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April 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Multi Lease AS S.r.l.’s EUR441.3m class A notes to ‘A+sf’ with a Stable Outlook as follows:
EUR441.3m Class A notes: upgraded to ‘A+sf’ from ‘A-sf’; Outlook Stable Multi Lease AS is a securitisation of receivables arising from performing lease contracts executed by Abf Leasing S.p.A. (ABF) and Sardaleasing S.p.A. (Sarda) with Italian SMEs and, to a smaller extent, private individuals and professionals.
Increased Credit Enhancement
In the period between the rating assignment in April 2013 and December 2013 the credit enhancement has grown to 51.9% from 41.5%, following amortisation of the class A notes to EUR441.3m from EUR625.9m. This is reflected in today’s upgrade. Enhancement is provided by unrated class B-1 (EUR168.4m) and class B-2 (EUR223.4m) notes as well as by a EUR30.5m reserve fund.
Fitch is maintaining annual average probability of default (PD) benchmarks for ABF and Sarda at 5% and 5.5% respectively (based on a 180 days past due definition). These benchmarks were derived from originators’ balance sheet at the time of the rating assignment. While the portfolio has produced lower observed defaults in the last year, the time span of observed data was considered insufficient to amend initial PD benchmarks.
Low Recovery Rate
As is typical in Italian leasing transactions, the originators have also transferred to the SPV the future receivables arising from the sale and/or re-lease of the underlying assets following a default of the debtors. However as the ownership of the underlying leased assets is not transferred to the issuer, and no security has been created for the benefit of the issuer over the underlying assets, Fitch gave no credit to recoveries from the sale or re-lease of the assets when setting its expectations on recoveries. This has resulted in a base case recovery rate of about 10% for the overall portfolio.
The two originators, who also act as servicers, are unrated by Fitch but servicing discontinuity risk is mitigated by the presence of cash reserves and back-up servicing arrangements. The role of account bank is performed by the Bank of New York Mellon (Luxembourg) S.A., Italian branch (AA-/Stable/F1+) and the transaction documents envisage downgrade language as being consistent with Fitch’s “Counterparty Criteria for Structured Finance Transactions”.
Benefit of Excess Spread Trapping
All available funds, after replenishment of the cash reserves and payment of class A interest, are used to repay the full principal of the class A notes, regardless of the level of defaults.
Initial payments made by the lessees are paid into an account at Banca Popolare dell‘Emilia Romagna soc coop. banking group (BPER, BB+/Negative/B) before being transferred to the account bank. While funds are only held at BPER for a day, the exposure is considered material due to a concentration in the payments of the lessees around the first day of the month. BPER is not in compliance with Fitch’s counterparty criteria at the ‘A+’ rating level and as such a commingling loss calculated as portfolio income for a 30-day period was assumed in analysis. Existing enhancement was sufficient to mitigate this loss in an ‘A+’ rating stress.
The transaction is a securitisation by ABF (representing 45% of the current pool balance) and Sarda (accounting for 55% of the current pool balance). The claims consist of interest and principal instalments due by the lessees under the lease contracts and exclude any residual value component.
Both the originators are unrated leasing companies and are part of BPER. ABF and Sarda also act as servicers of their respective portfolios in the transaction and each servicer has been appointed as the other’s first back-up servicer. In addition, BPER has been appointed as second back-up servicer for both ABF and Sarda, should the appointment of one and/or of the other servicer be terminated. In October 2013 Zenith Services A.p.A (Zenith) was appointed third back-up servicer following the downgrade of BPER in July 2013. Zenith will assume servicing responsibilities if ABF, Sarda and BPER are unable to do so.
Applying a 1.25x default rate multiplier to all assets in the portfolio would result in a five-notch downgrade of the notes. Applying a 0.75x recovery rate multiplier to all assets in the portfolio would result in a one-notch downgrade of the notes.