Euro 75.6 Million of Debt Securities Affected
Milan, September 22, 2010 -- Moody's Investors Service has today downgraded all outstanding classes
of notes issued by Ares Finance S.r.l. (Ares 1) and
Ares Finance 2 S.A. (Ares 2) (see list below).
Issuer: Ares Finance S.r.l.
....EUR17.74M E Bond, Downgraded
to Caa2(sf); previously on 31 March 2010 A3 (sf) Placed Under Review
for Possible Downgrade
....EUR15M F Bond, Downgraded to C(sf);
previously on 31 March 2010 Baa2(sf) Placed Under Review for Possible
Issuer: Ares Finance 2 S.A.
....EUR27.87M D Bond, Downgraded
to Ca(sf); previously on 31 March 2010 Baa3(sf) Placed Under Review
for Possible Downgrade
....EUR15M E Bond, Downgraded to C(sf);
previously on 31 March 2010 Ba3(sf) Placed Under Review for Possible Downgrade
Ares 1 and Ares 2 are non-performing loan securitisation transactions,
whose underlying collateral is composed of secured and unsecured loans
originated and consequently declared as defaulted ("in sofferenza"),
by Banca Nazionale del Lavoro (Aa3/Prime-1).
Today's downgrades conclude the review of both transactions, which
was initiated in March 2010. Moody's has taken into consideration
the markedly worse-than-expected performance of the collateral,
in particular the timing of recoveries on the collateral portfolio and
related uncertainty on future recoveries. For both deals,
timing of recoveries has been extremely slow and cumulated collections
have consistently been behind the securitisation business plans,
and have further significantly slowed down in the past years.
The ratings of the Ares 1 and Ares 2 notes factor in the projected collections
until legal maturity on the remaining respective portfolios as well as
the amount of cash already accumulated in the issuers' respective
accounts. These elements represent the key parameters used by Moody's
when reviewing the ratings of the outstanding notes which resulted in
the downgrade detailed above.
PROJECTED COLLECTIONS AND RELATED TIMING: For both deals,
Moody's was provided with an updated data tape including all unresolved
positions in the portfolio. The data tape detailed the amount of
expected collections for each borrower and the timing of cash flows.
Expected collections are well in excess of the outstanding amounts of
the respective rated notes of Ares 1 (EUR32.74 million) and Ares
2 (EUR 42.87 million) . However, the timing of collections
extends well beyond the legal maturity date of the notes, which
fall in March and July 2011, respectively.
Both deals' documentation clearly states that, at final maturity
date, any outstanding amount will be cancelled if the issuer has
insufficient funds to fully repay the notes.
Consequently, Moody's was only able to give value to the collections
the servicer expects to receive by the legal final maturity date of both
transactions and could not give any value to the collections expected
to come in after the legal final maturity date has passed. The
rating agency further notes that EUR45.3 million (Ares 1) and EUR16.5
million (Ares 2) are expected to be received by the respective issuers
on positions for which the sale of the security has already occurred (the
relevant court just needs to release funds) or from positions where an
out-of-court agreement with the borrower has been reached.
Although the probability of cashing in such collections is high,
the timing remains highly uncertain. Consequently, given
the tight maturity date on both deals, Moody's was unable
to give value to these figures as it is not certain they will be collected
by the legal final maturity of the notes.
CASH COLLECTIONS: Cash has accumulated in the issuers' respective
accounts since the last payment date. As Ares 1's next payment
date falls in September, the cash sitting in Ares 1's account
is EUR10 million. For Ares 2, the amount is EUR1 million
given the recent payment date in July with the next payment date falling
in January 2011.
Given level of information provided, Moody's has assumed that
such amounts are part of the projected cash flows the servicer expects
to get by the final maturity date of both deals (the projections are annually
updated and last update occurred in November 2009), in order to
avoid any potential double counting.
The principal methodology used in rating the Notes was Moody's Approach
to Rating Structured Finance Securities in Default published in November
2009. Other methodologies and factors that may have been considered
in the process of rating these Notes can also be found on Moody's website.
Hence, Moody's considers that both Ares 1 and Ares 2 notes
are very likely to default at their respective final maturity date as
the issuers are expected to have insufficient funds to fully repay the
In order to size the potential loss suffered by the noteholders at legal
maturity, Moody's first computed the amount of available funds
that each SPV (Ares 1 and Ares 2) is expected to have as a base case at
the maturity of the respective deal to pay both interest and principal
on the notes. Based on the information provided by the servicer
(last updated in March 2010), Moody's assumed that the issuers
would have accumulated gross collections of approximately 18 million
and 11 million for Ares 1 and Ares 2 respective maturity date.
In order to derive actual funds available for servicing the debt ,
senior costs including servicer and issuer expenses (such as asset management
fees, legal expenses, court costs) have been deducted from
the expected gross collections based on the servicer updated business
plan. The sizing of such costs was based on historical evidence
taken from the respective investors reports published in the past three
years (2008-2010) for each deal.
These available funds were then assumed to be allocated - according
to the relevant Ares 1 or Ares 2 waterfall - with an estimation
of EURIBOR at 1.5% (base rate on the notes) and under the
assumption that the notes would not amortise before legal maturity date.
Moody's then estimated the potential losses on the rated notes.
Based on this calculation, the loss on the Ares 1 Class E notes
is expected to be between 20% and 10%. As Ares 1
Class F notes are junior in the waterfall, principal amount is expected
to be fully lost. This results in a downgrade to Caa2(sf) from
A3(sf) for the Class E notes and C(sf) from Baa2(sf) for the Class F notes.
For Ares 2 (whose legal maturity falls in July 2011), the Class
D notes are expected to suffer a loss ranging between 35% and 65%
of the notes, and the Class E notes principal amount is expected
to be fully lost given the subordination of these notes in the waterfall.
This results in a downgrade to Ca(sf) from Baa3(sf) for the Class D notes
and C(sf) from Ba3(sf) for the Class E notes.
Moody's Investors Service did not receive or take into account a
third party due diligence report on the underlying assets or financial
instruments related to the monitoring of this transaction in the past
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the credit ratings are the following:
parties involved in the ratings, public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Additional research, including the pre-sale report for these
transactions and reports for prior transactions, are available at
www.moodys.com. In addition Moody's publishes a weekly
summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Structured Finance Group
Moody's Italia S.r.l
VP - Senior Credit Officer
Structured Finance Group
Moody's France SAS
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Moody's Italia S.r.l
MOODY'S DOWNGRADES ARES FINANCE S.R.L. AND ARES FINANCE 2 S.A., ITALIAN NON-PERFORMING LOANS ABS
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