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Rating Action:

Moody's assigns definitive ratings to notes issued by IBL CQS 2013 S.r.l.

20 Dec 2013

Approximately EUR 219 million of debt securities rated

Milan, December 20, 2013 -- Moody's Investors Service has assigned the definitive ratings to the ABS notes issued by IBL CQS 2013 S.r.l. (the "Issuer"). The following definitive ratings have been assigned on the total paid-up amounts of the notes issued from time to time listed below:

Issuer: IBL CQS 2013 S.r.l.

....EUR867.1M Class A Asset Backed Fixed Rate Notes due 2038 (EUR200.1M Paid-Up Amount at closing), Assigned A3 (sf)

....EUR81.7M Class B Asset Backed Fixed Rate Notes due 2038 (EUR18.8M Paid-Up Amount at closing), Assigned Baa3 (sf)

Moody's ratings were not assigned to EUR71.2M Class C Asset Backed Variable Return Notes due 2038 (EUR16.4M Paid-Up Amount at closing).

As stated previously, the Issuer is issuing the full Notional amount of the Notes at closing. However, only a portion will be considered as Paid up Amounts as defined according to the structure. Hence the issuer may increase the Paid up amount up to the maximum notional amount of each class of notes, as listed above, until the payment date falling on January 2015 (included) provided certain trigger tests and eligibility criteria are met, including keeping the credit enhancement consistent with the closing of the transaction-also considering the fact that there is a slight over issuance to fund the research fund (i.e. Class A at 85% of notes issued --equivalent to approx. 86.7% of portfolio, while Class B at 8% of Notes issued-equivalent to 8.2% of portfolio).

RATINGS RATIONALE

The subject transaction is a revolving cash securitisation of Cessione del Quinto loans ("CDQ") and Delegazione di Pagamento loans ("DP") extended to borrowers resident in Italy by Istituto Bancario del Lavoro - IBL Banca S.p.A. ("IBL"). Under a CDQ Loan, the debtor assigns to the lender one fifth of his net monthly salary or pension to cover his loan obligations; loans are collateralised by a maximum of 20% of the monthly salary of the employee/pension (net of taxes), plus any eventual Severance pay treatment (TFR). In addition, an obligatory insurance policy protects against loss of job, resignation and death of the debtor. DP loans are similar to CDQ loans, except for some fundamental differences including the following: (a) the monthly instalment can represent up to half of the borrower's net salary, although IBL grants DP loans up to one fifth of the net salary of the borrower, (b) the lender has a direct claim towards the employer only if the employer expressly accepts the delegation of payment, (c) the severance pay (TFR) is not automatically attached in favour of the lender unless the debtor and employer expressly provide their written consent, (d) if the employer becomes insolvent, the payment delegation is automatically terminated, (e) the DP can be terminated in the event of insolvency of the originator, and (f) the quota of salary delegated does not benefit of the exemption from seizure and attachment proceedings as for CDQ loans.

The definitive portfolio as of 30 November 2013 was made of 11,585 loans granted to 11,113 debtors, with a weighted average current loan amount equal to Euro 19,849 and total portfolio balance of approx. EUR 230.9 million. As stated previously, as the transaction envisions issuing increasing the Paid Up amount of the Notes to fund additional portfolio purchases during the revolving period, the portfolio can increase significantly from that of the initial portfolio at closing (with a maximum theoretical portfolio size of approx. EUR 1.000 Billion. Hence, the most important credit aspects are a dynamic credit enhancement mechanism, eligibility criteria and triggers during the revolving period.

Hence, portfolio characteristics include DP loans which may not exceed 20%, while CDQ loans can represent 100% of the portfolio. The portfolio is quite granular from an individual loan perspective with the top 1 and top 10 obligor exposures are 0.04% and 0.19%, respectively (although no minimum criteria exists to ensure this other than a maximum loan amount). The portfolio is heavily concentrated in employees working for the Italian public sector, and specifically central governmental entities, as well as pensioners receiving payments from INPS (the Italian social security institute). At closing, 40% of the obligors are pensioners/retired receiving their pension from INPS, while 51% of the obligors work for other Italian public sector entities (central state administration, healthcare authorities, military and police forces, etc.). 3% are employed by public companies (Ferrovie dello Stato and Poste Italiane) and the remaining 5.25% in the private sector. The exposure to pensioners cannot be higher than 50%. However, between CDQ loans to public sector employees and CDQ to Pensioneers, the portfolio may be 100% concentrated to Italian Governmental entities as employeer (or through INPS for pensioners) and was taken into consideration in Moody's analysis. As stated above, the employer plays a key part in the CDQ and DP product (from an operational, legal and credit aspect) and hence was part of Moody's analysis.

The rating on the notes takes into account, among other factors, (i) an evaluation of the underlying portfolio of loans and insurance coverage; (ii) macro-economic information and historical performance information; (iii) the credit enhancement provided by the excess spread and the reserve fund; (iv) the liquidity support available in the transaction, by way of principal to pay interest, and the reserve fund, which is only used as a source of liquidity during the life of the transaction, and as credit enhancement at the final maturity of the notes; (v) the back-up servicer and computation agent arrangements that mitigate operational risks; and (vi) the legal and structural integrity of the transaction.

