Rating action

The rating actions are as follows:

Series 1-2017 Class A notes, EUR 185.9m: affirmed at AAA_SF

Series 2-2018 Class A notes, EUR 21.2m: affirmed at AAA_SF

Series 3-2018 Class A notes, EUR 246.1m: affirmed at AAA_SF

Series 4-2018 Class A notes, EUR 196.1m: affirmed at AAA_SF

Series 4-2018 Class B notes, EUR 54.2m: affirmed at A+_SF

Series 5-2019 Class A notes, EUR 188.0m: affirmed at AAA_SF

Series 6-2019 Class A notes, EUR 179.2m: upgraded to AAA_SF from AA+_SF

Series 7-2019 Class A notes, EUR 279.0m: affirmed at AAA_SF

Series 8-2020 Class A notes, EUR 265.1m: affirmed at AAA_SF

Scope’s review considered transaction performance data up to December 2020.

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, 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 the borrower’s net monthly salary or pension by 20% for Cessione del Quinto (CDQ) loans and 50% for Delegazione di Pagameto (DP) loans.

Under the programme, several series of notes may be issued, and each series may consist of class A, class B and class J notes. Each series will be issued as an independent transaction, for the purpose of financing the purchase of a static portfolio of receivables originated by IBL Banca.

Eight series of notes have been issued under the programme.

The notes of each series are backed by segregated, specific and independent pools of loans. Each series issued under the programme has different capital structures, cash reserves and note interest rates. All the securitised portfolios are highly granular, and all the underlying loans are insured against life and employment events.

Distribution by the employer types – public administration, state administration, private sector, and pensioners – are respectively shown below as a percentage of the outstanding balance of the portfolios as of December 2020:

• Series 1-2017: 37.6%, 14.5%, 6.3% and 41.7%
   
• Series 2-2018: 35.8%, 14.8%, 2.7% and 46.8%
   
• Series 3-2018: 38.9%, 13.3%, 7.8% and 40.1%
   
• Series 4-2018: 35.8%, 12.6%, 12.4% and 39.2%
   
• Series 5-2019: 37.3%, 11.8%, 14.4% and 36.5%
   
• Series 6-2019: 38.5%, 13.0%, 4.4% and 44.1%
   
• Series 7-2019: 34.8%, 11.5%, 14.4% and 39.2%
   
• Series 8-2020: 20.3%, 27.9%, 17.5% and 34.3%

Rating rationale

The rating actions are supported by i) the good asset performance; ii) a well-diversified pool of insurance companies covering life and employment events; iii) high excess spread; iv) the structural deleveraging and build-up of credit enhancement; v) liquidity and credit protection via a liquidity reserve at target levels; and vi) robust structural protection provided by sequential principal amortisation.

Credit enhancement from subordination has increased since closing as follows:

• Series 1-2017 Class A notes: at 15.7% from 8.0%
   
• Series 2-2018 Class A notes: at 57.5% from 9.0%
   
• Series 3-2018 Class A notes: at 20.8% from 13.3%
   
• Series 4-2018 Class A notes: at 29.3% from 21.0%
   
• Series 4-2018 Class B notes: at 9.8% from 7.0%
   
• Series 5-2019 Class A notes: at 15.0% from 11.5%
   
• Series 6-2019 Class A notes: at 21.7% from 8.0%
   
• Series 7-2019 Class A notes: at 12.9% from 10.5%
   
• Series 8-2020 Class A notes: at 11.6% from 10.5%

The observed cumulative gross default ratios, cumulative net default ratios, and 90-days-past-due delinquency rates are respectively:

• Series 1-2017: 3.7%, 1.0% and 2.0%
   
• Series 2-2018: 2.6%, 0.6% and 2.3%
   
• Series 3-2018: 2.8%, 0.7% and 1.0%
   
• Series 4-2018: 2.3%, 0.7% and 1.1%
   
• Series 5-2019: 1.8%, 0.6% and 1.2%
   
• Series 6-2019: 1.7%, 0.5% and 1.7%
   
• Series 7-2019: 1.2%, 0.3% and 1.1%
   
• Series 8-2020: 0.5%, 0.2% and 0.9%

In light of the upward trend in the arrears, delinquency and default ratios since closing, Scope has adjusted upwards, for all outstanding portfolios, the remaining lifetime mean default rate and coefficient of variation assumptions. This had no negative impact on the ratings due to the deleveraging of the notes and the low level of cumulative net defaults.

Transaction counterparty risk has not materially changed since closing.

