The rating actions are as follows:

Series 1-2017 Class A (ISIN IT0005282089), EUR 398.6m (EUR 330.9m outstanding amount): definitive rating AAA_SF

Series 1-2017 Class J (ISIN IT0005282097), EUR 34.7m: not rated

Series 2-2018 Class A (ISIN IT0005322893), EUR 288.1m (EUR 132.8m outstanding amount): definitive rating of AAA_SF

Series 2-2018 Class J (ISIN IT0005322901), EUR 28.6m: not rated

Series 3-2018 Class A (ISIN IT0005328601), EUR 421.9m (EUR 382.9m outstanding amount): definitive rating of AAA_SF

Series 3-2018 Class J (ISIN IT0005328619), EUR 64.7m: not rated

Transaction overview

Marzio Finance S.r.l. has established a EUR 10 billion securitisation programme of notes backed by payroll-deductible loans (CQS) extended to borrowers in Italy and originated by IBL – Istituto Bancario del Lavoro S.p.A. (IBL Banca, BBB by Scope). CQS loans are collateralised by the debtor’s salary or pension and, in most cases, by any accrued severance amount (Trattamento di Fine Rapporto). Instalments cannot exceed 20% of the borrower’s net monthly salary or pension for CDQ loans and 50% respectively for Delegazione di Pagameto (DP).

Under the programme, several series of notes may be issued, and each series may consist of a Class A, a Class B and a Class J notes. Each series will be issued as an independent transaction, for the purpose of financing the purchase of a static portfolio of receivables originated by IBL Banca.

Three series of notes have been issued under the programme to date: Series 1-2017 notes on the 28th September 2017, Series 2-2018 notes on the 29th January 2018, Series 3-2018 notes on the 24th May 2018.

The notes of each series are backed by segregated specific independent pools of loans. Each series issued under the programme has different capital structures, cash reserves and notes’ interest rate levels. All the securitised portfolios are highly granular, and all of the underlying loans are insured against life and employment events. The composition of the portfolios of the three series, as of the last payment date are as follows:

• Series 1-2017: the current pool is comprised of CDQ (83.3%) and DP (16.7%) loans extended to employees of public administration (38.8%) and central State administration (15.3%), private sector employees (6.8%) and pensioners (39.1%). Around 78.1% of the pool has a residual life of more than 8 years. The top 3 insurance companies for life events are Axa France Vie (21.8%), Cardif Assurance Vie (21.3%) and Hdi Assicurazioni (16.3%), while the top 3 insurance companies for employment events are Axa France Iard (20.5%), Hdi Assicurazioni (16.3%) and Cardif Assurances Risques Divers (11.3%). The geographical concentration is as follows: North (25.7%), Central (31.0%) and South (43.3%).
   
• Series 2-2018: the current pool is comprised of CDQ (77.7%) and DP (22.3%) loans extended to employees of public administration (39.1%) and central State administration (16.7%), private sector employees (2.8%) and pensioners (41.4%). Around 81.0% of the pool has a residual life between 6 and 8 years. The top 3 insurance companies for life events are Hdi Assicurazioni (25.2%), Net Insurance (22.0%) and Ergo Previdenza (19.1%), while the top 3 insurance companies for employment events are Hdi Assicurazioni (25.2%), Net Insurance (19.4%) and Axa France Iard (9.4%). The geographical concentration is as follows: North (27.9%), Central (31.3%) and South (40.8%).
   
• Series 3-2018: the current pool is comprised of CDQ (83.4%) and DP (16.6%) loans extended to employees of public administration (41.2%) and central State administration (13.5%), private sector employees (8.7%) and pensioners (36.6%). Around 83.0% of the pool has a residual life of more than 8 years. The top 3 insurance companies for life events are Aviva Life (24.8%), Axa France Vie (18.8%) and Genertel Life (15.3%), while the top 3 insurance companies for employment events are Axa France Iard (18.4%), Generali Italia (15.3%) and Hdi Assicurazioni (12.8%). The geographical concentration is as follows: North (29.1%), Central (28.9%) and South (42.0%).

Rating rationale 

The ratings reflect: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral; iii) insurance protection against life and employment events iv) the ability of IBL Banca as originator, servicer, calculation agent, and collection account bank; v) the ability of Zenith Service S.p.A. (Zenith) in its role as back-up servicer and back-up calculation agent; vi) the counterparty exposure to Citibank N.A. as transaction bank and paying agent, and, vii) for Series 3-2018, the counterparty exposure to Credit Agricole Corporate and Investment Bank as swap counterparty.

The ratings are mainly driven by Scope’s assessment of the securitised portfolio characteristics and its expected performance, and by the relatively diversified pool of insurance companies covering life or employment events. The ratings also incorporate Scope’s positive assessment of the servicer’s abilities and incentives.

The rating of Series 1-2017 Class A is supported by 9% credit enhancement (as of the last payment date); by the structural protection provided by sequential principal amortisation; and by liquidity and credit protection via a fully funded liquidity reserve.

The rating of Series 2-2018 Class A is supported by 18% credit enhancement (as of the last payment date); by the structural protection provided by sequential principal amortisation; and by liquidity and credit protection via a fully funded liquidity reserve.

The rating of Series 3-2018 Class A is supported by 14% credit enhancement (as of the last payment date); by the structural protection provided by sequential principal amortisation; and by liquidity and credit protection via a fully funded liquidity reserve.

