The rating actions are as follows:

Series 1-2017 Class A (ISIN IT0005282089), EUR 398.6m: affirmed at AAA_SF

Series 2-2018 Class A (ISIN IT0005322893), EUR 288.1m: affirmed at AAA_SF

Series 3-2018 Class A (ISIN IT0005328601), EUR 421.9m: affirmed at AAA_SF

Series 4-2018 Class A (ISIN IT0005349441), EUR 305.9m: affirmed at AAA_SF

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

Rating rationale

The rating actions reflect the contained negative impact of the downgrade to BBB+ with a Stable Outlook of the Republic of Italy’s long-term issuer rating (local and foreign) on 7 December 2018 (see press release ‘Scope downgrades Italy’s sovereign rating to BBB+ and changes Outlook to Stable’).

The notes issued by Marzio Finance S.r.l. are backed by payroll-deductible (CQS) loans 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 and pension and, in most cases, by any accrued severance amount (TFR). A large portion of the portfolio for each of the four series is exposed to Italian 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 and 86.3% for Series 4-2018).

Given the relevance of the exposure to public employees and pensioners, Scope’s analysis quantified the impact of Italian sovereign risk by assessing the likelihood and severity of a distress scenario (CQS stress scenario) affecting the government of Italy. This approach allows Scope to reflect the benefits of each transaction’s liability structure and discriminate between them, rather than applying a mechanistic cap to the assigned ratings based on Italy’s sovereign rating.

Scope’s analysis assumed the likelihood of a CQS stress scenario event (a significant increase in portfolio defaults and delinquencies compared to the agency’s base case assumption) occurring to be equivalent to an A risk, i.e. two notches higher than Scope’s current rating on Italy. This scenario captures the potential effect on the transaction of a government default on its public debt. The probability assigned to this scenario reflects Scope’s view that a sovereign default would not necessarily trigger the permanent suspension of payments to the entire population of civil servants or pensioners in Italy, or a general dismissal of civil servants, because the state will need to maintain a minimum level of key operations.

For more details on how sovereign risk is treated in CQS loans transactions, see Scope’s Consumer ABS Rating Methodology.

Key rating drivers

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

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 and unemployment events.

Liquidity protection (positive): All the series benefit from a dedicated, fully funded liquidity reserve that will be available during the life of the transaction.

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 and Series 4-2018 class A notes pay one-month Euribor plus a margin, while the portfolio pays a fixed rate. To hedge interest rate risk, 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 a fixed rate.

Commingling risk (negative): Commingling risk is mitigated by: i) a daily sweep of collections to the issuer’s account; and ii) instructions to borrowers to redirect payments to the issuer’s account in the event of servicer disruption. However, as most employers pay by bank transfer, the redirection of payments may take longer than for a standard, unsecured loan portfolio.

Loan up-front commission set-off risk (negative): Borrowers can claim back a portion of the fees and commissions paid up front 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 pool performance 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 further rating downgrade of Italy could negatively affect the ratings. A 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 could also have a negative effect.

Quantitative analysis

Scope performed a cash flow analysis, considering the portfolio’s characteristics and the main structural features. The agency 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 considered assets and liabilities’ amortisation and the evolution in the pool’s composition.

Scope considered Italian sovereign risk by incorporating the impact of a distressed scenario under the following assumptions: i) 50% of the collections from the public-sector portfolio are fully suspended for a period of two years; and ii) 25% of the public-sector portfolio defaults.

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 results for each rated instrument change compared to the assigned rating when the portfolio’s expected mean default rate is increased by 50% or the 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
• Series 4-2018 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches
• Series 4-2018 Class B notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches

Methodology
The methodology used for these ratings, the ‘General Structured Finance Rating Methodology’, the ‘Consumer ABS Rating Methodology’, and the ‘Methodology for Counterparty Risk in Structured Finance’ are available on www.scoperatings.com.
Historical default rates of the entities rated by 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 audit, at closing of the transaction upon initial assignment of the ratings. 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 of Series 1-2017, Series 2-2018 and Series 3-2018 were first released by Scope on 14.11.2018, while the ratings of Series 4-2018 were first release by Scope on 21.11.2018. The ratings were last updated by Scope on 14.12.2018.

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
© 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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