Press Release

DBRS Morningstar Finalises Provisional Ratings on Quarzo S.r.l. - Series 2023

Consumer Loans & Credit Cards

May 11, 2023

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the Series A1 and Series A2 Notes (together, the Series A Notes or the Rated Notes) issued by Quarzo S.r.l. (the Issuer) under Series 2023 as follows:

-- Series A1 Notes at AA (sf)
-- Series A2 Notes at AA (sf)

The rating on the Series A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal maturity date in December 2039. DBRS Morningstar does not rate the Series B Notes (together with the Rated Notes, the Notes) also issued in this transaction.

The transaction represents the issuance of Notes backed by a portfolio of receivables related to unsecured consumer loan contracts granted by Compass Banca S.p.A. (Compass or the Seller) to private individuals residing in Italy. The initial portfolio of EUR 700 million comprises standard amortising loans granted for the purchase of new and used vehicles, personal loans, and other-purpose loans. Compass services the collateral portfolio and Banca Finanziaria Internazionale S.p.A. acts as the backup servicer facilitator.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, reserve funds, and excess spread;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net losses under various stressed cash flow assumptions for the Series A Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- Compass’ capabilities with respect to originations, underwriting, servicing, and its financial strength;
-- 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 on the Republic of Italy, currently rated BBB (high) with a Stable trend; and
-- 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 12-month revolving period during which the Issuer shall purchase additional collateral. During this period, the transaction will be subject to receivables eligibility criteria and concentration limits designed to prevent the deterioration of the portfolio quality, with which the Issuer will have to comply.

The transaction incorporates a single waterfall that facilitates the distribution of the available distribution amount. The Notes will amortise sequentially subject to a note-specific target principal redemption amount. The Series A1 and Series A2 Notes will rank pari passu and pro rata with respect to both interest and principal payments.

The Seller funded on the closing date a nonamortising liquidity reserve account equal to 1.0% of the Series A Notes’ initial principal balance through the proceeds of a subordinated loan. The reserve will provide liquidity support and will be available to pay senior transaction fees, swap payments, and interest payments on the Series A Notes.

All underlying contracts pay fixed rates while the Series A Notes pay a floating rate of interest, indexed to three-month Euribor. The resulting interest rate risk is mitigated through an interest rate swap agreement, entered into by the Issuer prior to the closing date.

TRANSACTION COUNTERPARTIES
Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) was appointed as the Issuer account bank for the transaction while Deutsche Bank S.p.A. (Deutsche Bank) was appointed as the account bank with respect to the payments and the liquidity reserve account. Based on DBRS Morningstar’s private ratings on Mediobanca and Deutsche Bank, 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 banks to be consistent with the ratings assigned to the Series A1 and Series A2 Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Banco Santander SA (Banco Santander) was appointed as the swap counterparty for the transaction. DBRS Morningstar publicly rates Banco Santander with a Long Term Critical Obligations Rating of AA (low). The downgrade and collateral posting provisions as defined in the draft swap documentation are consistent with 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 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.

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: 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.

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

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/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 originator directly or through the arranger, Mediobanca.

DBRS Morningstar was provided with detailed loan-by-loan characteristics and stratification tables of the initial portfolio as of 27 March 2023 as well as the related stratification tables and amortisation schedule.

DBRS Morningstar used the following data and information split by product type (new autos, used autos, personal loans, and other-purpose loans):
-- Static quarterly default data from Q1 2009 to Q4 2022;
-- Static quarterly recovery data from Q1 2009 to Q4 2022;
-- Static quarterly prepayments data from Q1 2009 to Q4 2022;
-- Dynamic quarterly prepayment data from Q1 2009 to Q4 2022; and
-- Dynamic quarterly delinquency data from Q1 2009 to Q4 2022.

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 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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):

-- Probability of default (PD) used: Expected PD of 4.9%, 19.7% at the AA (sf) rating level, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 23.0%.
-- Loss given default (LGD) used: Expected LGD of 77.0%, 83% at the AA (sf) scenario, a 25% and 50% increase on the applicable LGD.

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 on the expected LGD.
Scenario 5: A 50% increase in the expected PD 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 PD and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected PD and a 50% increase on the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Series A1 Notes: A (high) (sf), A (sf), AA (low) (sf), A (sf), BBB (high) (sf), AA (low) (sf), A (sf), BBB (high) (sf).
-- Series A2 Notes: A (high) (sf), A (sf), AA (low) (sf), A (sf), BBB (high) (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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 26 April 2023

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
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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