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Rating Action:

Moody's Investors Service assigns definitive ratings to the Italian RMBS Notes issued by Adriatico Finance RMBS S.r.l.

Global Credit Research - 27 Apr 2011

Approximately EUR 93.7 million of debt security affected

Milan, April 27, 2011 -- Moody's Investors Service has today assigned definitive long term ratings to Italian RMBS notes issued by Adriatico Finance RMBS S.r.l.:

Aaa (sf) to the €172,300,000 Class A Asset Backed Floating Rate Notes due 31 December 2044

Moody's has not assigned any rating to the €20,250,000 Class B Asset Backed Floating Rate Notes due 31 December 2044.

RATINGS RATIONALE

The transaction was initially not rated by Moody's and therefore Moody's rating analysis of the notes is based on the transaction structure as of today: the Class A notes issued at closing amounted to Euro 172.3 million and have now amortised to 93.7 million, notes ranking junior in the waterfall to Class A will only amortise upon full repayment of the Class A notes. The amount of notes outstanding at the most recent payment date (April 20, 2011) amount to Euro 113.95 million.

The ratings of the notes take into account the credit quality of the underlying mortgage loan pool, the dynamic delinquency data and the vintage data for defaults and recoveries received from the originator. The mortgage pool was originated by Cassa di Risparmio della Provincia di Teramo S.p.A. (Tercas).. Based on the different data sources Moody's has determined the Aaa MILAN Credit Enhancement and the expected loss for the portfolio. The transaction structure and legal considerations have been considered in Moody's cash flow analysis.

The transaction represents the first securitisation of receivables originated by Tercas (Baa2/P-2). The assets supporting the notes, which amount to around EUR 109.2 million, consists of residential mortgage loans on properties located in Italy. The transaction benefits from a cash reserve equal to 3.6% of the asset balance that primarily can cover interest shortfall on the rated notes and items senior thereto, while it only serves as credit enhancement when the Class A notes are fully redeemed or at final legal maturity. Tercas will service the portfolio and if its rating falls below Baa3 a back up servicer will be appointed. The Back-up servicer facilitator, Securitisation Services S.p.A., facilitates the search for and the appointment of a back-up servicer in case it would be needed. Furthermore, should the Servicer not be able to prepare the Servicer Report at any payment date, continuity of payments for rated notes will be assured by the calculation agent preparing the payment report on estimates: in this case only the amounts due to the rated notes and items in priority thereto will be paid.

The expected portfolio loss of 4.4% of the current portfolio balance (equivalent to 4.6% of the portfolio balance at closing) and the MILAN Aaa required Credit Enhancement of 13.0% served as input parameters for Moody's cash flow model, which is based on a probabilistic lognormal distribution as described in the report "The Lognormal Method Applied to ABS Analysis", published in September 2000.

The key drivers for the portfolio expected loss, which is in line with the Italian average for the sector, are: (i) around five years of vintage data for Tercas total mortgage loan book using the same default definition as in the transaction; (ii) the fact that vintage data show that the default rates experienced by Tercas are correlated with the market wide default rates for Italian residential mortgage loans; (iii) the negative outlook Moody's has on Italian RMBS; (iv) the amount of defaults that the transaction has experienced since closing; (v) eight years of dynamic delinquency data for Tercas mortgage loan book (vi) the fact that vintage data for recoveries only covers closed files but since the closed files covers around two thirds of all recovery procedures it could be partially used.

The key drivers for the MILAN Aaa Credit Enhancement number, which is higher than other Italian RMBS transactions are: (i) 50.4% of the pool are backed by properties that are located in the seismic zones categorised as 1 or 2, i.e. with a high or medium high seismic hazard risk, which is higher than the Italian average where around 36% of the properties are located in seismic zones 1 and 2; (ii) it has been assumed that all the valuations of the properties backing the loans have not gone through a valuation process made by an external appraiser but the valuation has rather been made by the head of the branch and validated against either the tax value or the values indicated by Agenzia del Territorio; to account for the lack of accuracy in the determination of the property value an haircut of 10% has been applied to all property values. According to the originator in many instances the valuation of the property has been made by an external expert but Moody's has not received that information on a loan-by-loan basis; (iii) Moody's has not received any information whether the borrower is a single borrower or a joint borrower and has therefore assumed that all borrowers are single borrowers; (iv) Moody's has considered that there could be other characteristics of the pool which have not been properly captured in the MILAN model and therefore the MILAN number has been qualitatively adjusted in order to generate a loss distribution with a certain level of volatility or with other words to account for a higher probability of "fat tail" events with respect to the expected loss.

