Rating action

Scope Ratings GmbH (Scope) has today assigned a preliminary rating of (P) AAA_SF to the notes to be issued by Marzio Finance S.r.l..

Series 12-2023 Class A, EUR 290.2m: rated (P) AAA_SF

Series 12-2023 Class J, EUR 68.0: not rated

Scope’s Structured Finance Ratings constitute an opinion about the relative credit risks and reflect the expected loss associated with the timely payment of interest and principal on or before the instrument’s legal maturity date. The preliminary rating relies on the information made available to Scope up to 12 September 2023. Scope may assign a final rating subject to the review of the final version of all transaction documents and legal opinions. Final credit ratings may deviate from preliminary ratings.

Transaction overview

Marzio Finance S.r.l. has established a EUR 10bn securitisation programme of notes backed by Italian payroll-deductible loans (CQS) extended to borrowers in Italy and originated by IBL – Istituto Bancario del Lavoro S.p.A. (IBL Banca, rated BBB / S-2 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 Pagamento (DP) loans.

The programme permits the issuance of several series of notes. 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 12-2023 is the twelfth issuance under the programme.

The portfolio of Series 12-2023 is composed of CQS (86.3%) and DP (13.7%) loans extended either to employees working for the public administration (20.5%), the central state administration (25.6%) or the private sector (13.5%), or to pensioners (40.4%). The portfolio is highly granular and has a weighted average seasoning of 2.5 years. All the underlying loans are insured against life events, whilst 60.4% are insured against employment events. The regional concentration is as follows: north (30.7%), centre (29.6%) and south (39.7%).

Rating rationale

The rating reflects: 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 (via IBL S.p.A.), master servicer (via IBL Servicing S.p.A.), calculation agent, and collection account bank; v) the appointment of a back-up servicer since closing; vi) the quality and ability of other counterparties involved in the transaction.

The rating is mainly driven by i) the securitised portfolio’s characteristics and its expected performance; and ii) the expected performance of the pool of insurance companies covering life or employment events. The rating also considers Scope’s positive assessment of the servicer’s abilities and incentives.

Series 12-2023 Class A is supported by 19.4% of credit enhancement and benefits from the structural protection provided by sequential principal amortisation including the liquidity reserve and an additional reserve that also provide liquidity protection to the class A notes.

IBL Banca performs several key roles, including originator, servicer, calculation agent and collection account bank. The 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 loan originators in Italy and its loan book has performed above-average¹.

Low historical losses of the underlying asset type (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 lender¹.

Liquidity and credit protection (positive). A fully funded liquidity reserve (EUR 2.2m at closing) will provide liquidity protection to the class A during the life of the transaction. An additional reserve (EUR 6.1m at closing) will provide liquidity support and ongoing credit protection to the class A. Both reserves can be utilised to repay the class A notes at maturity².

Static portfolio (positive). The transaction is static, reducing the risk of performance volatility compared to revolving transactions¹.

Public sector concentration (negative). Most of the portfolio is exposed to the public sector (86.5% at closing date). Public sector borrowers normally have lower default rates than those in the private sector, but their high share in the portfolio makes the transaction more exposed to sovereign risk. Scope’s analysis incorporates a sovereign stress event¹.

Insurance company concentration (negative). At closing date, the top two life insurance companies account for 51.3% of the total portfolio while the top two insurance companies covering employment events account for 34.5% of the non-retired pool. A failure by these insurers to honour obligations would negatively impact the portfolio recovery rate. Scope’s analysis incorporates this risk¹.

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 a servicer disruption. However, as most employers pay by bank transfer, the redirection of payments may take longer than for a standard unsecured loan portfolio².

Rating-change drivers

Significant deterioration in the credit profile of the insurance companies (downside) leading to lower rating-conditional recovery rate assumptions could negatively impact the rating.

Decline in the pool’s overall performance (downside) versus Scope’s initial expectations or a significant rating downgrade of Italy could also have a negative effect.

Quantitative analysis and assumptions

Scope’s cash flow analysis considered the portfolio’s 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 changes in the pool’s composition.

Scope assumed a default timing reflecting a constant default intensity and a stressed portfolio weighted average yield of 4.8%.

For the analysis of class A notes, Scope assumed a mean default rate of 7.0%, a coefficient of variation of 40%, and a rating-conditional recovery rate of 45.1%.

The rating-conditional recovery rate assumptions were calculated by taking the weighted average of two recovery rates: i) an 80% recovery rate in a scenario where the insurance company does not default; and ii) a 12.0% recovery rate in the event of insurance default after applying a rating-conditional haircut of 40%. The weights applied to each recovery rate reflect the default probability of the pool of insurance companies, assuming a 20% asset correlation between insurers. For the class A notes specifically, Scope has assumed that the pool of insurance companies will default with a probability of 51.3%.

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

Scope has analysed default and recovery vintage data from 2008 to 2022, reflecting the performance of the loan book originated by IBL Banca since 2008, which Scope considers a representative sample of the portfolio being securitised.

Sensitivity analysis

Scope tested the resilience of the preliminary rating 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.

For the Series 12-2023 Class A, 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:

• sensitivity to default rate, minus one notch
   
• sensitivity to recovery rate, minus two notches

The output of these sensitivities considers the probability of missing at least one coupon payment relative to the observed expected loss.

Rating driver references
1. Loan-by-loan data tape of the securitised pool and originator’s historical data (Confidential)
2. Transaction documentation (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings primarily analysed the distribution of portfolio losses and its impact on the rated instrument, with the use of Scope Ratings’ Portfolio Model Version 1.1.
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow Structured Finance Expected Loss Model Version 1.1 incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating (Consumer and Auto ABS Rating Methodology, 3 March 2023; General Structured Finance Rating Methodology, 25 January 2023; Counterparty Risk Methodology, 13 July 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for this Credit Rating are (Cash Flow Structured Finance Expected Loss Model Version 1.1., Portfolio Model Version 1.1.), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings 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. The external due diligence assessment was considered when preparing the Credit Rating and it has no impact on the Credit Rating¹.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

¹Editorial note: The paragraph was amended on 29 September 2023. In the initial publication the text read “Scope Ratings has not received a third-party asset due diligence assessment. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis was considered when preparing the Credit Ratings and it has no impact on the Credit Rating.”

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Rossella Ghidoni, Director.
Person responsible for approval of the Credit Rating: Benoit Vasseur, Executive Director.
The preliminary Credit Rating was first released by Scope Ratings on 12 September 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.