Euro 715 million of debt securities rated
Madrid, September 12, 2014 -- Moody's Investors Service has assigned the following definitive ratings
to ABS Leasing notes issued by LOCAT SV S.r.l. (the
"Issuer"):
....EUR 90M Class A1 Asset Backed Floating
Rate Notes due December 2036, definitive rating assigned A2 (sf)
....EUR 400M Class A2 Asset Backed Floating
Rate Notes due December 2036, definitive rating assigned A2 (sf)
....EUR 225M Class A3 Asset Backed Floating
Rate Notes due December 2036, definitive rating assigned A2 (sf)
EUR 585M Class B Asset Backed Variable Return Notes due December 2036
were not rated by Moody's.
UCL Locat SV -- 2014 Series is a revolving cash securitisation of
real estate, auto and equipment lease contracts extended to small
and medium-sized enterprises (SME) and individual entrepreneurs
domiciled in Italy. The Notes have been issued on a partly paid
basis, meaning EUR 505.6M of Class A Notes were drawn down
at closing, with the notes backed by a first portfolio of lease
contracts extended to obligors by UniCredit Leasing S.p.A.
("UCL", Baa3/P-3). During the warehouse
period (ending in December 2014), UCL has the right to sell to the
Issuer a second portfolio of lease contracts extended by Fineco Leasing
S.p.A. (merged with UniCredit Leasing S.p.A.
since 1 April 2014). This second portfolio represents approximately
30% of the nominal amount of the notes, which then will increase
the outstanding balance of the Class A Notes to EUR 715M.
The transaction stipulates a 23 months replenishment period. Moody's
relied on the eligibility criteria and early amortisation triggers to
assess the prospective credit characteristics of the replenishment portfolio.
RATINGS RATIONALE
According to Moody's, the rating takes into account, among
other factors, (i) a receivable-by-receivable evaluation
of the underlying portfolio, also complemented by the historical
performance information as provided by the originator; (ii) the structural
features of the transaction; and (iii) the sound legal structure
of the transaction.
In Moody's view, the credit positive features of this deal include,
among others: (i) the excess spread originated by the lease receivables,
which at closing is in the range of 4%; (ii) the granularity
of the portfolio in terms of exposure by lessee (with a top five lessee
exposure being approximately 3%); (iii) the relatively low
level of lessees in the real estate industry (9%); (iv) a
hedging mechanism in place to mitigate the base rate risk mismatch risk
on the floating portion of the portfolio and the fixed-floating
mismatch on the fixed portion of the portfolio; and (v) the lack
of set-off risk as no lessees have opened any kind of deposit or
derivative with UCL. Moody's notes that the transaction also features
a number of credit weaknesses, such as: (i) the lack of replenishment
criteria during the revolving period related, amongst others,
to the maximum exposure of real estate developers, the lessees'
size, or the weighted average life of the replenished portfolio;
(ii) 10% of the portfolio has been internally classified as "Alfa
Portfolio" by UCL, with a probability of default greater than
the pre-established threshold; (iii) a reserve fund not funded
at closing but through principal receipts during the two first months;
(iv) the impact on recoveries upon Originator's default; and
finally (v) the exposure to commingling risk.
As of the valuation date (27 June 2014), the first portfolio amounted
to EUR 919.5 million, approximately 70% of the notes
balance. The portfolio is composed of 14,332 contracts extended
to 10,114 lessees, mainly small and medium-sized companies
and individual entrepreneurs. The main exposure by industry according
to Moody's classification is to Beverage, Food and Tobacco
as well as Transportation -- Cargo, both at 14%,
while Construction & Building accounts for 11% of this first
portfolio. The portfolio is rather granular with the top 5 and
20 borrowers' group representing 4.2% and 11.1%
of the portfolio respectively. This first portfolio is also well
diversified geographically, with the top exposure in Lombardy (23%).
The weighted average seasoning is 3.0 years and the weighted average
remaining term equals approximately 5.6 years. The interest
rate is floating for 71.2% of the pool while the remaining
part of the pool is fixed.
The rating agency derived the default distribution, namely the relevant
main inputs such as the mean default probability and its related standard
deviation, via the analysis of: (i) the characteristics of
the receivable-by-receivable portfolio information,
complemented by the available historical vintage data; (ii) the potential
deterioration of the portfolio credit profile during the 23 months revolving
period; (iii) the potential fluctuations in the macroeconomic environment
during the lifetime of this transaction; and (iv) the portfolio concentrations
in terms of industry sectors and single obligors. Moody's assumed
the cumulative default probability of the portfolio to be equal to 9.2%
(equivalent to a B1 rating proxy) for the initial portfolio (first and
second portfolio included), as well as 23.3% (equivalent
to a B2 rating proxy) for the replenished portfolio. Moody's
assumed a coefficient of variation (i.e. the ratio of standard
deviation over the mean default rate) of 80% and 31% for
initial and replenished portfolio respectively. The rating agency
has assumed stochastic recoveries with a mean recovery rate of 40%
and a standard deviation of 20%. In addition, Moody's
has set the prepayments assumption at 5% per year.
