Press Release

DBRS Morningstar Finalises Provisional Credit Ratings on Red & Black Auto Italy S.r.l. – Compartment 2

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October 17, 2023

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional credit ratings on the following classes of notes (the Rated Notes) issued by Red & Black Auto Italy S.r.l. – Compartment 2 (the Issuer):

-- Class A1 Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BB (high) (sf)

DBRS Morningstar did not assign credit ratings to the Class A2 Notes (together with the Rated Notes, the Collateralised Notes) and the Class J Notes (together with the Collateralised Notes, the Notes) issued in this transaction.

The finalised credit rating on the Class E Notes is three notches higher, the finalised credit rating on the Class C Notes is two notches higher, and the finalised credit ratings on the Class A1 Notes, Class B Notes, and Class D Notes are one notch higher than the provisional credit ratings DBRS Morningstar assigned. As a result of the removal of the application of a stress scenario regime for sovereigns rated in the “A” category or below, together with lower overall margins of the Rated Notes and a higher yield of the final portfolio, the cash flow analysis on the Rated Notes improved in their credit rating stress scenarios.

The Notes are issued in the context of a securitisation transaction designed to follow the standard structure under Italian securitisation law. The securitisation is fully segregated from the Issuer's previous securitisation in September 2021, which was also carried out in accordance with Italian securitisation law.

The credit rating on the Class A1 Notes addresses the timely payment of scheduled interest and ultimate repayment of principal by the final maturity date. The credit ratings on the Class B Notes, Class C Notes, Class D Notes, and Class E Notes address the ultimate repayment of interest (timely when most senior) and the ultimate repayment of principal by the final maturity date.

CREDIT RATING RATIONALE
The Collateralised Notes are backed by a portfolio selected from a pool of approximately EUR 550 million of receivables related to auto loans granted by Fiditalia S.p.A. (Fiditalia; the Originator, the Seller), to individuals residing in Italy. The collateral portfolio will be serviced by Banca Finanziaria Internazionale S.p.A. (Banca Finint) as master servicer that delegates to Fiditalia (the Sub-Servicer) the management, collection, and recovery of the receivables. The proceeds of the Class J Notes are used to fund the cash reserve.

DBRS Morningstar based its credit ratings on a review of the following analytical considerations:
-- The transaction 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.
-- Fiditalia’s capabilities with respect to originations, underwriting, servicing, and financial strength.
-- The appointment of a backup subservicer at 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 rated BBB (high) with a Stable trend by DBRS Morningstar.
-- 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 has a mixed sequential/pro rata amortisation structure. Initially, all collections from the receivables will pay down the Class A1 Notes and Class A2 Notes in accordance with the relevant priority of payments. Once the Class A1 Notes and Class A2 Notes support ratio reaches 12%, principal payments on the Collateralised Notes will be allocated on a pro rata basis, unless a sequential redemption event occurs as outlined in the transaction documents. Sequential redemption events include, among others, the breach of performance related triggers or the Seller not exercising the call option.

The transaction benefits from liquidity support provided by a cash reserve, with an initial balance of EUR 6.1 million (equal to 1.1% of the Collateralised Notes' initial balance). The balance of the reserve will not amortise in line with the Collateralised Notes until the amortisation of the Class A1 Notes and Class A2 Notes reaches 50% since issuance. After that date, the balance of the reserve will be replenished to a target equal to the maximum of (1) 1.1% of the aggregate of the principal amount of the Collateralised Notes at the relevant period; or (2) 0.25% of the initial balance of the Collateralised Notes (up to the date when the Rated Notes are fully repaid or a trigger notice is served).

The cash reserve is available to cover the payment of senior expenses, swap payments, and interest on the Collateralised Notes prior to being replenished. In certain scenarios, the cash reserve also ultimately provides credit enhancement to the Collateralised Notes.

All underlying contracts are fixed rate, while the Collateralised Notes pay a floating rate. The Collateralised Notes are indexed to one-month Euribor. Interest rate risk is mitigated through an interest rate swap for the Collateralised Notes.

COUNTERPARTIES
The Bank of New York Mellon SA/NV–Milan Branch (BNYM) has been appointed as the Issuer’s account bank for the transaction. DBRS Morningstar has a Long-Term Senior Debt rating of AA (high) and a Long Term Deposits Rating of AA (high) on BNYM and considers BNYM to meet the relevant criteria to act in this capacity. The transaction documents contain downgrade provisions related to the account bank consistent with DBRS Morningstar’s criteria.

DZ BANK AG Deutsche Zentral Genossenschaftsbank, Frankfurt am Main (DZ Bank) has been appointed as the swap counterparty. DBRS Morningstar has a Long-Term Senior Debt rating of AA (low) and a Long Term Critical Obligations Rating of AA on DZ Bank. The hedging documents contain downgrade provisions consistent with DBRS Morningstar’s criteria.

DBRS Morningstar’s credit ratings on the Rated Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. For the Rated Notes the associated financial obligations are the related interest amounts and the related principal amounts outstanding.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784/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 credit 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.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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/421590.

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.

The sources of data and information used for these credit ratings include the Seller and its agents.
DBRS Morningstar received the following information:
-- Static gross loss and recovery vintage going back to January 2014, split by new (split into standard and dual plan loans) and used cars (split into Km0 and No Km0 vehicles);
-- Dynamic delinquencies and originations from January 2014 to May and June 2023, respectively, split by new (Standard and DualPlan) and used cars (Km0 and NoKm0);
-- Total dynamic prepayments data from January 2014 to May 2023;
-- Summarised stratification tables for the portfolio as at 30 September 2023; and
-- A theoretical amortisation of the selected pool.

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 credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

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

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

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

-- Expected default rate: 1.9%
-- Expected recovery rate: 22.7%
-- Loss given default (LGD): 86.4% for the AAA (sf) scenario, 85.2% for the AA (sf) scenario, 84.0% for the A (high) (sf) scenario, 82.2% for the BBB (high) (sf) scenario and 80.3% for the BB (high) (sf) scenario

Scenario 1: 25% increase in LGD
Scenario 2: 50% increase in LGD
Scenario 3: 25% increase in PD
Scenario 4: 50% increase in PD
Scenario 5: 25% increase in PD and 25% increase in LGD
Scenario 6: 25% increase in PD and 50% increase in LGD
Scenario 7: 50% increase in PD and 25% increase in LGD
Scenario 8: 50% increase in PD and 50% increase in LGD

DBRS Morningstar concludes that the expected credit ratings under the eight stress scenarios would be:
-- Class A1 Notes: AA (high) (sf), AA (high) (sf), AA (high) (sf), AA (sf), AA (sf), AA (sf), A (high) (sf), and A (high) (sf)
-- Class B Notes: AA (sf), AA (sf), AA (low) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (low) (sf), and A (low) (sf)
-- Class C Notes: A (low) (sf), A (low) (sf), A (low) (sf), BBB (high) (sf), BBB (high) (sf), BBB (high) (sf), BBB (low) (sf), and BBB (low) (sf)
-- Class D Notes: BBB (sf), BBB (sf), BBB (sf), BB (high) (sf), BB (high) (sf), BB (high) (sf), BB (sf), and BB (sf)
-- Class E Notes: BB (sf), BB (sf), BB (sf), B (sf), B (sf), B (sf), below B (low) (sf), and below B (low) (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://registers.esma.europa.eu/cerep-publication/. 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 credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jose Escandell, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 4 September 2023

DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500

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 credit 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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