The rating actions are as follows:

Class A (ISIN IT0005022154), EUR 210.6m (EUR 113.4m outstanding amount): not rated

Class B (ISIN IT0005092603), EUR 26.4m (EUR 15.1m outstanding amount): affirmed at BBB+_SF

Class C (ISIN IT0005092611), EUR 14.3m (EUR 6.7m outstanding amount): affirmed at BB_SF

Class D (ISIN IT0005092652), EUR 12.2 (EUR 8.3m outstanding amount): not rated

Transaction overview

Dyret SPV S.r.l. is a securitisation of payroll-deductible (CQS) loans extended to borrowers in Italy and originated by Dynamica Retail S.p.A. (Dynamica). The notes have entered the amortisation period following the conclusion of the ramp-up period in December 2018. The transaction’s legal maturity is 23 December 2038.

Rating rationale

The rating actions are primarily driven by stable asset performance, in line with Scope’s expectations. The portfolio has amortised to EUR 138.0m and credit enhancement has increased to 12.2% for class B and to 7.6% for class C. Cumulative defaults are 2.8% of the transferred portfolio and non-defaulted assets more than 90 days past due represent 0.27% of total non-defaulted assets. Scope’s analysis is based on monthly reporting provided by Dynamica through to February 2019.

The ratings reflect the legal and financial structure of the transaction, together with the counterparty exposures to i) Dynamica as originator and sub-servicer; ii) Zenith Services S.p.A. as servicer; and iii) BNP Paribas Securities Services, Milan Branch as account bank and paying agent.

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

Given the relevance of the exposure to public employees and pensioners (around 88.5% of the portfolio), Scope’s analysis quantified the impact of sovereign risk by assessing the likelihood and severity of a distress scenario (CQS stress scenario) affecting the government of Italy. A CQS stress scenario would entail a significant increase in portfolio defaults and delinquencies compared to the agency’s base case assumptions and captures the potential effect on the transaction of a government defaulting on its public debt. 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.

The analysis assumed the likelihood of a CQS stress scenario to be equivalent to an A risk, which is two notches higher than Scope’s current rating on Italy. 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 needs 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

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

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.

Independent servicer (positive). Zenith Services S.p.A. 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.

Static portfolio (positive). The portfolio is now static, discontinuing the risk of negative asset quality migration.

Exposure to public entities (negative). 88.5% 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.

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 sub-servicer disruption. However, as most employers pay by bank transfer, the redirection of payments may take longer than for a standard, unsecured loan portfolio.

Set-off risk on upfront loan commissions (negative). Borrowers can claim back a portion of the fees and commissions paid upfront if they prepay their loan. A dedicated reserve 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

The rating could be downgraded upon: i) a significant further rating downgrade of Italy; ii) a deterioration in the credit profile of the insurance companies, as this would lead to lower rating-conditional recovery rate assumptions; and iii) a decline in the pool’s overall performance versus Scope’s expectations.

Quantitative analysis and assumptions

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 the 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 the amortisation of assets and liabilities as well as the evolution in the pool’s composition.

Assumptions include a portfolio mean default rate of 10.5%, a coefficient of variation of 35% and rating-conditional recovery rate assumptions of 62% and 71% for the class B and the class C notes, respectively.

The CQS stress scenario regarding the government of Italy assumed: i) the suspension of 50% of collections from the public-sector portfolio for two years; and ii) defaults for 25% of the public-sector portfolio. The probability of such a scenario is assumed to be equivalent to an A risk.

Sensitivity analysis

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 assigned ratings 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 default rate increases by 50% or the portfolio’s expected recovery rate decreases by 50%, respectively:

• Class B notes: sensitivity to default rate, three notches; sensitivity to recovery rate, four notches
   
• Class C notes: sensitivity to default rate, four notches; sensitivity to recovery rate, five notches

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

Cash flow analysis
Scope has primarily analysed the distribution of portfolio losses and its impact on the rated instruments using the Scope Portfolio Model (Model) Version 1.
Scope analysed the transaction’s cash flows using the Scope Cash Flow SF/CB EL Model Version 1. This model incorporates default and recovery rate assumptions over the portfolio’s amortisation period and the transaction’s main structural features such as the notes’ priorities of payment, size and coupons. The analysis yielded an expected loss and expected weighted average life for the notes.

Methodology
The methodologies 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.

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’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 provided at the initial assignment of the ratings. The audit review has no negative impact on the credit ratings.
Prior to the issuance of the rating action, 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 disclosures
These credit ratings are issued by Scope Ratings GmbH.
Lead analyst: Leonardo Scavo, Analyst.
Person responsible for approval of the rating: David Bergman, Executive Director
The ratings were first released by Scope on 09.03.2018. The ratings were last updated by Scope on 05.03.2019.

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
© 2019 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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