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Rating Action:

Moody's assigns definitive ratings to Notes issued by Adriatico Finance SME S.r.l.

26 Apr 2011

EUR 129.5 million of debt securities rated

Milan, April 26, 2011 -- Moody's Investors Service has assigned definitive ratings to notes issued by Adriatico Finance SME S.r.l.:

EUR129,500,000 Class A Asset Backed Floating Rate Notes due 31 December 2047, Assigned Aaa (sf)

RATINGS RATIONALE

Adriatico Finance SME S.r.l. is a cash securitisation of secured loans to small and medium-sized enterprises (SME) mainly located in Abruzzo (Italy) extended by Cassa di Risparmio della Provincia di Teramo ("Banca Tercas", Baa2/P-2). The transaction closed in July 2008 and was initially not rated by Moody's.

According to Moody's, the ratings take account of, among other factors, (i) the sound legal structure of the transaction with a principal to pay interest mechanism and a reserve fund of EUR7.3 million, providing liquidity support to Class A notes; and (ii) credit enhancement build-up below the Class A notes since the closing date in July 2008 as result of the portfolio amortization. Initially, the originator had the option to add further assets for the first 18 months, but it has never done so. In addition, Moody's positively views the financial strength of the servicer (i.e. Banca Tercas, Baa2/P-2) as well as the high collateralisation of the portfolio (i.e. all loans have a first lien mortgages).

Moody's notes that the transaction also features a number of credit weaknesses, such as: (i) the geographical concentration (mainly in the region of Abruzzo); (ii) certain relatively large obligor concentrations; (iii) some concentration in the building and real estate sector of the pool (according to Moody's industry classification). However, loans must be fully drawn and construction loans are excluded. This has been taken into account in Moody's quantitative analysis. In addition, no interest rate swap agreement is in place to protect against interest rate risk on floating-rate contracts (accounting for more than 90% of the total portfolio), while only an interest rate cap agreement (not compliant with Moody's criteria) is in place for the fixed-rate portion of the portfolio. Moody's has taken these features into account in its quantitative analysis by subjecting the portfolio yield to a haircut resulting from some stressed assumptions on the mismatch between the interest rate received on the portfolio and the three-month Euribor paid on the notes on a quarterly basis.

Moody's has assigned a composite V Score of "medium" to this transaction, which is in line with the Italian SME ABS sector. The rating agency notes that the transaction complexity is "medium", given that, although the structure is static, there is no interest rate swap in place. The market value sensitivity is also medium, because the portfolio, being 100% collateralised by residential and commercial real estate properties, is exposed to fluctuations in the regional real estate market. The back-up servicer arrangement is "low/medium", as the structure includes (i) the appointment of a back-up servicer at the loss of Baa3 by Banca Tercas; and (ii) a back-up servicer facilitator (i.e. Securitisation Services), which will attempt to find a new servicer in the event of need. 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. Moody's has assigned the V-Score according to its reports "V Scores and Parameter Sensitivities in the Global Consumer Loan ABS Sectors", published in May 2009 and "V Scores and Parameter Sensitivities in the EMEA Small-to-Medium Enterprise ABS Sector", published in June 2009.

As of 28th February 2011, the outstanding portfolio of EUR94.9 million worth of performing underlying assets was composed of 799 contracts granted to 680 borrowers, either individuals, professionals or SMEs. The loans were originated between 2002 and 2008, with a weighted average seasoning of 5.2 years and a weighted average remaining term of approximately ten years. The interest rate is floating for 91.5% of the pool, the weighted average margin over the index being 1.35%. Some 8.5% of the portfolio is instead represented by fixed-rate loans, with a weighted average yield of 5.7%. Geographically, the pool is concentrated in the region of Abruzzo (70%) where the originator is actually located, while -- as far as industry concentration is concerned -- the "construction and building" sector represents 35% of the outstanding pool.

