RPT-Fitch: Structure, security explain Italian ABS leasing outlook
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Dec 16 (Reuters) - (The following statement was released by the rating agency)
Weaker structural features in Italian ABS leasing transactions compared with Italian SME CLOs mean our 2014 rating Outlook for the two sectors is different, despite both being exposed to Italian SME asset performance, Fitch Ratings says.
Most outstanding Italian ABS leasing transactions were structured so the portfolio could be replenished during the initial revolving period and that the mezzanine tranches could be repaid on a pro-rata basis with the most senior notes, subject to, among others, minimum portfolio performance conditions. However, some of them provided less protection for senior noteholders, for example, by not including a mandatory switch from pro rata to fully sequential pay-down close to the end of the deal, when obligor concentration and adverse selection are typically a risk from a credit perspective.
Some originators supported their transactions by buying back large amounts of defaulted and delinquent loans. While this support has reduced the amount of defaults the transactions had to bear, without it we think that some revolving periods would have been halted well before their scheduled expiry date. Also, some pro-rata conditions would not have been met, which weakened the protection available to the senior notes.
Another key difference between Italian ABS leasing deals and SME CLOs lies in the security package of the underlying loans. Almost 70% of loans in SME CLO pools are backed by mortgages. But for leasing deals, the ownership of the leased assets is not transferred to the special-purpose vehicle (SPV), and no specific security is created for the SPV's benefit. As a result, leasing deals are exposed to the originator's creditworthiness because the receivables arising from the sale and/or re-lease of the underlying financed assets on debtor default, which Italian originators typically transfer to the SPV upon collection thereof, may not be swept to the SPV's accounts if the originator is insolvent.
This means we do not give credit to recoveries from the sale or re-lease of the leased assets when setting recovery assumptions for rating scenarios above the originator's rating in leasing transactions.
These relative weaknesses meant that our rating Outlook for Italian ABS leasing transactions in 2014 is Negative, while for Italian SME CLOs it is Stable/Negative (with the Negative component largely driven by the Outlook on the Italian sovereign rating), even though we have a Negative asset performance outlook on Italian SME collateral.
Our 2014 European Structured Finance rating and asset performance outlooks were recently released in our '2014 Outlook: European Structured Finance' publication, available at www.fitchratings.com.
Link to Fitch Ratings' Report: 2014 Outlook: European Structured Finance