IBL Banca performs several key roles, including originator, servicer, calculation agent, and collection account bank. The programme includes some measures that mitigates operational risks, such as daily sweep of the collections into the issuer’s collection account. Additionally, Zenith has been appointed back-up servicer and back-up calculation agent since closing of each series.

Key rating drivers

Experienced originator (positive): IBL Banca is one of the most experienced CQS loans originator in Italy, showing an above average track record in the default and recovery performance of its loans book.

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.

Diverse insurance coverage (positive): All the loan portfolios benefit from a well-diversified pool of insurance companies covering individual borrowers against life events and unemployment. Series 2-2018, compared to the other series, presents a higher exposure to local and unrated insurance companies. This has been incorporated in Scope’s default assumptions of the insurance companies.

Liquidity protection (positive): All the series benefit from a dedicated fully funded liquidity reserve that will be available during the life of the transaction. The liquidity reserves of each series amount to: (i) 1.8% of the current balance of Series 1-2017 Class A notes; (ii) 3.3% of the current balance of Series 2-2018 Class A notes; and (iii) 2.9% of the current balance of Series 3-2018 Class A notes. Liquidity reserves are floored to (i) 0.75% of the initial balance of the Class A notes for Series 1-2017, (ii) 0.75% of the initial balance of the Class A notes for Series 2-2018 and (iii) 1.3% of the initial balance of the Class A notes for Series 3-2018.

No set-off risk (positive). At closing, borrowers do not have deposits with the originator.

Static portfolio (positive). All portfolios started to amortise immediately after closing, reducing the risk of performance volatility compared to revolving transactions.

Interest rate swap (positive). Series 3-2018 Class A notes pay one-month Euribor plus a margin, while the portfolio pays fix. To hedge interest rate risk of Series 3-2018, the issuer has entered into a fixed-floating interest rate swap with Credit Agricole Corporate and Investment Bank. For Series 1-2017 and Series 2-2018 notes there is no interest rate mismatch since both the notes and the portfolio pay fix.

Exposure to public entities (negative): a large portion of each of the three portfolios is exposed to public entities that pay salaries or pensions to borrowers (93.2% for Series 1-2017, 97.2% for Series 2-2018, 91.3% for Series 3-2018). These borrowers normally have lower default rates than those in the private sector. However, such a high concentration can increase vulnerability to a sovereign default. Scope’s analysis has considered this by incorporating an event of sovereign stress.

Loan up-front commissions set-off risk (negative): Borrowers can claim back a portion of the up-front paid fees and commissions if they prepay their loan. A dedicated reserve, equal to 25% of the total exposure for each series, mitigates set-off risk.

Upside rating-change drivers

Better-than-expected performance of the pool may positively impact the ratings. A rating upgrade of Italy or a reduction of the insurance companies’ default risk 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 pools’ 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, considering portfolios’ characteristics and the main structural features. Scope applied its large homogenous portfolio approximation approach when analysing collateral pools and projecting cash flows over their amortisation period. The cash flow analysis considers the probability distribution of each portfolio’s default rate, 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 considered assets and liabilities’ amortisation and the evolution in the pool’s composition.

Scope considered the assets’ amortisation schedule and assumed a default timing reflecting a constant default intensity. Scope assumed a portfolio weighted average yield equal to: (i) 5.1% for Series 1-2017 Class A notes, (ii) 5.8% for Series 2-2018 Class A notes, and (iii) 5.2% for Series 3-2018 Class A notes.

Scope has assumed the following mean default rates, coefficient of variations, and recovery rate assumptions respectively:

Series 1-2017 Class A notes, 6.0%, 45.0% and 55.6%

Series 2-2018 Class A notes, 5.0%, 45.0%, and 30.2%

Series 3-2018 Class A notes, 7.0%, 40.0% and 54.4%.

Scope’s recovery rate assumptions are equal to 20% in the absence of insurance, and 80% assuming insurance coverage. In a scenario with no insurance coverage, Scope’s recovery rate assumption also reflects rating-conditional recovery rate haircuts of 40% for Class A of Series 1-2017, Series 2-2018 and Series 3-2018. Scope has assumed a 20% correlation between the insurers when deriving the joint-default distribution of insurance companies.

Scope has considered the Italian sovereign risk by incorporating in the results the impact of a distressed scenario with the following assumptions: (i) 50% of the public-sector portfolio is fully suspended for a period of 2 years, and (ii) 25% of the public-sector portfolio defaults.

Scope has taken into account default rate and recovery vintage data from 2008 to 2018 for the securitised portfolios of the three series, which reflects the performance of the loan book originated by IBL Banca since 2008. The observation period for loan origination by IBL Banca is approximately 10 years. The period includes a severe recession experienced in Italy from 2012 to 2014. Scope did not consider a long-term reference default distribution because the vintage data captures a full economic cycle of performance that is sufficient to derive a long-term forward-looking view on the portfolio.

Rating sensitivity

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean-default rate and the 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 each portfolio’s expected mean default rate is increased by 50% and each portfolio’s expected recovery rate is reduced by 50%, respectively:

• Series 1-2017 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, one notch
   
• Series 2-2018 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches
   
• Series 3-2018 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero 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.
Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

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.
Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and the principal grounds on which it is based. Following that review, the rating was not amended before being issued.

Regulatory and legal disclosures
These credit ratings are issued by Scope Ratings GmbH.
The rating analysis was prepared by Leonardo Scavo, Analyst.
Responsible for approving the rating: Guillaume Jolivet, Managing Director
The ratings were assigned as final ratings by Scope on 14.11.2018.
The rating concern a financial instrument, which has been rated by Scope for the first time.

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
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

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