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Rating Action:

Moody's assigns definitive ratings to Italian CDQ ABS Notes issued by ERIDANO II SPV S.R.L.

17 Dec 2019

EUR 415.5 million ABS Notes rated, relating to a portfolio of Italian CDQ Loans

Milan, December 17, 2019 -- Moody's Investors Service ("Moody's") has assigned the following definitive rating to the Notes issued by ERIDANO II SPV S.r.l.: (the "Issuer"):

....EUR 210.6M Class A1 Asset Backed Partly Paid Floating Rate Notes due May 2035, Assigned Aa3 (sf)

....EUR 158M Class A2-R Asset Backed Partly Paid Floating Rate Notes due May 2035, Assigned Aa3 (sf)

....EUR 17.5M Class A3 Asset Backed Partly Paid Floating Rate Notes due May 2035, Assigned Aa3 (sf)

....EUR 29.4M Class B Asset Backed Partly Paid Floating Rate Notes due May 2035, Assigned Baa3 (sf)

Moody's has not assigned any rating to the EUR 80M Class C Asset Backed Partly Paid Fixed Rate and Variable Return Notes due May 2035.

RATINGS RATIONALE

Eridano II SPV S.r.l. is a securitisation of consumer loans with a ramp-up and revolving period ending in May 2020. The Notes are backed by a pool of Italian Cessione del Quinto (CDQ) and Delegazione di Pagamento (DP) consumer loans originated by ViViBanca S.p.A.. (NR). This represents the second transaction originated by ViViBanca S.p.A.

EUR 415.5M Class A and B Notes have been issued in November 2018 on a partly paid basis and as of end of August 2019 only EUR 199.9 M for Class A and B have been subscribed.

The amount of the notes will increase during the ramp up period, if certain conditions are met, up to the total issued amount. Among other conditions the minimum subordination level for Class A and B Notes is set respectively at 13% and 6% of the outstanding performing pool balance. The total subscribed amount of the Class C notes, on the contrary, will be not fully covered by the nominal amount of the portfolio and it will include the above par portfolio purchase price, some transaction costs and expenses and the funding of the cash and prepayment reserves.

As of end of August 2019, the portfolio comprises 11,201 loans, with a total outstanding principal balance of EUR 206.1 million. It is split between CDQ (89.2%) and DP (10.8%) loans, the average current loan size is EUR 18,217 and has a seasoning of 1.3 years. A significant portion of the borrowers receive income from the Italian public sector: public sector workers represent 42.4% of the pool and borrowers receiving public sector pension from INPS (the Italian social security institute), 40.5%. The remaining portion, 17.1% of the pool, is represented by private sector employees.

All the loans in the initial portfolio benefit from life insurance and 59.6% also benefit from employment insurance. The top three life insurers represent over 51.9% of the pool: Aviva Life Spa (NR) (17.8%), Metlife Europe D.a.C (NR) (17.5%) and Axa France VIE (Aa3) (16.6%) and Employment insurance is provided by: Great America International Insurance Ltd (NR) (17.5%), Net Insurance SpA (NR)(13.2%) and AXA France IARD (Aa3) (11.4%).

The insurance policies will pay off the outstanding loan balance in the event of, inter alia, borrowers' unemployment, resignation or death. Since those events would be the typical driver of defaults in a standard consumer loan transaction, the existence of the insurance is credit positive. Therefore, the default risk of the insurers and their correlation to the portfolio are a key aspect in Moody's quantitative analysis of the transaction.

Moody's analysis focused, amongst other factors, on: (i) an evaluation of the underlying portfolio during the ramp-up/ revolving and amortisation period, complemented by the historical performance information as provided by the originator, (ii) the liquidity and credit support provided by subordination, excess spread and the amortising cash reserve sized at 2.0% of the Class A and B Notes balance, (iii) the specific contractual features of CDQ and DP loans, (iv) the exposure to different insurance companies and (v) the other legal and structural characteristics of the transaction.

According to Moody's, the transaction benefits from credit strengths such as (i) low historical losses, (ii) strong loan repayment mechanisms and (iii) significant recoveries from insurance coverage. However, Moody's notes that the transaction features some credit challenges such as (i) the revolving and ramp-up structure, and (ii) operational risk due to the limited financial strength of the originator, servicer and sub-servicer, (iii) unhedged interest rate risk due to assets paying a fixed rate interest and notes paying a floating interest rate linked to one month euribor, and (iv) some concentrations in insurance counterparty exposure.

Various mitigants have been included in the transaction structure such as a back-up servicer which will replace the servicer upon termination and performance triggers to stop the ramp up and revolving period. Moody's has also applied an haircut to the interest rate that the pool is generating in order to consider the asset-liability mismatches.

Moody's determined the portfolio lifetime expected defaults of 11%, expected recoveries of 75% (pre-insurance default scenario) and Aa3 portfolio credit enhancement ("PCE") of 25% related to borrower receivables. The expected defaults and recoveries capture our expectations of performance considering the current economic outlook, while the PCE captures the loss we expect the portfolio to suffer in the event of a severe recession scenario prior to giving any benefit to insurance recoveries. Expected defaults and PCE are parameters used by Moody's to calibrate its lognormal portfolio loss distribution curve and to associate a probability with each potential future loss scenario in the ABSROM cash flow model to rate Consumer ABS.

Portfolio expected defaults of 11% is higher than EMEA CDQ Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) historic performance of the loan book of the originator, (ii) benchmark transactions, and (iii) other qualitative considerations.

Portfolio expected recoveries of 75% (pre- insurance default scenario) are in line with the EMEA CDQ Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) historic performance of the loan book of the originator, (ii) benchmark transactions, and (iii) other qualitative considerations.

PCE of 25% is in line with the EMEA CDQ Loan ABS average and is based on Moody's assessment of the pool which is mainly driven by: (i) evaluation of the underlying portfolio, complemented by the historical performance information as provided by the originator, (ii) the relative ranking to originator peers in the EMEA CDQ loan market and (iii) the exposure to different insurance companies. The PCE level of 25% results in an implied coefficient of variation ("CoV") of 65.53%.

Moody's also considered the insurance company exposure in the transaction and the impact of one or more insurance companies defaulting on the recovery figure above, as well as shifts in the concentration to single insurance companies. These scenarios are weighted by the credit quality of the insurance companies to derive a joint loss distribution for Moody's cash-flow model.

The principal methodology used in these ratings was "Moody's Approach to Rating Consumer Loan-Backed ABS" published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:

Factors that may cause an upgrade of the ratings of the notes include significantly better than expected performance of the pool together with an increase in credit enhancement of Notes and an increase in the local currency ceiling.

Factors that would lead to a downgrade of the ratings include: (i) increased counterparty risk leading to potential operational risk of servicing or cash management interruptions; and (ii) economic conditions being worse than forecast resulting in higher arrears and losses.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andrea Corda
AVP-Analyst
Structured Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anthony Parry
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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