DBRS Confirms Ratings on Quarzo S.r.l. 2016 and Quarzo S.r.l. 2017

DBRS Ratings Limited (DBRS) confirmed its ratings on two Quarzo transactions as follows:

Quarzo S.r.l. 2016 (Quarzo 2016)
-- Series A Notes confirmed at A (high) (sf)

Quarzo S.r.l. - Series 2017 (Quarzo 2017)
-- Series A Notes confirmed at A (high) (sf)

These rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- The overall portfolios’ performance as of the November 2017 payment date, particularly regarding low levels of cumulative net loss and delinquencies;
-- No Purchase Termination Events have occurred; and
-- The current levels of credit enhancement (CE) available to the Series A Notes to cover expected losses.

The ratings of the Quarzo 2016 and Quarzo 2017, Series A Notes address the timely payment of interest and ultimate repayment of principal by the Final Maturity Date in November 2032 and November 2033, respectively.

Quarzo 2016 and Quarzo 2017 are securitisations of unsecured Italian consumer loan receivables originated by Compass Banca S.p.A. (Compass), a subsidiary of Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca). The portfolios contain mostly personal loans but also include other purpose loans and loans for the purchase of new and used vehicles. Quarzo 2016 closed in February 2016 while Quarzo 2017 closed in February 2017 and both include a 42-month revolving period.

PORTFOLIO PERFORMANCE
As of the November 2017 payment date, loans more than 90 days delinquent in the Quarzo 2016 portfolio were at 0.8% of the outstanding principal balance. Gross cumulative defaults stood at 1.3% of the initial portfolio balance plus all subsequent portfolios, of which 4.8% were recovered. The Quarzo 2017 portfolio had 0.6% loans more than 90 days delinquent; gross cumulative defaults were 0.4%, of which 0.3% were recovered.

REVOLVING PERIOD
Both transaction structures allow for additional portfolios to be purchased during a revolving period, which are due to mature in August 2019 and August 2020 for Quarzo 2016 and Quarzo 2017, respectively. There are concentration limits and Purchase Termination Events in place to mitigate potential portfolio performance deterioration during the revolving periods, allowing for amortisation to begin earlier than scheduled. To date, all tests have been passed.

CREDIT ENHANCEMENT
CE for the Quarzo 2016, Series A Notes is provided by the subordination of the unrated EUR 660.0 million Series B notes and has remained at 20.0% since closing. CE for the Quarzo 2017, Series A Notes is provided by the subordination of the unrated Series B Notes and has remained at 19.0% since closing.

The transaction structures include non-amortising liquidity reserves, funded at closing with the proceeds from the issuance of the Series B Notes, which are available to cover senior expenses and missed interest payments on the respective Series A Notes. The liquidity reserves are currently at their target levels of EUR 12.0 million and EUR 5.9 million, for Quarzo 2016 and Quarzo 2017, respectively.

The structures also include a Flexible and LibeRata Loans Cash Reserve, which mitigates the liquidity risk arising from Flexible and LibeRata Loans. In Quarzo 2016, these loans can represent up to 10.0% of the outstanding balance of the portfolio and are currently at the level of 1.0%. In Quarzo 2017, these loans can represent up to 5.0% of the outstanding balance of the portfolio and are currently at the level of 0.3%. 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 the payments is higher than 2.0% of the portfolio balance. As of the November 2017 payment date, this condition had not been breached.

Mediobanca acts as the Account Bank for both transactions. DBRS’s private rating of Mediobanca complies with the minimum institution rating given the ratings 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 ratings is: “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transactions 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 transactions, the analysis continues to be based on the worst-case replenishment criteria set forth in the transactions legal documents.

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

Other methodologies referenced in these transactions 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include quarterly investor reports provided by Deutsche Bank S.p.A. (the Calculation Agent) and monthly servicing data provided by Compass.

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

At the time of the initial rating of Quarzo 2016, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

At the time of the initial rating of Quarzo 2017, DBRS was 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 these ratings to be of satisfactory quality.

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

The last rating action on Quarzo 2016 took place on 7 February 2017, when DBRS confirmed its rating on the Series A Notes at A (high) (sf).

The last rating action on Quarzo 2017 took place on 15 February 2017, when DBRS assigned a final rating of A (high) (sf) to the Series A Notes.

The lead analyst responsibilities for these transactions have been transferred to Matt Albin.

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

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

-- DBRS expected a Base Case probability of default rate (PD) and loss given default rate (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 Quarzo 2016 pool of assets of receivables, excluding sovereign stress are 9.9% and 85.9%, respectively.

-- The Base Case PD and LGD of the current Quarzo 2017 pool of assets of receivables, excluding sovereign stress are 9.2% and 85.5%, respectively.

For example, if the LGD increases by 50%, the rating of the Quarzo 2016, Series A Notes would be expected to decrease to A (low) (sf) while the rating of the Quarzo 2017, Series A Notes would be expected to decrease to A (sf), ceteris paribus. If the PD increases by 50%, the ratings of both the Quarzo 2016, Series A Notes and Quarzo 2017, Series A Notes would be expected to decrease to BBB (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the ratings of both the Quarzo 2016, Series A Notes and Quarzo 2017, Series A Notes would be expected to decrease to BBB (low) (sf), ceteris paribus.

Quarzo 2016, Series A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Quarzo 2017, 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 (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (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 and US regulations only.

Lead Analyst: Matt Albin, Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 25 February 2016 (Quarzo 2016); 15 February 2017 (Quarzo 2017)

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

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.