More specifically, Moody's ABSROM cash flow model evaluates all
default scenarios that are then weighted considering the probabilities
of such default scenarios as defined by the transaction-specific
default distribution. On the recovery side Moody's assumes a stochastic
(normal) recovery distribution which is correlated to the default distribution.
In each default scenario, the corresponding loss for each class
of notes is calculated given the incoming cash flows from the assets and
the outgoing payments to third parties and noteholders. Therefore,
the expected loss for each tranche is the sum product of (i) the probability
of occurrence of each default scenario; and (ii) the loss derived
from the cash flow model in each default scenario for each tranche.
As such, Moody's analysis encompasses the assessment of stressed
scenarios.
Moody's used CDOROM to determine the coefficient of variation of the default
distribution for this transaction. The Moody's CDOROM™ model
is a Monte Carlo simulation which takes borrower specific Moody's default
probabilities as input. Each borrower reference entity is modelled
individually with a standard multi-factor model incorporating intra-
and inter-industry correlation. The correlation structure
is based on a Gaussian copula. In each Monte Carlo scenario,
defaults are simulated.
The ratings address the expected loss posed to investors by the legal
final maturity of the notes. In Moody's opinion, the structure
allows for timely payment of interest and ultimate payment of principal
with respect to the Notes by the legal final maturity. Moody's
ratings address only the credit risk associated with the transaction,
Other non-credit risks have not been addressed but may have a significant
effect on yield to investors.
No previous ratings were assigned to this transaction.
Factors that would lead to an upgrade or downgrade of the rating:
Factors or circumstances that could lead to a downgrade of the rating
affected by today's action would be (1) the worse-than-expected
performance of the underlying collateral; (2) deterioration in the
credit quality of the counterparties, especially UCL acting as servicer;
and (3) an increase in Italy's sovereign risk.
Factors or circumstances that could lead to an upgrade of the ratings
affected by today's action would be a decline in Italy's sovereign risk.
Moody's also tested other set of assumptions under its Parameter Sensitivities
analysis. At the time the rating was assigned, the model
output indicated that the Class A2 and Class A3 Notes would have achieved
A2 if the mean default rate was as high as 12.8% / 27.0%
(for initial and replenished portfolio) with a recovery rate assumption
of 30% (all other factors unchanged).For more details,
please refer to the full Parameter Sensitivity analysis included in the
New Issue Report of the transaction.
Parameter Sensitivities provide a quantitative, model-indicated
calculation of the number of notches that a Moody's-rated structured
finance security may vary if certain input parameters used in the initial
rating process differed. The analysis assumes that the deal has
not aged. It is not intended to measure how the rating of the security
might migrate over time, but rather, how the initial rating
of the security might differ as certain key parameters vary.
Methodology Underlying the Rating Action:
The principal methodology used in this rating was Moody's Approach to
Rating ABS Backed by Equipment Leases and Loans published in December
2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions of the disclosure form.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments in this transaction.
Further information on the representations and warranties and enforcement
mechanisms available to investors are available on http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF374507.
In rating this transaction, Moody's used CDOROM™ to model
the cash flows and determine the loss for each tranche. Moody's
CDOROM™ is a Monte Carlo simulation that uses Moody's default
probabilities as input. Moody's models each corporate reference
entity individually with a standard multi-factor model that incorporates
both intra- and inter-industry correlations. The
correlation structure is based on a Gaussian copula. Each Monte
Carlo scenario simulates defaults to derive losses on a portfolio,
which the model then allocates to the notes in reverse order of priority
to derive the loss on the issuer's notes. By repeating this
process and averaging the number of simulations, Moody's can
derive an estimate of the expected loss on the notes.
As the section on loss and cash flow analysis describes, Moody's
quantitative analysis entails an evaluation of scenarios that stress factors
contributing to sensitivity of ratings and take into account the likelihood
of severe collateral losses or impaired cash flows. Moody's
weights the impact on the rated instruments based on its assumptions of
the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Antonio Tena
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Thorsten Klotz
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service assigns definitive ratings to Lease ABS notes issued by UCL Locat SV - 2014 Series
