The rating actions are as follows:

Series 5-2019 Class A (ISIN IT0005367732), EUR 255.1m: definitive rating of AAA_SF

Series 5-2019 Class J (ISIN IT0005367740), EUR 33.1m: not rated

The latest information on the rating, including rating reports and related methodologies are available on this LINK.

Transaction overview

Marzio Finance S.r.l. has established a EUR 10bn 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% for Delegazione di Pagameto (DP) loans.

Under the programme, several series of notes may be issued. Each series is 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 5-2019 is the fifth issuance under the programme.

The current portfolio of Series 5-2019 is comprised of CQS (82.7%) and DP (17.3%) loans extended to employees working for public administration (37.6%), central state administration (12.0%), the private sector (15.8%), as well as pensioners (34.5%). The portfolio is highly granular and most loans were originated between 2018 (79.3%) and 2019 (20.5%). All the underlying loans are insured against life and employment events. Aviva Life S.p.A., Cardif Assurance Vie S.A. and Net Insurance Life S.p.A. are the top three insurance companies covering life events, while Net Insurance S.p.A., Generali Italia S.p.A. and Cardif Assurances Risques Divers S.A. are the top three insurance companies covering employment events. The regional concentration is as follows: north (29.4%), centre (30.6%) and south (40.1%).

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. 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.

The ratings are mainly driven by the securitised portfolio’s characteristics and its expected performance and by the 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 5-2019 Class A is supported by 11.5% of credit enhancement and benefits from the structural protection provided by sequential principal amortisation. A liquidity reserve and an additional reserve provide both liquidity and credit protection to the class A notes.

IBL Banca performs several key roles, including originator, servicer, calculation agent and collection account bank. Operational risk is mitigated by the appointment of Zenith Service S.p.A. 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, with a track record of above-average performance for its loan 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.

Liquidity and credit protection (positive). A fully funded liquidity reserve (EUR 2.6m at closing) will provide liquidity protection to the class A during the life of the transaction. An additional reserve (EUR 4.2m at closing) will also protect the liquidity of the rated notes and provide ongoing credit protection to the class A. Both reserves will be available to repay the notes at maturity.

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

Excess spread (positive). Scope expects that a high level of excess spread will remain available (3.6%) after stressing the weighted average portfolio yield and deducting fees and interests on liabilities.

No interest rate risk (positive). There is no interest rate mismatch since both the notes and the portfolio pay a fixed rate.

Exposure to public entities (negative). A large portion of the portfolio is exposed to public entities that pay salaries or pensions to borrowers (84.2%). 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.

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.

Insurance company concentration (negative). The top two life insurance companies account for 46.7% of the total portfolio while the top two insurance companies covering employment events account for 43.8% of the non-retired pool. A failure in honouring their obligations would negatively impact the portfolio recovery rate. Scope has considered this risk in its analysis.

Upside rating-change drivers

A rating upgrade of Italy, a reduction of the insurance companies’ default risk or better-than expected pool performance would contribute to the robustness of the rating, which is already at the highest possible level.

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 may 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

A cash flow analysis was performed, 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 used 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 has considered the amortisation of assets and liabilities and the evolution in the pool’s composition.

Scope assumed a default timing reflecting a constant default intensity. A stressed portfolio weighted average yield of 5.1% was assumed.

Class A note assumptions included a mean default rate of 7.5%, a coefficient of variation of 40%, and a rating-conditional recovery rate of 48.7%.

Rating-conditional recovery rate assumptions were calculated by taking the weighted average of two recovery rate levels. Scope assumed an 80% recovery rate in a scenario where the insurance does not default (RR1) and a 20% recovery rate in the event of insurance default (RR2). The weights applied to RR1 and RR2 reflect the default probability of the pool of insurance companies, assuming a 20% asset correlation between insurers. For the class A notes specifically, Scope applied a rating-conditional haircut to RR2 of 40%.

Scope has considered Italian sovereign risk by incorporating the impact of a distressed scenario under the following assumptions: i) 50% of the public sector portfolio is fully suspended for two 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 two severe recessions experienced in Italy: the first one between 2008 to 2009 and then a second one from 2012 to 2014. As a consequence, Scope did not consider a long-term reference default distribution because the vintage data captures more than a full economic cycle of performance.

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 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 5-2019 Class A: sensitivity to default rate, zero notches; sensitivity to the recovery rate, one notch.

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

Cash flow analysis
Scope has primarily analysed the portfolio rating-conditional recovery rate 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 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.

*Editor's Note: The cash flow model name was changed on 22 July 2019 to correct a typographical error.

Methodology
The methodology used for these ratings, the ‘General Structured Finance Rating Methodology’, the ‘Consumer and Auto 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 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’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 not received a third-party asset due diligence assessment/asset audit. Scope Ratings GmbH will receive a third-party asset due diligence assessment/asset audit after the date of release of this rating. Audit reviews provided in the context of previous series of notes, issued under the same securitisation programme, had no impact on their credit ratings.
Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory and legal disclosures
This credit rating is issued by Scope Ratings GmbH.
Lead analyst Leonardo Scavo, Analyst.
Person responsible for approval of the rating: David Bergman, Executive Director
The rating was first released by Scope on 05.04.2019.
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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