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.
