DBRS Morningstar Upgrades and Confirms Ratings on Five Series of the Marzio Finance Securitisation Programme

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on five series of notes issued by Marzio Finance S.r.l. (the Issuer) in the context of a securitisation programme (the programme):

-- Series 3-2018 (M3): Class A Notes confirmed at AA (sf)
-- Series 4-2018 (M4): Class A Notes confirmed at AA (sf)
-- Series 4-2018 (M4): Class B Notes upgraded to AA (sf) from AA (low) (sf)
-- Series 5-2019 (M5): Class A Notes confirmed at AA (sf)
-- Series 7-2019 (M7): Class A Notes upgraded to AA (sf) from AA (low) (sf)
-- Series 8-2020 (M8): Class A Notes confirmed at AA (low) (sf)

The ratings on the Class A Notes address the timely payment of interest and the ultimate payment of principal on or before the respective final maturity dates.

The rating on the M4 Class B Notes addresses the ultimate payment of interest and principal by the final maturity date in accordance with the Issuer’s default definition provided in the transaction documents (i.e., the timely payment of interest only when they become the most-senior tranche).

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performances, in terms of delinquencies, defaults, and losses, as of the November 2022 payment dates;
-- Updated portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels.

Marzio Finance S.r.l. is a EUR 10,000,000,000 programme established in August 2017 and amended in November 2018 and March 2020, designed to follow the standard structure under Italian securitisation law. The programme represents the issuance of notes under various series backed by pools of receivables related to salary and pension assignment loans as well as payment delegation loans granted by Istituto Bancario del Lavoro S.p.A. (IBL) to Italian employees and pensioners. The portfolios are serviced by IBL Servicing S.p.A. (fully owned by IBL) with IBL acting as subservicer and Zenith Service S.p.A. acting as backup servicer.

PORTFOLIO PERFORMANCE
The five portfolios are performing within DBRS Morningstar’s expectations. As of the October 2022 cut-off dates, the 90+-days arrears and gross cumulative default ratios were as follows:
-- M3: 3.4% and 4.7%, respectively;
-- M4: 3.1% and 4.6%, respectively;
-- M5: 1.9% and 4.2%, respectively;
-- M7: 1.8% and 3.8%, respectively; and
-- M8: 1.3% and 2.9%, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case annualised PD and LGD assumptions as follows:
-- M3: 7.2% and 4.7%, respectively;
-- M4: 7.3% and 6.7%, respectively;
-- M5: 7.3% and 7.3%, respectively;
-- M7: 7.4% and 5.0%, respectively; and
-- M8: 7.4% and 6.0%, respectively.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding collateral portfolios provides credit enhancement to the rated notes issued under the programme. For M4, M5, M7, and M8, the additional reserve also provides credit enhancement to the Class A Notes. As of the November 2022 payment dates, credit enhancement levels were as follows:
-- M3: Class A Notes: 73.0%, up from 35.8% as of the December 2021 payment date;
-- M4: Class A Notes: 91.5%, up from 35.7% as of the December 2021 payment date;
-- M4: Class B Notes: 25.9%, up from 9.3% as of the December 2021 payment date;
-- M5: Class A Notes: 25.1%, up from 17.3% as of the December 2021 payment date;
-- M7: Class A Notes: 18.0%, up from 14.7% as of the December 2021 payment date; and
-- M8: Class A Notes: 16.0%, up from 13.4% as of the December 2021 payment date.

All series benefit from amortising cash reserves, available to cover senior fees and expenses, swap payments (if any), and interest payments on the Class A Notes (for M4, also on the Class B Notes, but only prior to an interest performance trigger). The M3 and M4 cash reserves have already reached their floor levels. As of the November 2022 payment dates, all cash reserves were at their target levels.

Cash-trapping conditions are in place to trap the excess spread upon the breach of certain triggers in case the cumulative net default ratio rises above a certain threshold.

M4, M5, M7, and M8 also benefit from additional reserves that provide credit enhancement to the rated notes on top of liquidity support. The additional M4 and M5 reserves have already reached their floor levels. As of the November 2022 payment dates, all additional reserves were at their target levels.

Each series also benefits from a prepayment reserve, available to cover losses arising from the set-off of capitalised fees.

Citibank N.A./Milan Branch acts as the account bank for the transactions. Based on DBRS Morningstar’s private rating on the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Credit Agricole Corporate & Investment Bank SA, Milan Branch is the swap counterparty for M3 and M4. M5, M7, and M8 are naturally hedged. DBRS Morningstar’s private rating on the swap counterparty is consistent with the first rating threshold, as defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology. The swap documents are compliant with the same methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations

Social (S) and Governance (G) Factors
The high exposure to public-sector employees, pensioners, and civil servants makes the programme dependent on the creditworthiness of the Italian sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Italy – namely Human Capital and Human Rights (S) and Institutional Strength, Governance & Transparency (G) – to be significant rating factors. According to the IMF Word Economic Outlook, Italy’s GDP per capita of USD 35,473 in 2021 was low compared with its euro area peers. At the same time, according to the World Bank, Italy ranked in the 64.9th percentile for Governance Effectiveness in 2021. DBRS Morningstar took these factors into account in the “Economic Structure and Performance”, “Fiscal Management and Policy”, and “Political Environment” building blocks of its “Global Methodology for Rating Sovereign Governments”.

There were no Environmental factors that had a significant or relevant effect 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transactions structures 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” (21 December 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 transactions in accordance with the principal methodology.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

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 the servicer report, investor reports, and additional performance information provided by IBL as well as loan-level data provided by the European DataWarehouse GmbH.

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 actions on these transactions took place on 27 January 2022, when:
-- M3: DBRS Morningstar upgraded its rating on the Class A Notes to AA (sf) from AA (low) (sf);
-- M4: DBRS Morningstar confirmed its rating on the Class A Notes at AA (sf) and upgraded its rating on the Class B Notes to AA (low) (sf) from A (high) (sf);
-- M5: DBRS Morningstar upgraded its rating on the Class A Notes to AA (sf) from AA (low) (sf);
-- M7: DBRS Morningstar confirmed its rating on the Class A Notes at AA (low) (sf); and
-- M8: DBRS Morningstar confirmed its rating on the Class A Notes at AA (low) (sf).

The lead analyst responsibilities for these transactions have been transferred to Pascale Kallas.

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 transactions 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 Issuers are as follows:
-- M3: 7.2% and 4.7%, respectively;
-- M4: 7.3% and 6.7%, respectively;
-- M5: 7.3% and 7.3%, respectively;
-- M7: 7.4% and 5.0%, respectively;
-- M8: 7.4% and 6.0%, 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. Taking the Class A Notes of M3 as an example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to remain at AA (sf).

M3:
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

M4:
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

M4:
Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

M5:
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

M7:
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

M8:
Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (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: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
--M3: 24 May 2018
--M4: 21 November 2018
--M5: 5 April 2019
--M7: 9 October 2019
--M8: 16 March 2020

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 these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (21 December 2022), https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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 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.