TEXT - Fitch cuts Sestante Finance S.r.l. ratings
(The following statement was released by the rating agency) Dec 6 - Fitch Ratings has downgraded five and affirmed 12 tranches of the four Italian RMBS from Sestante Finance S.r.l.. Fitch has also revised the Outlook to Negative on one tranche and lowered the recovery estimates on three junior tranches. A complete list of the rating actions is available at the end of this commentary. The downgrades of the class A and B notes of Sestante 3 and Sestante 4 reflect Fitch's concerns over the on-going deterioration of assets, which resulted in the reduction of credit support available to withstand the current rating stresses. Concerns over further asset deterioration are reflected in the Negative Outlooks assigned to the notes, as well as the revision in recovery estimates assigned to tranches rated 'CCCsf' and below. Despite signs of weak asset performance in Sestante 1 and Sestante 2, Fitch believes that the portfolios have seen significant deleveraging with the weighted average loan-to-value ratio at 59% compared to 70% at transaction close. The agency is also of the opinion that the level of credit support that has built-up over the years is presently sufficient to cover for the expected losses, thus leading to the affirmation of the ratings. The agency is however concerned that further asset deterioration could put pressure on the ratings of the mezzanine and junior notes, and this is reflected in the Negative Outlooks assigned to the class B and C notes across the two structures. Meanwhile, the Outlooks on the most senior notes are driven by the Outlook on Italy's Long-Term Issuer Default Rating (IDR; 'A-'/Negative/'F2'). Fitch was informed by Italfondiario ('RPS2'/'RSS1-'), who in May 2011 took over the servicing activity from Meliorbanca (part of the Banca Popolare dell'Emilia Romagna Group, BPER; 'BBB'/'F2'/Negative), that the current state of the Italian economy combined with lower-than-market-average-income of borrowers in these pools are the main reasons behind the increase in the arrears observed over the past 12 months. The phenomenon does not seem to be impacted by borrower nationality (around 30% of the loans were granted to foreigners residing in Italy) but more by the limited affordability, which in the majority of the cases the servicer attributes to a job loss. As of the most recent interest payment dates (IPD) in September and October 2012, across the four transaction loans in arrears by more than three months ranged between 4.3% (Sestante 2) and 6.6% (Sestante 4) of the total pool balance, respectively. The four structures include a provisioning mechanism, whereby defaulted loans are allocated to and cleared through a principal deficiency ledger (PDL). A loan is classified as defaulted once it has 12 or more unpaid instalments or the servicer has classified the loan as such in line with the guidelines set out by the Bank of Italy. Despite seeing a slowdown in the number of period defaults following the implementation of Italfondiario's servicing strategies for non-performing loans, the transactions have seen a limited inflow of recoveries. The limited recoveries in combination with weak performance of pools have resulted in outstanding PDLs of EUR3.6M, EUR10.9 and EUR27.8m, for Sestante 2, 3 and 4 respectively. In other words, the excess revenue generated by these pools has been insufficient to fully provision for period defaults or to clear the outstanding PDLs. In particular, Sestante 4 has reported an increase in the outstanding PDL compared to a year ago (EUR24.3m), reducing the credit support available to the rated notes. For this reason, Fitch downgraded the ratings of the Sestante 4's class A1, A2 and B notes to 'BBBsf' and 'CCCsf', respectively. Meanwhile, the insufficient excess spread generated by Sestante 1 has resulted in the utilisation of the reserve fund for provisioning purposes. Fitch believes that the main cause for the insufficient revenue is the payment due to the class A2 excess spread notes, which ranks senior to the class A1's PDL. As of the September 2012 IPD Sestante 1's reserve fund stood at 58% of its target amount. Considering the volume of loans in arrears in the pipeline, Fitch expects more defaults to occur over the upcoming quarters and thus further reserve fund draws, putting pressure on the credit support available to the notes. In Fitch's view all four transactions remain highly dependent on future recoveries. Given the lengthy foreclosure timing in Italy, which in some regions may take up to nine years, the agency expect the inflow of recoveries to remain limited in upcoming payment dates. In May 2011 collection accounts were opened in the name of the issuer with BPER All collections are deposited into the transactions' account banks (Bank of New York Mellon, Italian branch; 'AA-'/'F1+'/Stable) on a daily basis. The bank was also appointed as the back-up servicer in all four transactions. Fitch views such implementations as a positive feature, thus reducing the risk of a potential payment interruption. Sestante Finance S.r.l (Sestante 1): Class A1 (ISIN IT0003604789): affirmed at 'AAAsf'; Outlook Negative Class A2 (ISIN IT0003604813): affirmed at 'AAAsf'; Outlook Negative Class B (ISIN IT0003604839): affirmed at 'A+sf'; Outlook revised to Negative from Stable Class C (ISIN IT0003604854): affirmed at 'BBB+sf'; Outlook Negative Sestante Finance S.r.l - 2(Sestante 2): Class A (ISIN IT0003760136): affirmed at 'AAAsf'; Outlook Negative Class B (ISIN IT0003760193): affirmed at 'BBB-sf'; Outlook Negative; Class C1 (ISIN IT0003760227): affirmed at 'CCCsf'; Recovery Estimate (RE) of 25% Class C2 (ISIN IT0003760243): affirmed at 'CCsf'; RE of 0% Sestante Finance S.r.l - 3 (Sestante 3): Class A (ISIN IT0003937452): downgraded to 'AAsf' from 'AAAsf'; Outlook Negative Class B (ISIN IT0003937486): downgraded to 'BBsf; from 'BB+sf'; Outlook Negative Class C1 (ISIN IT0003937510): affirmed at 'CCsf'; RE of 0% Class C2 (ISIN IT0003937569): affirmed at 'CCsf'; RE of 0% Sestante Finance S.r.l - 4 (Sestante 4): Class A1 (ISIN IT0004158124): downgraded to 'BBBsf' from 'AAsf'; Outlook Negative Class A2 (ISIN IT0004158157): downgraded to 'BBBsf' from 'AAsf'; Outlook Negative Class B (ISIN IT0004158165): downgraded to 'CCCsf' from 'Bsf'; RE of 30% Class C1 (ISIN IT0004158249): affirmed at 'CCsf'; RE of 0% Class C2 (ISIN IT0004158264): affirmed at 'CCsf'; RE of 0% (Caryn Trokie, New York Ratings Unit)
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