DBRS Morningstar Assigns Rating to Auto ABS Italian Rainbow Loans S.r.l. (2022)

DBRS Ratings GmbH (DBRS Morningstar) assigned a AA (high) (sf) rating to the Class A Notes issued by Auto ABS Italian Rainbow Loans S.r.l. (2022) (the Issuer).

DBRS Morningstar does not rate the Class Z Notes (together with Class A Notes, the Notes) also issued in this transaction.

The Issuer is a public limited company incorporated under the laws of Italy, acting as a special-purpose entity for the purpose of issuing asset backed securities. The new securitisation is fully segregated from a previous securitisation of the Issuer. The Issuer has already engaged in a first securitisation transaction in July 2020, which was also carried out in accordance with Italian securitisation law.

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

The Notes are backed by a portfolio of fixed-rate receivables related to Italian standard auto loans and balloon auto loans granted by Banca PSA Italia S.p.A. (BPSA or the Seller) to private individuals or commercial debtors residing in the Republic of Italy. BPSA, a joint venture equally owned by Banque PSA Finance and Santander Consumer Bank S.p.A., will also act as the Servicer for the transaction.

DBRS Morningstar based its rating on a review of the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels that 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 under which they have invested.
-- BPSA’s capabilities with respect to originations, underwriting, servicing, and its financial strength.
-- The appointment of a backup servicer facilitator upon closing.
-- 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.
-- The sovereign rating on the Republic of Italy, currently 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 and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction includes a two-year revolving and ramp-up period during which the Issuer will purchase new receivables that the originator may offer through additional subscription payments under the Notes, provided that certain conditions set out in the transaction documents are satisfied. The amount of the additional subscription payment is calculated pro rata based on its relevant percentage and the applicable pro rata share (90% for the Class A Notes and 10% for the Class Z Notes). The pro rata share equals the Notes’ initial percentage of the outstanding receivables balance as of closing. The Issuer can request additional subscription payments, which will be carried out on the respective interest payment date subject to the consent of all Class A and Class Z Noteholders. The Notes can be increased up to their maximum amount of EUR 800 million.

The transaction benefits from a EUR 4.8 million general reserve that the Seller funds through a subordinated loan that can be used to cover shortfalls in senior expenses and interest under the Class A Notes. During the revolving and ramp-up period, the general reserve will remain constant at 1.5% of the issued Notes as of closing then, during the amortisation period, will reduce dynamically subject to a floor of EUR 500,000. The Class A Notes and the receivables pay fixed interest.

At the end of the revolving period, the Notes will be repaid on a fully sequential basis. The transaction’s available funds are distributed through a combined interest and principal waterfall.

COUNTERPARTIES
The Bank of New York Mellon SA/NV - Milan Branch (BNYM) is the account bank for the transaction. DBRS Morningstar’s Long-Term Issuer Rating on BNYM is AA (high) with a Stable trend and its Short-Term Issuer Rating is R-1 (high) with a Stable trend. The transaction documents contain downgrade provisions relating to the account bank that are consistent with DBRS Morningstar’s criteria.

ESG CONSIDERATIONS
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.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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” (29 October 2021).

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.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include BPSA and its agent, Banco Santander S.A.

DBRS Morningstar received quarterly static default and recovery data from Q4 2011 to Q4 2021 and quarterly dynamic delinquency, prepayment, and origination data from Q4 2011 to Q4 2021. DBRS Morningstar also received loan-by-loan level information and stratification tables for the loan pool as of 11 April 2022 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.

Sensitivity Analysis: 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 (the Base Case):

-- Probability of default (PD) used: Expected PD of 2.4%
-- Loss given default (LGD) used: Expected LGD of 52.0% (63.4% for the AA (high) (sf) scenario)

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

DBRS Morningstar concludes that the expected ratings under the eight hypothetic scenarios are
-- Class A Notes: AA (sf), AA (low) (sf), AA (sf), A (high) (sf), A (sf), AA (low) (sf), A (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. 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: Guglielmo Panizza, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 27 April 2022

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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 (29 October 2021), https://www.dbrsmorningstar.com/research/387042/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (30 July 2021),
https://www.dbrsmorningstar.com/research/382486/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021),
https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.