The rating actions are as follows:

Series 4-2018 Class A (ISIN IT0005349441), EUR 305.9m: definitive rating of AAA_SF

Series 4-2018 Class B (ISIN IT0005349458), EUR 54.2m: definitive rating of A+_SF

Series 4-2018 Class B (ISIN IT0005349466), EUR 27.1m: 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, rated 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 CQS loans and 50% respectively for Delegazione di Pagameto (DP).

Under the programme, several series of notes may be issued. Each series are structured as an independent transaction, with no cross-collateralisation, for the purpose of financing the purchase of a static portfolio of receivables originated by IBL Banca. The capital structure, cash reserve level and notes’ interest rates may differ among the different series. Series 4-2018 is the fourth issuance under the programme.

The current portfolio of Series 4-2018 is comprised of CQS (82.3%) and DP (17.7%) loans extended to employees of public administration (36.6%) and central State administration (12.8%), private sector employees (13.7%) and pensioners (36.9%). The portfolio is highly granular and around 98.7% of the loans have been originated in 2018. All the underlying loans are insured against life and employment events (Aviva Life, Cardif Assurance Vie and Genertel Life are the top 3 insurance companies for life event, while Generali Italia, Cardif Assurances Risques Divers and Hdi Assicurazioni are the top 3 insurance companies for employment events). The regional concentration is as follows: north (30.2%), centre (28.4%) and south (41.4%).

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 (through its subsidiary IBL Servicing S.p.A.), 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; and vi) the counterparty exposure to Citibank N.A. as transaction bank and paying agent, and of Credit Agricole Corporate and Investment Bank as swap counterparty.

The ratings are mainly driven by 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.

Series 4-2018 Class A and Class B are supported by 21% and 7% credit enhancement, respectively. Class A notes benefit from the structural protection provided by sequential principal amortisation and from credit protection via a fully funded cash reserve. A dedicated reserve provides liquidity protection to Class A and B notes. However, if cumulative net defaults exceed 3%, Class B interest will be subordinated to the full repayment of class A notes. As a result, the rating of Class B notes reflects a strong credit quality when measured in expected loss terms but it is constraint by the default risk of the tranche.

IBL Banca performs several key roles, including originator, servicer (through its subsidiary IBL Servicing S.p.A.), calculation agent, and collection account bank. Operational risk is mitigated by the appointment of Zenith as back-up servicer and back-up calculation agent.

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 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 are withheld by the borrower’s employer and paid directly to the lender.

Diverse insurance coverage (positive): The portfolio benefits from a well-diversified pool of insurance companies covering individual borrowers against life events and unemployment.

Liquidity and credit protection (positive): A fully funded reserve, equal to 1% of the outstanding balance of Class A and B notes, will provide liquidity protection to Class A notes during the life of the transaction, and to Class B notes as long as the cumulative net default ratio does not exceed 3%. In addition, an additional reserve equal to 1.6% of the current balance of Class A and Class B notes, will provide credit protection to Class A notes.

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

Static portfolio (positive). The portfolio will start amortising immediately after closing, reducing the risk of performance volatility compared to revolving transactions.

Interest rate swap (positive). The Class A notes pay one-month Euribor plus a margin, while the portfolio pays fix. To hedge interest rate risk, the issuer has entered into a fix-floating interest rate swap with Credit Agricole Corporate and Investment Bank (Paris branch).

Exposure to public entities (negative): A large portion of the portfolio is exposed to public entities that pay salaries or pensions to borrowers (86.3%). 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, 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 pool’s overall performance versus Scope’s initial 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 the portfolio characteristics and the main structural features. Scope applied its large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over their amortisation period. The cash flow analysis considers the probability distribution of 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 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 5.3%.

Scope assumed a mean default rate of 7.5%, a coefficient of variation of 40%, and rating-conditional recovery rate assumptions of 52.8% and 59.2% for Class A and Class B notes, respectively.

Scope calculated rating-conditional recovery rate assumptions as the weighted average of two levels of recovery rates. Scope assumed a 80% recovery rate in a scenario of insurance coverage (RR1) and a 20% recovery rate upon insurance default (RR2). The weights applied to RR1 and RR2 reflect the default probability of the pool of insurance companies assuming a 20% correlation between insurers. Scope applied rating-conditional haircuts to RR2 of 40% and 24% for Class A and Class B notes, respectively.

Scope has considered the Italian sovereign risk by incorporating in the results the impact of a distressed scenario under 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 portfolio, 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 performance.

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

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 the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Series 4-2018 Class A: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches
• Series 4-2018 Class B: 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 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 21.11.2018.
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
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