Economic Outlook, Italy’s GDP per capita of USD 31,300 in 2020 was low compared with its euro-area peers. At the same time, Italy ranked in the 62nd and 69th percentile for Rule of Law and Government effectiveness, respectively, in 2019 according to the World Bank indicators. These factors have been taken into account in the “Economic Structure and Performance”, “Fiscal Management and Policy”, and” Political Environment” building blocks of DBRS Morningstar’s “Global Methodology for Rating Sovereign Governments”.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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” (3 September 2020).

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.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/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.

DBRS Morningstar received the following data information, split by type of borrower/employer:
-- Static default analysis by quarterly vintages from Q1 2018;
-- Static recovery analysis by quarterly vintages from Q3 2018;
-- Dynamic delinquency and default analysis by month from February 2018; and
-- Dynamic prepayment data by month from February 2018.

In addition, DBRS Morningstar received loan-level characteristics as at 28 February 2021.

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

At the time of the initial rating, DBRS Morningstar was supplied with one or more 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.

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

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 with the parameters used to determine the rating:

-- Probability of default (PD) used: Expected PD of 35.5% for the AA (low) (sf) scenario, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 36.9% for a AA (low) (sf) scenario.
-- Loss given default (LGD) used: Expected LGD of 63.1% for a AA (low) (sf) 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 a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are
-- Class A Notes: A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (sf), A (high) (sf), A (high) (sf), and A (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

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

Lead Analyst: Anna Dingillo, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 16 April 2021

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.

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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