DBRS Confirms Rating on Series A Notes Issued by Quarzo S.r.l. 2016

DBRS Ratings Limited (DBRS) has today confirmed its A (high) (sf) rating on the EUR 2,640.0 million Series A Notes issued by Quarzo S.r.l. 2016 (the Issuer) following an annual review of the transaction.

The above-mentioned rating action is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of November 2016;
-- No Purchase Termination Events have occurred;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the Notes;
-- The current available credit enhancement to the Series A Notes to cover expected losses assumed in line with the A (high) (sf) rating level.
-- Updated base case assumptions, considering the updated quarterly vintage performance data received by DBRS;

The rating on the Series A Notes addresses the timely payment of interest and ultimate payment of principal payable on or before the Final Maturity Date in November 2032.

The Issuer is an Italian securitisation collateralised by a portfolio of consumer loan receivables granted by Compass Banca SpA (Compass), Mediobanca SpA’s consumer credit company. The transaction closed in February 2016 and has a three-and-a-half year revolving period scheduled to end in August 2019 (inclusive), during which additional receivables may be acquired with proceeds from monthly Principal Collections generated by the securitised portfolio. There are concentration limits and Purchase Termination Events in place to mitigate the potential portfolio performance deterioration during the revolving period. To date, all of these tests have passed.

As of 15 November 2016, the balance of the Series A Notes was EUR 2,640.0 million and the balance of the Series B Notes was EUR 660.0 million. The EUR 3,299.9 million securitised portfolio (excluding defaulted receivables) consisted of auto loans (22.8%), personal loans (71.4%) and other purpose loans (5.8%), mainly concentrated in Southern Italy (45.5%).

Delinquent loans, defined as 60+ days in arrears, were 0.5% of the outstanding principal balance of the portfolio. Gross cumulative defaults, as a percentage of the original portfolio and cumulative transferred receivables, stood at 0.4%, with cumulative recoveries of 0.8%.

Credit enhancement to the Series A Notes has been stable at 20.0% since the closing date and is provided by the subordination of the Series B Notes.

DBRS has received updated vintage performance data, split by product type. With the updated data, DBRS recalibrated its base case assumptions of gross default and recovery for each loan type. The updated base case Probability of Default (PD) is 10.0% and the Recovery Rate is 14.1%, excluding sovereign adjustment.

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 Series A Notes. Up to the November 2016 payment date, the Liquidity Reserve has always been at its target level of EUR 12.0 million.

The structure also includes a Flexible and LibeRata Loans Cash Reserve Account, which mitigates the liquidity risk arising from Flexible and LibeRata Loans. These loans can represent up to 10% of the outstanding balance of the portfolio and are currently at 1.9%. 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 2.0% of the outstanding balance of all loans. As of the November 2016 payment date, this condition has not been breached.

Mediobanca SpA acts as Account Bank for the transaction. The DBRS private rating of Mediobanca SpA complies with the Minimum Institution Rating given the rating assigned to the Series A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating 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 cashflow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the legal 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 data and information used for this rating include investor reports provided by Deutsche Bank S.p.A. (the Calculation Agent) and data provided by Compass and from the European DataWarehouse GmbH.

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

At the time of the initial rating DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

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

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

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, is available on www.dbrs.com.

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

-- DBRS expected a base case PD and loss given default (LGD) for the portfolio based on a review of the current assets and the transaction’s replenishment criteria. 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 10.0% and 85.9%, respectively, excluding sovereign stress.

-- The Risk Sensitivity below illustrates the ratings expected for the Series 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 of the Series A Notes would be expected to decrease to A (sf), all else being equal. If the PD increases by 50%, the rating of Series A Notes would be expected to decrease to BBB (high) (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of the Series A Notes would be expected to decrease to BBB (sf), all else being equal.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (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.

Lead Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 25 February 2016

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

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