The rating actions are as follows:

Class A1 (ISIN IT0005352809), up to EUR 210.6m (EUR 131.4m paid-up): definitive rating of AA_SF

Class A2-R (ISIN IT0005364580), up to EUR 158.0m (EUR 82.5m paid-up): definitive rating of AA_SF

Class A3 (ISIN IT0005353401), up to EUR 17.5m (EUR 10.2m paid-up): definitive rating of AA_SF

Class B (ISIN IT0005352825), up to EUR 29.4m (EUR 18.4m paid-up): definitive rating of BBB_SF

Class C (ISIN IT0005352833), up to EUR 80.0m (EUR 54.4m paid-up): not rated

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

Transaction overview

Eridano II SPV S.r.l. is a cash securitisation backed by payroll-deductible (CQS) loans extended to borrowers in Italy. 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.

The EUR 204m portfolio, as of August 2019, comprises CQS loans originated by ViViBanca (EUR 136m) and CQS loans acquired by the issuer from Legion CQ S.r.l. (EUR 68m), a securitisation vehicle set up in the context of a former transaction originated by MCE Locam S.p.A.

There is a ramp-up period that is scheduled to conclude in May 2020, which is subject to covenants on asset and performance eligibility. During this period, the issuer can purchase additional assets originated by ViViBanca, using principal received from the current pool of assets and through further notes’ subscription payments.

The securitised portfolio, as of August 2019, is composed of CQS (89.2%) and DP (10.8%) loans extended to employees working for public administrations (36.4%), para-public administrations (6.1%), the private sector (17.2%), as well as pensioners (40.4%). The portfolio is highly granular and has a weighted average seasoning of 1.3 years. All the underlying loans are insured against life and employment events. Aviva Life, Axa France Vie and Metlife are the top three insurance companies covering life events, while Great American International Insurance, Net Insurance and Axa France Iard are the top three insurance companies covering employment events. The regional concentration is as follows: north (17.9%), centre (68.0%) and south (14.1%).

Rating rationale

The ratings reflect: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral; iii) the insurance protection against life and employment events; iv) the ability of ViViBanca as originator and servicer, Quinservizi as back-up servicer and MCE Locam as collection agent; v) the ability of Securitisation Services in its role as calculation agent, corporate servicer and noteholders’ representative; and vi) the counterparty exposure to BNP Paribas as account 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 our assessment of the servicer’s abilities and incentives. We considered Italian sovereign risk by assessing the impact on the ratings of a distress scenario affecting the government of Italy and the associated loss severity for the securitised assets.

The senior notes (class A1, A2-R and A3, which rank pari passu and pro rata without priority among themselves) and the mezzanine notes (class B) are supported, respectively, by 15% and 8% of credit enhancement from subordination, the cash reserve and available excess spread. A cash reserve provides both liquidity and credit protection to the senior and mezzanine notes.

Key rating drivers

Loan product with low historical losses (positive). CQS loans generally 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 loan portfolio benefits from a diversified pool of 8 insurers covering borrowers against life events and unemployment.

Liquidity and credit protection (positive). A fully funded cash reserve (equal to 2% of the outstanding balance of the senior and mezzanine notes) will provide liquidity protection to the senior and mezzanine notes during the life of the transaction. The cash reserve will be available to repay the notes at maturity.

Excess spread (positive). Scope expects that a significant level of excess spread will remain available (2.0%), considering a stressed weighted average portfolio yield and deducting fees and interests on liabilities.

Ramp-up period (negative). New loans can be added to the pool during the ramp-up period, which is expected to conclude in May 2020. These loans will be financed by using principal collections from the current portfolio and by increasing the notes’ paid-up amount. The risk of asset quality deterioration is partially mitigated by replenishment criteria, which we have factored into the analysis.

Exposure to public entities (negative). A large portion of the portfolio is exposed to public entities that pay salaries or pensions to borrowers (82.8%). 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 has considered this risk by incorporating a sovereign stress event in the analysis.

Small and relatively new servicer (negative). ViViBanca is a relatively new servicer with around ten years’ experience servicing CQS loans. Scope’s operational review has provided comfort in ViViBanca’s abilities and capacity in this role.

Interest rate risk (negative). The transaction is exposed to potential interest rate mismatches since the notes pay a floating coupon, indexed to Euribor, while the portfolio pays a fixed rate. Scope’s analysis has considered interest rate risk by considering a stressed Euribor assumption.

Commingling risk (negative). Most of the employers and pension entities pay by bank transfer. Therefore, the redirection of payments may take longer than for a standard unsecured loan portfolio.

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 an upgrade of the ratings.

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 and a stressed portfolio weighted average yield of 5.2%.

For the analysis of the notes, Scope assumed a mean default rate of 11.0%, a coefficient of variation of 40%, and rating-conditional recovery rate assumptions of 53.6% and 59.8% for the senior and mezzanine notes, respectively.

Rating-conditional recovery rate assumptions were calculated by taking the weighted average of two recovery rate levels: i) 80% recovery rate in a scenario where the insurance company does not default (RR1); and ii) 15.0% 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 and class B notes, we have assumed that the pool of insurance companies will default with a probability of 37.8% and 30.0%, respectively.

Scope has considered Italian sovereign risk by incorporating the impact of a distressed scenario under the following assumptions: i) 50% of the public sector borrowers in the portfolio is fully suspended for two years; and ii) 25% of the public sector portfolio defaults.

Scope has analysed default and recovery vintage data from 2009 to 2019, reflecting the performance of the loan book originated by ViViBanca, which Scope considers a representative sample of the portfolio being securitised. 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 ratings 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:

Class A1: sensitivity to default rate, four notches; sensitivity to the recovery rate, four notches.
Class A2-R: sensitivity to default rate, four notches; sensitivity to the recovery rate, four notches.
Class A3: sensitivity to default rate, four notches; sensitivity to the recovery rate, five notches.
Class B: sensitivity to default rate, two notches; sensitivity to the recovery rate, three notches.

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 1.0.2.
Scope analysed the transaction’s cash flows using the Scope Cash Flow SF EL Model Version 1.1.1. 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 outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodology used for these ratings, 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 received a third-party asset due diligence assessment. The external due diligence assessment was considered when preparing the ratings and it has no impact on the credit ratings.
Prior to the issuance of the ratings, the rated entity was given the opportunity to review the ratings and the principal grounds on which the credit ratings is based. Following that review, the ratings was not amended before being issued.

Regulatory and legal disclosures
This credit ratings are issued by Scope Ratings GmbH.
Lead analyst Leonardo Scavo, Analyst.
Person responsible for approval of the ratings: David Bergman, Managing Director
The ratings were first released by Scope on 18 December 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
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