October 17, 2017 / 4:28 PM / a month ago

Fitch Maintains Sestante RMBS Series on Rating Watch Evolving

(The following statement was released by the rating agency) MILAN/LONDON, October 17 (Fitch) Fitch Ratings maintained all tranches from the Sestante Finance series on Rating Watch Evolving (RWE). The Sestante series comprises four Italian RMBS transactions originated by Meliorbanca (now part of BPER Banca banking group, BB/Stable/B) and serviced by Italfondiario S.p.A. (RSP2+/RSS1-). A full list of rating actions is available at the end of this commentary. The transactions are Sestante Finance S.r.l. (SF1), Sestante Finance S.r.l. - 2 (SF2), Sestante Finance S.r.l. - 3 (SF3) and Sestante Finance S.r.l. - 4 (SF4). KEY RATING DRIVERS Stabilised Performance The Sestante Finance series has consistently underperformed the Italian RMBS average due to the non-standard features of the underlying collateral, with higher original loan-to-value ratios than average, and non-Italian national and self-employed borrowers. However, Fitch expects the asset deterioration since the beginning of the financial crisis to start levelling off, supported by the portfolios' long seasoning. The uncleared balance of the principal deficiency ledger (PDL) has decreased in all transactions except SF1, where there is no PDL outstanding. The most prominent improvement was in SF2. The excess spread is between 0.7% a year for SF3 and 0.9% a year for SF2, mainly supported by the total return swaps with Commerzbank (BBB+/Stable/F2), whose derivative exposures are collateralised. Drawings on SF1's cash reserve slowed over the last 12 months compared to previous years, but the full repayment of the class A2 notes in December 2016 has not been enough to free up excess spread and start replenishing the reserve fund. Late-stage arrears (more than three months overdue) are between 5.7% of the current pool for SF3 and 6.05% for SF1, compared with 7% and 4.7%, respectively, 12 months ago. SF1 is the only transaction in the series still showing some volatility in arrears performance, with an increase in the last year. Cumulative defaults as a percentage of the initial pool are between 8.9% for SF1 and 17.7% for SF4 compared to 8.4% and 16.8%, respectively in October 2016. In SF4, interest on the class B notes is not being paid as it now ranks junior to the PDL, which has a large outstanding balance of EUR40.8 million, due to the breach of the class B interest deferral trigger (cumulative defaults are higher than 17%). Interest on class B, C1 and C2 will not be paid until the PDL balance is fully cleared, but these missed payments of interest do not constitute an event of default under the notes. Subdued Recoveries Fitch estimates a weighted average recovery rate on closed and open positions of about 60%. The agency derived its assumption from the updated loan-by-loan recovery information provided by the servicer as of end-September 2017. The agency also extended the recovery timing for new defaults to 14 years for all four transactions (from 12 years in the last surveillance review) to reflect the long time needed to collect recoveries, which is reflected in the low transaction recovery rates of between 21% for SF4 and 39% for SF1. Transaction-specific recovery rates, from 56% for SF4 to 69% for SF1 of new defaults were also used in Fitch's analysis. Fitch applied different assumptions on outstanding defaults (from 45% in SF3 and SF4 to 55% in SF1) and derived them from assumptions for new defaults after taking into account recoveries cashed in so far in each deal. In Fitch's view, the assumptions on future recoveries play a key role in the rating analysis of the Sestante series considering the high level of outstanding defaults, and they can materially influence the generation of future excess spread. Potential Principal Shortfall at Maturity (SF1) A mismatch of about EUR31,600 exists between SF1 assets and liabilities. Fitch has contacted the servicer, BPER and the calculation agent to investigate the cause of this under-collateralisation despite the PDL in this transaction being fully clear. To the extent this gap results from the allocation of some principal funds to repay principal on the class A2 excess spread notes, according to the transaction legal documentation, the PDL should be debited accordingly, and excess spread used to restore the "borrowed" principal funds. Otherwise, Fitch does not see any structural mitigant in SF1 that could cure this principal shortfall because the cash reserve can only be used to clear the PDL but will not be part of the principal available funds at the legal maturity date. If not cured, this potential shortfall, even though it is of a minor amount, could lead to the default of the class C notes at their final maturity date as the cash reserve would not be used to repay the notes unless it is needed to clear the PDL balance, which is cleared already. Fitch has maintained the class C