This deal benefits from credit strengths, such as the low historical losses, loan protections through salary/TFR assignment, and insurance coverage, as well as certain structural features such as a computation agent able to estimate and make payments under the notes in case of a servicer disruption. Moody's however notes that the transaction features a number of credit weaknesses, as there is exposure to commingling risk as well as operational risk, which is mitigated by the appointment of a back up servicer and a back up servicer facilitator from day one. The portfolio concentration in terms of employers is higher than usually seen in a typical consumer loan transaction, especially that linked to one particular employer or sector as stated above. Moody's has treated this in its quantitative assessment.

One of the particular aspects of CDQ and DP products is that all the loans are partially guaranteed by insurance coverage. There are specific concentrations to insurance companies in the transaction. The top insurer provides coverage to 23.5% of the individual loans in the portfolio. The top exposure can increase up to 37.5% during the ramp-up period. Hence, the transaction would be exposed to potential default risk of insurance companies in honoring their claims. This, coupled with a 1-year ramp up period, during which new portfolios will be added adds additional uncertainty to the transaction in terms of concentration and from that at closing, although certain eligibility criteria and triggers are in place. These characteristics, amongst others, were considered in Moody's quantitative analysis and ratings.

The V Score for this transaction is Medium, which is higher than the score assigned for the Italian Consumer loan sector. Some notable features pertain to the M score for "Issuer/Sponsor/Originator's Historical Performance Variability", which considers the uncertainty regarding the effect on portfolio performance of a sovereign crisis , as well as the lack of historical data covering a scenario of default of one of the insurers that provides life and unemployment risk protection. In addition, the "Transaction Complexity" and "Analytic Complexity" have been assigned a M score given the higher complexity compared to the average transaction in the market as (a) notes are partially paid; there is a 1-year ramp up period, during which new portfolios will be added, and although eligibility criteria in place, approximately 80% of the total portfolio could consist of new added portfolios after 1 year, and (b) Cessione del Quinto and Delegazione di Pagamento are products containing specific features, such as insurance coverage and TFR coverage that requires more complex analysis. For more information on V Scores, please see the report "V Scores and Parameter Sensitivities in the Global Consumer Loan ABS Sector", published in May 2009.

In its quantitative assessment, Moody's assumed a mean default rate of 6.5% for the initial portfolio, with a coefficient of variation of 90% and a recovery rate of 75% (non-insurance default scenario-see explanation above) as the main input parameters to derive the lognormal portfolio loss distribution, in the scenario where the insurance companies fulfill their obligations. Moody's also considered the insurance company exposure in the transaction considering scenarios where one or more insurance companies default and its impact on the recovery figure above. This was weighted by the credit quality of the insurance entities to derive a joint loss distribution, then used in Moody's cash-flow model ABSROM.

Moody's Parameter Sensitivities: Moody's principal portfolio model inputs are Moody's cumulative default rate assumption and the recovery rate. Moody's tested various scenarios derived from different combinations of mean default rate (i.e. adding a stress on the expected average portfolio quality) and recovery rate. For example, Moody's tested for the mean default rate: 6.5% as base case ranging to 8.5% and for the recovery rate (non-insurance default-see explanation above): 75.0% as base case ranging to 55.0%. At the time the rating was assigned, the model output indicated that class A would have achieved Baa2 output even if the cumulative mean default probability (DP) had been as high as 8.5%, and the recovery rate as low as 55.0% (all other factors being constant). Moody's Parameter Sensitivities provide a quantitative / model-indicated calculation of the number of rating notches that a Moody's-rated structured finance security may vary if certain input parameters would change. The analysis assumes that the deal has not aged. It is not intended to measure how the rating of the security might migrate over time, but rather, how the initial rating of the security might have differed if the two parameters within a given sector that have the greatest rating impact were varied.

The principal methodology used in this rating was Moody's Approach to Rating Consumer Loan ABS Transactions published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the rating

Factors that may cause an upgrade of the rating include a significantly better than expected performance of the pool and/or significant positive overall credit quality of the public employer concentrations, together with an increase in credit enhancement of notes. Factors that may cause a downgrade of the ratings include a decline in the overall performance of the pool according to Moody's expectations or a significant deterioration of the credit profile of the counterparts including the insurance companies not covered due to structural features.

Loss and Cash Flow Analysis

In rating this transaction, Moody's used ABSROM to model the cash flows and determine the loss for each tranche. The cash flow model evaluates all default scenarios that are then weighted considering the probabilities of the lognormal distribution assumed for the portfolio default rate. In each default scenario, the corresponding loss for each class of notes is calculated given the incoming cash flows from the assets and the outgoing payments to third parties and noteholders. Therefore, the expected loss or EL for each tranche is the sum product of (i) the probability of occurrence of each default scenario; and (ii) the loss derived from the cash flow model in each default scenario for each tranche.

Therefore, Moody's analysis encompasses the assessment of stress scenarios.

The ratings address the expected loss posed to investors by the legal final maturity of the notes. In Moody's opinion, the structure allows for timely payment of interest and ultimate payment of principal with respect to the bonds by legal final maturity. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed but may have a significant effect on yield to investors.

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.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments in this transaction.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF351254

Moody's describes its loss and cash flow analysis in the section "Ratings Rationale" of this press release.

As the section on loss and cash flow analysis describes, 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Pier Paolo Vaschetti
Vice President - Senior Analyst
Structured Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Alex Cataldo
Associate Managing Director
Structured Finance Group
Telephone:+39-02-9148-1100

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Moody's assigns definitive ratings to notes issued by IBL CQS 2013 S.r.l.
No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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