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)
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
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
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.
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.
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Service(s) to the rated entity or its related third parties within the
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Please see ratings tab on the issuer/entity page on Moodys.com
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The date on which some Credit Ratings were first released goes back to
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of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Structured Finance Group
Moody's Italia S.r.l
Frankfurt am Main
MD - Structured Finance
Structured Finance Group
Moody's Deutschland GmbH
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Moody's Italia S.r.l
Moody's assigns definitive ratings to Notes issued by Adriatico Finance SME S.r.l.
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