The rating actions are as follows:

Class B (ISIN IT0005092603), EUR 26.4m (EUR 14.8m drawn): assigned a final rating of BBB+_SF
Class C (ISIN IT0005092611), EUR 14.3m (EUR 6.6m drawn): assigned a final rating of BB_SF

Scope Ratings has not assigned any ratings to the Class A (ISIN IT0005022154), EUR 210.6m with a current paid up amount of EUR 137.0m or the Class D (ISIN IT0005092652), EUR 12.2m with a current paid up amount of EUR 7.7m.

DYRET SPV S.R.L. is the first securitisation of payroll-deductible (CQS) loans extended to borrowers in Italy backed by loans originated by Dynamica Retail S.p.A. (Dynamica). The transaction has a ramp-up period that is scheduled to conclude in December 2018, during which time the portfolio of loans backing the notes can increase from its current balance of EUR 160.3m to a maximal amount of EUR 258.3. The current portfolio is comprised of loans issued to Italian consumers split by employer segment type: Public (54.8%), Pensioners (35.3%) and Private (9.9%). The portfolio is highly granular and all of the underlying loans are insured against life and employment events. The regional concentration is as follows: North (16.4%), Central (21.8%) and South (61.8%).

Download the full rating report here.

Rating rationale

The ratings reflect: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral given the Italian macroeconomic environment; iii) the ability of Dynamica Retail S.p.A (Dynamica) as originator/seller and sub-servicer; iv) the ability of Zenith Service S.p.A. (Zenith) in its role as servicer; and v) the counterparty exposure to BNP Paribas Securities Services, Milan Branch (BNP Paribas) as account bank and paying agent.

The ratings are chiefly driven by Scope’s assessment of: the securitised portfolio; the relatively diversified pool of insurance companies covering life or employment events within the transaction; and historical performance of the originator’s loan book.

The ratings are supported by 10.3% and 4.7% credit enhancement for class B and class C, respectively; 1.38% of excess interest; structural protection provided by sequential principal amortisation; and the liquidity protection for classes B and C via a fully funded cash reserve.

The ratings incorporate Scope’s positive assessment of the sub-servicer’s abilities and incentives. 

The ratings reflect the macroeconomic dynamics in Italy, characterised by a gradual recovery and progress in delivering structural reforms.

Key rating drivers

Loan product with low historical losses (positive): CQS loans incur lower losses than standard unsecured consumer loans, primarily because the loans are fully insured and instalments must be withheld by the borrower’s employer and paid directly to the lender – measures that increase recoveries in case of default.

Diverse insurance coverage (positive): The loan portfolio benefits from a diversified pool of 10 insurers covering individual borrowers against life events and unemployment. No insurance company can cover more than 25% of the portfolio.

Liquidity protection (positive): The fully funded cash reserve covers around 10 months of fees (1.0% annual assumption) and interest payments to note classes A, B, and C. The target reserve ratio at the end of the ramp-up period is 2.0% of the non-defaulted portfolio. The cash reserve will amortise and be used to cover defaults.

Management fee reserve (positive): The management fee reserve is fully funded and sized to cover the full amount of potential set-off claims, stemming from fees paid upfront that the borrowers can reclaim when they prepay the loan.

Independent Servicer (positive): Zenith is the servicer, with the ability to immediately perform both this role and the sub-servicer’s. This reduces potential servicing disruptions and prevents delays caused by a search for a suitable back-up servicer.

Loans without first instalment paid (negative): Assets added to the portfolio during the ramp-up period are not required to have a minimum number of instalments paid by the borrower. Occasionally, an employer does not deduct the first instalment in a timely manner, which can increase arrears and introduce opportunities for fraud. This is mitigated by Dynamica’s origination practices and commitment to repurchase delinquent loans. Nevertheless, this increases counterparty risk to Dynamica, which Scope has sized in its analysis.

Exposure to public entities (negative): 90.1% of the portfolio is exposed to public entities that pay salaries or pensions to borrowers. These borrowers normally have lower default rates than those in the private sector. However, such a high concentration can increase vulnerability to a potential insolvency of the Italian government, given the method by which CQS loans are repaid. Scope’s analysis has considered this by incorporating an event of sovereign stress.

