Scope completed a monitoring review of the following notes issued by Marzio Finance S.r.l.:

Series 7-2019 Class A (ISIN IT0005386765), current balance EUR 298.8m: AAA_SF
Series 7-2019 Class J (ISIN IT0005386773), EUR 41.3m: not rated

The notes are backed by a EUR 332.6m outstanding portfolio of payroll-deductible loans extended to employees working for the public administration (34.7%), the central state administration (11.6%), the private sector (14.8%), as well as pensioners (38.9%).
The review took place on 6 October 2020 using transaction data through August 2020, resulting in no action on the assigned rating. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found at www.scoperatings.com.

Key rating factors

The class A credit enhancement has improved since closing to 11.5% from 10.5%. The transaction continues to benefit from fully funded liquidity reserves, along with significant excess spread. There is no material change in the exposure of the portfolio to the distribution of insurance companies since closing.
In response to the upward trend in arrears, delinquency and default ratios observed since closing, Scope adjusted its mean remaining lifetime default rate and coefficient of variation assumptions to 8.3% and 37.4% respectively from 7.5% and 40% at closing. The update additionally accounts for the reduction in the risk horizon since closing.

CREDIT-POSITIVE (+)
Underlying asset type with low historical losses. CQS loans incur lower losses than standard unsecured consumer loans, primarily because the loans are fully insured, and installments are withheld by the borrower’s employer and paid directly to the lender.

Excess spread: The current portfolio yield is very high (5.9%) compared to the rate payable in the rated notes (0.5%). We expect that net excess spread will remain high (at least 3.6%), even after accounting for potential yield compression and stressed servicing fees.

Experienced originator. IBL Banca is one of the most experienced CQS loan originators in Italy, with a track record of above-average performance for its loan book.

Credit enhancement. The Class A notes benefit from 11.5.0% credit enhancement up from 10.5% at closing. A liquidity reserve and additional reserve provide both liquidity and credit protection to the class A notes.

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

CREDIT-NEGATIVE (-)
Weak macro-economic outlook. The post-pandemic macro-economic outlook has deteriorated significantly relative to our view at closing. In addition, the transaction shows an increasing trend in arrears, delinquency and default ratios since closing. Scope adjusted it’s mean remaining lifetime default rate assumption to 8.3% from 7.5% at closing.

Exposure to public entities. A large portion of the portfolio is exposed to public entities that pay salaries or pensions to borrowers (85.2%). Such a high concentration increases vulnerability to sovereign default.

Insurance company concentration. The top two life insurance companies account for 46.5% of the total portfolio while the top two insurance companies covering employment events account for 42.2% of the non-retired pool. A failure in honouring their obligations would negatively impact the portfolio recovery rate.

The methodologies applicable for the reviewed ratings (Consumer and Auto ABS Rating Methodology, published 4 March 2020; Methodology for Counterparty Risk in Structured Finance, published 8 July 2020) are available on https://www.scoperatings.com/#!methodology/list.

This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.

Lead analyst Leonardo Scavo

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