Key rating drivers

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 instalments are withheld by the borrower’s employer and paid directly to the lender. This is well reflected in the low cumulative net default ratio.¹ 

Excess spread. The current portfolio yield is very high compared to the rate payable in the rated notes across all series. Scope expects that net excess spread will remain high, even after accounting for potential yield compression and stressed servicing fees.¹

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.³

CREDIT-NEGATIVE (-)

Weak macro-economic outlook. The post-pandemic macro-economic outlook has deteriorated significantly relative to Scope’s view at closing.²

Exposure to public entities. A large portion of the portfolio is exposed to public entities that pay salaries or pensions to borrowers (above 80%¬ for all series). Such a high concentration increases vulnerability to sovereign default.¹

Insurance company concentration. For all series, the insurer concentration, as depicted by Inverse-Herfindahl Index, ranges from 5.5 to 6.1 for the non-retired pool as of December 2020. This implies a moderate concentration of insurers across all the series. A failure by insurers in honouring obligations would negatively impact the portfolio recovery rate.¹

Rating-change drivers

POSITIVE (+)

Strong pool performance. All the senior notes are at the highest achievable rating. Better-than-expected pool performance will positively impact the rating of Series 4-2018 class B.

NEGATIVE (-)

Insurance company exposure. 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.

Sovereign risk. A significant rating downgrade of Italy may negatively impact on the ratings.

Quantitative analysis and assumptions

Scope has performed a cash flow analysis, considering the portfolios’ characteristics and the main structural features. Scope applied its large homogenous portfolio approximation approach when analysing collateral pools and projecting cash flows over their amortisation period. The cash flow analysis considers the probability distribution of each 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 has considered the assets’ amortisation schedule and assumed a default timing reflecting a constant default intensity.

Scope’s assumptions on the lifetime mean default rate, coefficient of variation, and base case rating-conditional recovery rate are respectively:

• Series 1-2017: 6.3%, 48.7% and 76.6%
   
• Series 2-2018: 3.0%, 60.7%, and 63.6%
   
• Series 3-2018: 7.0%, 41.7% and 76.5%
   
• Series 4-2018: 7.3%, 41.7% and 72.0%
   
• Series 5-2019: 7.6%, 39.8% and 71.1%
   
• Series 6-2019: 3.2%, 47.6% and 80.0%
   
• Series 7-2019: 7.6%, 39.0% and 70.9%
   
• Series 8-2020: 8.5%, 35.7% and 69.9%

The updated assumptions for the remaining mean lifetime default rate and coefficient of variation are due to a combination of the upward trend in defaults and reduced risk from deleveraging.

Scope’s recovery rate assumptions, however, remain unchanged from closing. This is mainly due to the stable share of insurers within each series since closing, with no deterioration in their credit quality.

Scope’s weighted average yield assumptions also remain unchanged from closing.

Scope has considered Italian sovereign risk by incorporating into the results the impact of a distressed scenario that assumes: i) a full two-year suspension for 50% of the public sector portfolio; and ii) defaults for 25% of the public sector portfolio.

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 each portfolio’s expected mean default rate is increased by 50% and each 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, zero notches
   
• 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, one notch
   
• Series 5-2019 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches
   
• Series 6-2019 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches
   
• Series 7-2019 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches
   
• Series 8-2020 Class A notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, one notch

Rating driver references
1. Transaction reporting (confidential)
2. Scope’s sovereign research
3. Servicer’s internal documents and information (confidential)

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

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF EL Model Version 1.1 incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these ratings (Consumer and Auto ABS Rating Methodology, 4 March 2020; Methodology for Counterparty Risk in Structured Finance, 8 July 2020) are available on https://www.scoperatings.com/#!methodology/list.
The model used for these ratings Scope Cash Flow SF/EL Model Version 1.1 is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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 Ratings’ definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The rated entity and its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s rating 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 has received a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit was considered when preparing the credit ratings and it has no 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 the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The credit rating and/or outlook is UK endorsed.
Lead analyst: Leonardo Scavo, Senior Analyst
Person responsible for approval of the credit rating: David Bergman, Managing Director
The credit ratings/outlooks for Series 1-2017 were first released by Scope Ratings on 14 November 2018. The credit ratings/outlooks were last updated on 14 December 2018.
The credit ratings/outlooks for Series 2-2018 were first released by Scope Ratings on 14 November 2018. The credit ratings/outlooks were last updated on 14 December 2018.
The credit ratings/outlooks for Series 3-2018 were first released by Scope Ratings on 14 November 2018. The credit ratings/outlooks were last updated on 14 December 2018.
The credit ratings/outlooks for Series 4-2018 were first released by Scope Ratings on 21 November 2018. The credit ratings/outlooks were last updated on 14 December 2018.
The credit ratings/outlooks for Series 5-2019 were first released by Scope Ratings on 5 April 2019. 
The credit ratings/outlooks for Series 6-2019 were first released by Scope Ratings on 31 July 2019. 
The credit ratings/outlooks for Series 7-2019 were first released by Scope Ratings on 9 October 2019. 
The credit ratings/outlooks for Series 8-2020 were first released by Scope Ratings on 16 March 2020. 

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of credit ratings.
 
Conditions of use / exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.