notes of SF1 in RWE and will closely monitor the situation pending more clarity on this point and on if and how the parties intend to cure the shortfall. RWE Maintained on All Tranches Fitch placed all European RMBS Ratings, including all tranches in the Sestante series, on RWE on 5 October 2017 following the publication of its "Exposure Draft: European RMBS Rating Criteria" on 15 September 2017. The RWE indicates the possibility of rating change as a result of the application of the proposed updated criteria. The RWE will be resolved on a transaction-specific basis by undertaking a full review of each transaction with the final criteria and either affirming, upgrading or downgrading each rating. The review of all RMBS transactions within the scope of the proposed criteria, including the Sestante series, will be completed within six months of the publication of the final criteria. Payment Interruption Risk Mitigated SF1 is the only transaction in the Sestante series with some cash reserve left, although this is below its target amount, whereas the cash reserves in all other transactions have been fully depleted by large provisions for defaults. The fully drawn liquidity lines, collateralised with cash standing on the issuer's account bank, are available in the SF2, SF3 and SF4 transactions to mitigate the payment interruption risk. In Fitch's view, payment interruption risk is mitigated in the Sestante Finance series, even though the cash reserve of SF1 is below target. RATING SENSITIVITIES Failure to cure the gap between SF1 assets and rated notes may lead to a multi-category downgrade of the class C notes due to the pronounced risk of default of the notes at their legal maturity date. Changes to Italy's Long-Term Issuer Default Rating (BBB/Stable) and the rating cap for Italian structured finance transactions, currently 'AAsf', could trigger rating changes on the notes at this rating level. Higher-than-expected recoveries and/or recoveries received faster than Fitch's assumed timing may lead to upgrades of the junior tranches in all deals as their repayment mainly relies on restoring healthy excess spread, clearing the PDLs and replenishing the cash reserves. Conversely, lower and slower recoveries than assumed by Fitch may lead to downgrades of the notes, starting from the junior ones. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that affected the rating analysis. Fitch has not reviewed the results of any third-party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. SOURCES OF INFORMATION The information below was used in the analysis. -Loan-by-loan data provided by Italfondiario at 31 May 2017 for SF1 and SF2, 15 June 2017 for SF3 and 30 June 2017 for SF4 -Transaction reporting provided by Italfondiario as at 27 June 2017 for SF1, 10 July 2017 for SF2, 17 July 2017 for SF3 and 24 July 2017 for SF4 -Loan-by-loan enforcement details provided by Italfondiario as at 30 September 2017 -Portfolio amortisation profile provided by Italfondiario -Discussions with Italfondiario and the calculation agent in September and October 2017 MODELS <a href="https://www.fitchratings.com/site/structuredfinance/rmbs/resiemea "> ResiEMEA. <a href="https://www.fitchratings.com/site/structuredfinance/rmbs/emearsm "> EMEA RMBS Surveillance Model. <a href="https://www.fitchratings.com/site/structuredfinance/emeacfm ">EMEA Cash Flow Model. Fitch has maintained the following ratings: Sestante Finance S.r.l. (SF1): Class A1 (ISIN IT0003604789): 'AAsf'; RWE Class B (ISIN IT0003604839): 'A+sf'; RWE Class C (ISIN IT0003604854): 'BBB-sf'; RWE Sestante Finance S.r.l. - 2 (SF2): Class A (ISIN IT0003760136): 'AAsf'; RWE Class B (ISIN IT0003760193): 'BBB-sf'; RWE Class C1 (ISIN IT0003760227): 'CCsf'; RWE; RE (recovery estimate) of 40% Class C2 (ISIN IT0003760243): 'CCsf'; RWE; RE of 0% Sestante Finance S.r.l. - 3 (SF3): Class A (ISIN IT0003937452): 'Asf'; RWE Class B (ISIN IT0003937486): 'CCCsf'; RWE; RE of 80% Class C1 (ISIN IT0003937510): 'CCsf'; RWE; RE of 0% Class C2 (ISIN IT0003937569): 'CCsf'; RWE; RE of 0% Sestante Finance S.r.l. - 4 (SF4): Class A2 (ISIN IT0004158157): 'Bsf'; RWE Class B (ISIN IT0004158165): 'CCsf'; RWE; RE of 0% Class C1 (ISIN IT0004158249): 'CCsf'; RWE; RE of 0% Class C2 (ISIN IT0004158264): 'CCsf'; RWE; RE of 0% Contacts: Lead Surveillance Analyst Daniela Di Filippo Director Phone +39 02 87 90 87 243 Fitch Italia S.P.A Via Morigi 6 Committee Chairperson Ilaria Farina Senior Director Phone +39 02 87 90 87 242 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria Addendum: Italy (pub. 06 Jul 2017) here EMEA RMBS Rating Criteria (pub. 15 Sep 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Global Structured Finance Rating Criteria (pub. 03 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Structured Finance and Covered Bonds Country Risk Rating Criteria (pub. 18 Sep 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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