Approximately EUR 738M of debt securities provisionally rated
Frankfurt am Main, March 06, 2015 -- Moody's Investors Service has assigned the following provisional ratings
to notes to be issued by Quarzo CQS S.r.l. (the "Issuer"):
....EUR 738.0M Class A Asset Backed
Fixed Rate Notes due 2030; Assigned (P)Aa2 (sf)
In addition, unrated Class B notes will be issued in an amount of
EUR 82.0M.
RATINGS RATIONALE
The subject transaction is a static cash securitisation of Cessione del
Quinto loans ("CDQ") and Delegazione di Pagamento loans ("DP") extended
to borrowers resident in Italy by Futuro S.p.A. (not
rated).
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
combined instalments for DP and CDQ loans can represent up to half of
the borrower's net salary; (b) the lender has a direct claim towards
the employer only if the employer expressly accepts the delegation of
payment, which is the case for all loans to be securitized in this
transaction, (c) the TFR is not automatically attached in favour
of the lender unless the debtor and employer expressly provide their written
consent, which is the case for all DP loans to be securitized in
this transaction; (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 portfolio as of 28 February 2015 was made of 57,944 loans granted
to 55,199 debtors, with a weighted average current loan amount
equal to Euro 14,151 and total portfolio balance of approx.
EUR 820.0 million.
The portfolio consists of CDQ loans (88.5%) and DP loans
which account (11.5% of the portfolio).
The portfolio is quite granular from an individual loan perspective with
the top 1 and top 10 obligor exposures are 0.01% and 0.10%,
respectively. The portfolio is highly 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,
35.5% of the obligors are pensioners/retired receiving their
pension from INPS, while 40.2% of the obligors work
for other Italian public sector entities and the remaining 24.3%
in the private sector.
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,
and liquidity reserve (v) the back-up servicer, the back-up
servicing facilitator and the 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 a high excess
spread level, 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 33.1% of the individual loans
in the portfolio. Hence, the transaction would be exposed
to potential default risk of insurance companies in honoring their claims.
These characteristics, amongst others, were considered in
Moody's quantitative analysis and ratings.
MAIN MODEL ASSUMPTIONS
In its quantitative assessment, Moody's assumed a mean default rate
of 7.5% for the initial portfolio, with a potfolio
credit enhancment of approximately 13% 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.
METHODOLOGY
The principal methodology used in this rating was Moody's Approach to
Rating Consumer Loan-Backed ABS published in January 2015.
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..
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.
STRESS SCENARIOS
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: 7.5% as
base case ranging to 9.00% and for the recovery rate (non-insurance
default-see explanation above): 75.0% as base
case ranging to 65.0%. At the time the rating was
assigned, the model output indicated that class A would have achieved
Aa3 output even if the cumulative mean default probability (DP) had been
as high as 9.00%, and the recovery rate as low as
65.0% (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.
Moody's issues provisional ratings in advance of the final sale of securities
and the above rating reflects Moody's preliminary credit opinions regarding
the transaction only. Upon a conclusive review of the final documentation
and the final note structure, Moody's will endeavour to assign a
definitive rating to the above notes. A definitive rating may differ
from a provisional rating . Please note that the actual definitive
issuance amounts of the rated classes may change from those stated above
given confirmed capital structure and final portfolio levels. However,
this aspect should not fundamentally impact the ratings as credit enhancement
and portfolio credit features are expected to be consistent
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_SF398520.
Moody's describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
Moody's describes the stress scenarios it has considered for this
rating action in the section "Ratings Rationale" of this press
release.
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.
Sebastian Schranz
Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Yian Ning Loh
VP - Sr Credit Officer/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns provisional ratings to notes to be issued by Quarzo CQS S.r.l.