Ramp-up period (negative): New loans can be added to the pool during the ramp-up period, which is expected to conclude in December 2018. These loans will be financed by increasing the notes’ paid-up amount and principal collections from the portfolio. The risk of asset quality deterioration is partially mitigated by replenishment criteria, which Scope has also factored into its analysis.

Small, unrated originator/sub-servicer (negative): Dynamica performs several key roles, including originator and sub-servicer. Dynamica is an unrated boutique servicer with nine years’ experience servicing CQS loans. Scope’s operational review has provided comfort in Dynamica’s abilities and capacity in these roles. Additionally, Zenith can serve as back-up servicer. Daily sweeps to the issuer account bank also limit sub-servicer commingling risk, which has been factored in the analysis.

Upside rating-change drivers
Better-than-expected performance of the pool may positively impact the ratings. A consequential rating upgrade of Italy or a reduced default risk for the insurance companies could also lead to an upgrade.

Downside rating-change drivers
A significant deterioration in the credit profile of the insurance companies would lead to lower rating-conditional recovery rate assumptions, which could negatively impact the ratings. A decline in the pool’s overall performance versus Scope’s expectations or a significant rating downgrade of Italy could also have a negative effect.

Quantitative analysis and key assumptions
Scope has performed a cash flow analysis that incorporates important mechanisms in the structure. Scope applied its large homogenous portfolio approximation approach when analysing the highly granular collateral pool and projecting cash flows over its amortisation period. The cash flow analysis considers the probability distribution of portfolio default rates, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche. Scope has taken into account asset and liability amortisation and the evolution in the pool composition.

Scope assumed a default rate of 10.5%, a coefficient of variation of 35% and recovery rate assumptions of 59.7% and 67.6%, respectively, for the class B and the class C notes. Scope’s recovery rate assumptions reflect a 20% recovery rate on loans in the absence of insurance and an 80% recovery rate on loans assuming insurance coverage, as well as the default distribution for the portfolio’s insurance companies assuming a 20% correlation between the insurers and an average default risk profile commensurate with an investment grade. Scope’s recovery rate assumptions also reflect rating-conditional recovery rate haircuts of 16% and 8%, respectively, for the class B and the class C notes in a scenario with no insurance coverage.

Scope has taken into account default rate and recovery vintage data from 2009 to 2017 for the securtised portfolio, which reflects the performance of the loan book originated by Dynamica since 2009. The observation period for loan origination by Dynamica is approximately 8 years. The period includes a severe recession experienced in Italy from 2012-2014. Scope did not consider a long-term reference default distribution because the vintage data capture a full economic cycle of performance that is sufficient to derive a long-term forward-looking view on the portfolio.

Scope considered the assets’ amortisation characteristics and assumed a default timing reflecting a constant default intensity. Scope assumed a portfolio margin of 3.8%.

Rating sensitivity
Scope tested the resilience of the rating against deviations of the main input parameters: the portfolio mean-default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.
The following shows how the quantitative results change when the portfolio’s expected default rate increase by 50% and the portfolio’s expected recovery rate reduce by 50%, respectively:

• Class B: sensitivity to probability of default, three notches; sensitivity to recovery rates, four notches
• Class C: sensitivity to probability of default, four notches; sensitivity to recovery rates, five notches

Methodology
The methodology used for these ratings ‘General Structured Finance Rating Methodology’, ‘Consumer ABS Rating Methodology’, and the ‘Methodology for Counterparty Risk in Structured Finance’ are available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

Solicitation, key sources and quality of information
The issuer of the rated instruments and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the issuer of the rated instruments, the issuer’s agents, third parties and Scope internal sources. Scope considers the quality of information available to Scope on the issuer of the rated instruments and instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.

Scope Ratings GmbH has relied on a third-party asset due diligence/asset audit. The audit review has no negative impact on the credit rating.

Regulatory and legal disclosures
These credit ratings are issued by Scope Ratings GmbH.
The rating analysis was prepared by Thomas Miller-Jones, Associate Director.
Responsible for approving the rating: Guillaume Jolivet, Managing Director
The ratings were assigned as final ratings by Scope on 09.03.2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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