Moody's used the Monte Carlo simulation to determine the default distribution for this transaction due to the poor granularity of the portfolio. The rating agency derived the default distribution, namely the mean default probability and its related standard deviation, via the analysis of: (i) the characteristics of the loan-by-loan portfolio information and the historical vintage data; (ii) the potential fluctuations in the macroeconomic environment during the lifetime of this transaction; and (iii) the portfolio concentrations in terms of industry sectors and single obligors.

Moody's expects the cumulative default probability over the weighted average life of 5.3 years of the portfolio to be 15% (equivalent to Ba3/B1), and the average pairwise correlation to be 10%, which leads to an equivalent coefficient of variation (i.e. the ratio of standard deviation over mean default rate) of around 52%. The rating agency has assumed stochastic recoveries with a mean recovery rate of 65% (which is higher than recoveries assumed in other Italian SME transactions and reflects the high collateralisation ratio), a standard deviation of 20% and a recovery time of between two and eight years after the default occurrence. In addition, Moody's has assumed the prepayments to be around 8% per year. Furthermore, Moody's has considered: (i) the amortisation and an adjusted yield vector of the portfolio, derived from the loan-by-loan data file as of the 28 February 2011; and (ii) a potential stressed set-off exposure of 3% amortising with the portfolio.

The transaction was closed in July 2008 and has accumulated some defaults since then. As Moody's was only asked to rate this transaction at the beginning of 2011, it has modelled the outstanding performing portfolio of the underlying assets as of the cut-off date (i.e. 28 February 2011) in its cash flow model. The total notes balance issued at closing amounted to EUR162.95 million. The outstanding balance on the notes as of the last payment date in March 2011 amounts to EUR99.1 million, while the balance on the outstanding Class A notes is EUR65.65 million, the balance on the Class B notes (not rated) has remained unchanged at EUR33.45 million. Moody's analysis of the notes is based on their outstanding principal amount after the latest payment date. Therefore, the rating agency has also considered the following aspects in its cash flow model: (i) expected recoveries of EUR4.1 million on the outstanding defaults (including re-performing loans); and (ii) an unpaid principal deficiency ledger of EUR4.2 million.

To rate this transaction Moody's used the following models: (i) ABSROM (v.2.2.12), to model the cash flows and determine the loss for each tranche; and (ii) CDOROM (V.2.8), to estimate the default distribution.

The ratings address the expected loss posed to investors by the legal final maturity of the notes in December 2047. In Moody's opinion, the structure allows for the timely payment of interest and ultimate payment of principal on the Class A notes at par on or before the final legal maturity date. Moody's ratings address only the credit risks associated with the transactions. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

Before Moody's decided on the ratings assigned to the class A notes, it tested some parameter sensitivities for this transaction. The model sensitivity output indicated that the Class A notes would have achieved an Aaa rating even assuming a recovery rate of 53% (with a 5% standard deviation, compared with a stochastic recovery rate of 65% with a standard deviation of 20% in the base scenario) or a prepayment rate of 12% (compared with 8% in the base scenario). Moody's parameter sensitivities provide a quantitative/model-indicated calculation of the number of rating notches that a Moody's-rated structured finance security could vary if certain input parameters were to change.

The principal methodologies used in this rating were Refining the ABS SME Approach: Moody's Probability of Default Assumptions In The Rating Analysis of Granular Small and Mid-sized Enterprise portfolios in EMEA, published in March 2009, Moody's Approach to Rating Granular SME Transactions in Europe, Middle East and Africa, published in June 2007, and V Score and Parameter Sensitivities in the EMEA Small-to-Medium Enterprise ABS Sector, published in June 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, 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
Monica Curti
Vice President - Senior Analyst
Structured Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

Frankfurt am Main
Thorsten Klotz
MD - Structured Finance
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's assigns definitive ratings to Notes issued by Adriatico Finance SME S.r.l.
No Related Data.
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