DBRS Confirms Rating on Quarzo S.r.l. 2015

DBRS Ratings Limited (DBRS) has today confirmed its A (high) (sf) rating on EUR 1,694,000,000 Series 2015, Class A notes (Class A Notes) issued by Quarzo S.r.l. 2015 (the Issuer).

The above-mentioned rating action is based on the following analytical considerations, as described more fully below:
-- The portfolio performance, in terms of level of delinquencies and cumulative net losses, as of May 2016 payment date;
-- No Purchase Termination Events have occurred;
-- Probability of default, loss given default and expected loss assumptions for the remaining collateral pool.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested;
-- The current available credit enhancement to the Class A Notes to cover expected losses assumed in line with an A (high) (sf) rating level.

The rating on the Class A Notes addresses timely payment of interest and ultimate repayment of principal by the Final Maturity Date in February 2032.

Quarzo S.r.l. 2015 is a securitisation collateralised by a pool of consumer loan receivables granted by Compass Banca SpA (Compass), Mediobanca SpA’s consumer credit company, to individuals resident in Italy. The transaction has a three-and-a-half year revolving period scheduled to end in January 2019, during which the Issuer can purchase additional portfolios. There are concentration limits and Purchase Termination Events in place to mitigate the potential portfolio performance deterioration during the revolving period. To date, all tests have passed.

The collateral portfolio consists of auto loans (4.49%), personal loans (94.78%) and other purpose loans (0.73%). The pool is moderately seasoned (slightly less than two years) and mainly concentrated in the South of Italy (42.14%). The weighted-average remaining maturity is just over four years. All debtors pay on a monthly basis.

The portfolio is performing in line with DBRS’s expectations. The gross cumulative default ratio (as a percentage of the aggregate original portfolio) is 0.57% as of May 2016. The delinquency ratio is 0.83%, with delinquencies being defined as +60 days in arrears.

Credit Enhancement to the Class A Notes has been stable at 23% since issuance in July 2015 and is provided by the subordination of the Series B Notes.

The transaction benefits from a non-amortising Liquidity Reserve Account funded at closing through the proceeds of the Series B Notes, available to cover senior expenses and missed interest payments on the Class A Notes. Up to the May 2016 payment date, the Liquidity Reserve has always been at its target level of EUR 11 million.

The structure also includes a Flexible and LibeRata Loans Cash Reserve, which mitigates the liquidity risk arising from Flexible and LibeRata Loans. These loans can represent up to 20% of the outstanding balance of the portfolio and are currently at the level of 4.01%. Under these agreements, borrowers have the option to skip one monthly instalment per year (up to a maximum of five times during the life of the loan) or to modify the amount of the monthly instalments. This reserve is only funded if, for three consecutive calculation dates, the outstanding balance of the Flexible and LibeRata Loans in relation to which the debtors have exercised the contractual right to postpone is higher than 5% of the outstanding balance of all Loans. As of the May 2016 payment date, this condition has not been breached.

Mediobanca SpA serves as Account Bank for the transaction. The DBRS private rating of Mediobanca SpA is at least equal to the Minimum Institution Rating given the rating assigned to the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Since both the underlying receivables and the Notes pay fixed rates there is no hedging agreement in place to mitigate interest rate risk.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: “Master European Structured Finance Surveillance Methodology”.

DBRS 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. However, due to the inclusion of a revolving period in the transaction and no change in assumptions, the initial analysis based on worst-case replenishment criteria set forth in the transaction legal documents was assumed.

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

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include investor reports provided by Deutsche Bank S.p.A., servicer reports provided by Compass and data from the European DataWarehouse GmbH.

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

DBRS was supplied with third party assessments at the Initial Rating Date. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This is the first rating action since the Initial Rating Date.
The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

-- DBRS expected a base case probability of default (PD) and loss given default (LGD) for the portfolio 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 receivables are 10.06% and 89.33% (excluding sovereign stress), respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected for the Class A Notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating for the Class A Notes would be expected to decrease to A (high) (sf), all else being equal. If the PD increases by 50% the rating for the Class A Notes would be expected to decrease to A (low) (sf), respectively, all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating for the Class A Notes would be expected to decrease to BBB (sf), all else being equal.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf).
-- 50% increase in LGD, expected rating of A (high) (sf).
-- 25% increase in PD, expected rating of A (sf).
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf).
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf).
-- 50% increase in PD, expected rating of A (low) (sf).
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf).
-- 50% increase in PD and 50% increase in LGD by 50%, expected rating of BBB (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Alessio Pignataro
Initial Rating Date: 22 July 2015
Initial Rating Committee Chair: Chuck Weilamann

Lead Surveillance Analyst: Joana Seara da Costa, Financial Analyst
Rating Committee Chair: Chuck Weilamann, Managing Director

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at:
http://www.dbrs.com/about/methodologies

--Master European Structured Finance Surveillance Methodology
--Legal Criteria for European Structured Finance Transactions
--Operational Risk Assessment for European Structured Finance Originators
--Operational Risk Assessment for European Structured Finance Servicers
--Rating European Consumer and Commercial Asset-Backed Securitisations

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375