The structure is un-hedged with respect to fixed floating, base rate and timing of base rate mismatches. Moody's has made a haircut to the interest that the pool is generating in order to consider: (i) the base rate and base rate timing mismatch that the floating rate loans (around 77.8% of the pool) are generating; (ii) the fixed floating mismatch that stems for 22.2% of the portfolio; and (iii) the additional risk that is generated by a part of the floating rate loans where the borrower has an interest rate cap, above which the interest rate due under the mortgage loan cannot increase irrespective of the level of the index it is pegged to (around 10.5% of floating rate loans). For the base rate and base rate timing mismatch Moody's has observed the historical volatility between the different rates on the mortgage loans and the notes in a given time interval defined on the basis of the cash-flow dynamics in the transactions. The haircut is then computed by applying an historical VAR approach with 99% confidence interval for each payment period. Moody's has in the base case for the fixed-floating mismatch further assumed that the three-month EURIBOR would increase by 25 bps per quarter until it reaches a level of 12% and then stay at that level for the remaining time of the transaction's life. Moody's has also made various sensitivities with more sever increases of the three-month EURIBOR both with respect to the speed of the increases and the final level; and the ratings remain stable also under those more stressed scenarios.

Liquidity in the transaction comes from (i) the non-amortising cash reserve of € 4 million (equal to 3.6% of the current pool balance), which normally works more like a liquidity ledger since it mainly covers interest on the rated notes, swap payments and senior fees during the life of the transactions and only serves as credit enhancement when the Class A notes are redeemed or at final legal maturity, and (ii) the principal to pay interest mechanism.

Moody's assigned a Composite V Score for this transaction of Medium, which is higher than the V score assigned for the Italian RMBS sector. The following sub components of the transaction's V Score differ from the Italian RMBS sector score: (i) "Quality of Historical Data for the Issuer/Sponsor/Originator" to Medium from Low/Medium as the recovery data was only provided on loans where the recovery process has been finalised and the vintage data for defaults with a similar default definitions as the one in the transactions was covering less than five years; (ii) "Issuer/Sponsor/Originator's Historical Performance Variability" which is assessed to be Low/Medium, higher than the Low sector's average, because of the very high default levels observed in the current transactions since closing while the fact that the delinquency level in the transaction is in line with average Italian RMBs transaction; the high default level could partially be explained by the tight default definition; (iii) "Transaction Complexity" at Medium compared to Low/Medium for the sector since the transaction is un-hedged; (iv) "Analytic Complexity" to Medium from the sector's Low/Medium as the high concentration of properties in areas with an increased seismic risk had to be evaluated in order to adjust the MILAN number; (v) "Market Value Sensitivity" to Medium from Low/Medium as the transaction is un-hedged; and (vi) "Experience of, Arrangements Among and Oversight of Transaction Parties" which is assessed to be Medium, higher than the Low/Medium sector's average, as this is the first transaction with Tercas as Originator and Servicer and also the Calculation Agent and the Representative of the Noteholders are parties with limited experience in publicly rated transactions. V Scores are a relative assessment of the quality of available credit information and of the degree of dependence on various assumptions used in determining the rating. High variability in key assumptions could expose a rating to more likelihood of rating changes. The V Score has been assigned according to the report "V-Scores and Parameter Sensitivities in the Major EMEA RMBS Sectors" published in April 2009.

Moody's Parameter Sensitivities: If the expected loss increased to 9.68% from 4.4%, the model output indicated that Classe A would still have achieved Aaa even if the MILAN Aaa CE increased to 15.6% from 13.0% and all other factors remained the same. Moody's Parameter Sensitivity provide a quantitative/model-indicated calculation of the number of rating 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 and 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 have differed if key rating input parameters were varied. Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.

The definitive 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 at par with respect to the Class A notes on or before the legal final maturity date of the notes. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

The principal methodology used in this rating was Moody's Approach to Rating RMBS in Europe Middle East and Africa, published in October 2009.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments in this transaction.

REGULATORY DISCLOSURES

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 rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning 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.

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.

Milan
David Bergman
Asst Vice President - Analyst
Structured Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

Milan
Michelangelo Margaria
VP - Senior Credit Officer
Structured Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Moody's Investors Service assigns definitive ratings to the Italian RMBS Notes issued by Adriatico Finance RMBS S.r.l.
No Related Data.
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