Fitch Ratings has upgraded QQuant Master Servicer Single Member S.A.'s (QQuant) asset-backed and commercial special servicer ratings to 'ABSS2' and 'CSS2' from 'ABSS2-' and 'CSS2-', respectively.
The upgrades reflect QQuant's demonstrated ability to grow its corporate and retail assets under management (AUM), more mature business and enhanced portfolio performance reporting tools.
KEY RATING DRIVERS
Since Fitch's previous review in 2019, QQuant has met its target of growing its AUM. As of end-March 2021, AUM, comprising retail and corporate non-performing loans, was EUR11.9 billion, up from EUR5.8 billion in July 2019. The portfolio growth was driven by mandates from existing clients and new clients (banks) seeking servicing for their balance sheet loans. The servicer's plans include expanding into the residential non-performing loan (NPL) space.
QQuant's loan administration processes are highly automated (e.g. loan boarding, written communication with borrowers, etc.). During the review period, QQuant developed new tools for portfolio performance reporting and increased the headcount in the portfolio analytics and reporting department. Investors are given access to QQuant's Power Business Intelligence tool daily to access their portfolio data. The servicer also produces monthly reports on various parts of its operations required for both internal and external stakeholders. It continues to seek innovative data-driven solutions that will help its recovery strategies.
At the previous review, QQuant had only been actively servicing NPL loans for 13 months, and the efficacy of processes and controls was yet to be fully demonstrated. In this review, we have evidence that the previously established processes around headcount management have been successfully implemented. As the business continues to grow, the servicer has increased headcount to manage the growing AUM, and the operational staff turnover for the retail portfolio has reduced compared with the previous review. The servicer has also developed employee performance management processes, and in the 12 months leading to the data cut-off date, nine people were promoted.
Since Fitch's previous review, the senior management team has been reorganised, introducing a deputy CEO role to support business development. Furthermore, the number of middle managers has increased to 18 from nine to support the business growth, which somewhat reduces key-person risk. The company tenure of senior and
Middle managers have improved since the previous review. Still, we note that four middle managers left the business in the 12 months before the cut-off date, leading to an increase in the Fitch-calculated turnover to 23.5% compared with 13.3% in the previous review.
Since Fitch's previous review, QQuant has set up a training plan, offering its staff a broad range of training channels, such as online courses, formal training sessions (individual or corporate), on-the-job training and job shadowing. Training courses are prioritised according to key business needs, including regulatory, technical and soft skills. Priority is given to mandatory induction training for new hires, regulatory mandatory training for all staff (including compliance and information security) and technical product and processes training. The average number of training hours (excluding on-the-job training) remains lower than is commensurate with a '2' rating definition. However, average on-the-job training hours are high.
Fitch has also seen evidence of consistent risk governance controls. Quality assurance processes are advanced, with the quality assurance team having visibility over the servicing system fields used by call centre agents. Committees that had only been established at previous reviews frequently occur and have regular input into and oversight of the servicer's risk exposures.
While there is no centralised function for vendor management, the level of control over third parties is multi-layered. It includes audits performed by the internal audit team, QQuant's daily presence at the vendor and weekly performance assessments. There is evidence of underperforming vendors being replaced, demonstrating the efficacy of QQuant's processes and controls over vendor management.
QQuant proactively manages defaulted loans. The initial business plans are developed by the portfolio management team, relying on the analyses performed by the underwriting and modelling team. Thereafter, performance against the business plan is reviewed weekly internally (at portfolio performance meetings) and at portfolio committees with portfolio owners at an agreed frequency, e.g., biweekly for retail portfolios and monthly for corporate portfolios. Portfolio business plans are updated during the budget cycle (October - December), and annual projections are agreed with portfolio owners. However, significant deviations in performance compared with the business plan may lead to business plan revisions whenever required.
Business plans for retail loans are created automatically, while those for corporate loans are done manually by the relationship manager due to their complexity. We deem the processes and controls for defaulted loan management commensurate with the '1' and '2' rating categories for asset-backed and commercial assets, respectively.
QQuant's servicing platform is highly automated, and it seeks to implement artificial intelligence and robotics tools to increase its processes' efficiency further. At the previous review, the business continuity plan had only been created, and testing was due. Fitch understands that the test was performed but that the pandemic, change of premises and revision of the plan to reflect the change in premises, had led to the next annual test being delayed, which is why Fitch was not able to give full credit to the regular testing in its scoring of this section of its scoring matrix. However, we note that at the onset of the pandemic, the servicer successfully transitioned to remote working with a limited impact on its daily operations of the servicer.
As the servicer continues to grow its business, Fitch will continue to monitor QQuant's progress in developing its infrastructure. The agency expects the servicer to consistently achieve its strategic objectives, which will drive any rating action.
Unless stated otherwise, this rating action commentary is based on information provided to Fitch as of the end of March 2021.