Press Release

DBRS Morningstar Confirms Ratings on Quarzo S.r.l. – Series 2019-1

Consumer Loans & Credit Cards

November 14, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings on the Series A1 and the Series A2 Notes (together, the Series A Notes) issued by Quarzo S.r.l. – Series 2019-1 (the Issuer) at AA (high) (sf).

The ratings on the Series A Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in October 2036.

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of delinquencies, defaults, and losses, as of the October 2022 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- The current level of credit enhancement available to the Series A Notes to cover expected losses at their AA (high) (sf) rating level.

The transaction is a securitisation of unsecured Italian consumer loan receivables originated and serviced by Compass Banca S.p.A. (Compass or the originator). The transaction, which closed in November 2019, represents the issuance of the Series A1, Series A2, and Series B Notes backed by a portfolio that contains mostly personal loans but also includes other-purpose loans and loans for the purchase of new and used vehicles. The transaction had an initial six-month revolving period, which ended in April 2020.

PORTFOLIO PERFORMANCE
As of the October 2022 payment date, loans that were one to two months and two to three months delinquent represented 1.0% and 0.6% of the portfolio balance, respectively, while loans that were more than three months delinquent represented 0.8%. Gross cumulative defaults amounted to 2.6%, of which 9.3% have been recovered so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted an analysis of the current pool of receivables and updated its base case PD and LGD assumptions to 5.1% and 77.0%, respectively, based on updated historical vintage data received from the originator.

CREDIT ENHANCEMENT
The Series A Notes rank pro rata and pari passu and the subordination of the Series B Notes provides credit enhancement to the Series A Notes. As of the October 2022 payment date, credit enhancement to the Series A Notes was 36.9%, up from 22.5% at the time of the last annual review.

The transaction benefits from a nonamortising 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 3.9 million.

Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on Mediobanca, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Series A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Credit Agricole Corporate & Investment Bank (Credit Agricole) acts as the swap counterparty for the transaction. DBRS Morningstar's private rating on Credit Agricole is consistent with the first rating threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact on the credit analysis.

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/396929 (17 May 2022).

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (19 May 2022).

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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/401817/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 these ratings include investor reports provided by Credit Agricole, servicer reports provided by Compass, and loan-level data provided by the European DataWarehouse GmbH. In the context of a newer transaction from the same originator, DBRS Morningstar was provided with updated historical performance data as follows:
-- Quarterly static delinquency data from Q1 2009 to Q4 2021,
-- Quarterly static prepayments data from Q1 2009 to Q4 2021,
-- Quarterly static default data from Q1 2009 to Q4 2021,
-- Quarterly static recovery data from Q1 2009 to Q4 2021, and
-- Quarterly dynamic delinquency and prepayment data from Q1 2009 to Q4 2021.

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

At the time of the initial ratings, 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 these ratings 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.

The last rating action on this transaction took place on 16 November 2021, when DBRS Morningstar upgraded its ratings on the Series A Notes to AA (high) (sf) from AA (sf).

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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):
-- DBRS Morningstar 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 current pool of loans for the Issuer are 5.1% and 77.0%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the ratings on the Series A Notes would be expected to remain at AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the ratings on the Series A Notes would be expected to remain at AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the ratings on the Series A Notes would also be expected to remain at AA (high) (sf).

Series A Notes Risk Sensitivity:
-- 25% increase in LGD, expected ratings of AA (high) (sf)
-- 50% increase in LGD, expected ratings of AA (high) (sf)
-- 25% increase in PD, expected ratings of AA (high) (sf)
-- 50% increase in PD, expected ratings of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected ratings of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected ratings of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected ratings of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected ratings of AA (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: https://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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Preben Cornelius Overas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 7 November 2019

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://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 https://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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