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Global Credit Research - 23 Nov 2010
Approximately 126 million of securitised debt affected
Frankfurt am Main, November 23, 2010 -- Moody's Investors Service has today confirmed the long-term
credit rating of one class of notes, issued by Locat Securitisation
Vehicle 2 S.r.l.
....EUR126 million B Notes, Confirmed
at A2 (sf); previously on May 10, 2010 A2 (sf) Placed Under
Review for Possible Downgrade
The notes were placed under review for possible downgrade in May 2010
prompted by worse than expected performance.
Today's action has been prompted by worse than expected performance,
which is offset by increased credit enhancement in the form of over-collateralisation.
Cumulative default levels for the transaction are worse than expected
at closing of the transaction compared to the pool factor and amortisation
of the portfolio.
In its analysis, Moody's considered the negative outlook on
the Italian leasing ABS sector (see the report "EMEA ABS,
CMBS & RMBS Asset Performance Outlooks", July 2010).
Specifically, Moody's considered the forecasts for the main
macro-economic drivers of the collateral deterioration, in
particular, corporate insolvencies and GDP contraction.
Corporate insolvencies rose 20% in 2008 compared with 2007,
and increased 35%-40% in 2009 compared with 2008.
According to credit management solutions company Euler-Hermes,
business insolvencies are likely to increase in Italy by 15% in
2010. After a sharp contraction of 5.0% in 2009,
Moody's expects GDP growth of 1.1% in 2010, followed
by 1.3% in 2011. Although this level of economic
growth is sluggish by historical standards, it should help limit
the growth in companies' insolvencies.
Moody's has reassessed its lifetime default expectation for the pool,
taking into account the collateral performance to date as well as the
current macroeconomic environment in Italy. The transaction has
under-performed Moody's performance expectations, assumed
The portfolio of the transaction is made up of three pools of Italian
financial leases originated by Locat S.p.A. for equipment,
auto and real estate leases. Due to the shorter amortisation profile
of the equipment and auto portion, the pool is now mainly exposed
to the real estate sector.
The default definition in Locat Securitisation Vehicle 2 differentiates
between defaulted and defaulting loans. Defaulted loans are held
by borrowers against which legal action has started, defaulting
loans are defined as loans being more than 240 days in arrears.
The amount of cumulative defaulted loans as of the last reporting date
in September stood at 2.2% of the total securitised balance,
but excluding the outstanding amount of defaulting loans, which
stand at 19.3 million Euro or 0.5% on total securitised
balance. The cumulative number is close to the initial mean default
rate of 3.4%, taking into consideration the pool factor
When revising the mean default number, Moody's based its assumption
merely on the defaulted loans reported to date (2.2%) and
stressed this number for defaulting loans. Due to the structural
working of the deal, excess spread of the period is used to cover
outstanding defaulting loans plus new periodic defaulted loans.
This mechanism led to an over-collateralisation of app.
76 million Euro, as excess spread used to cover defaulted and outstanding
defaulting loans is used to redeem the principal of the notes.
As a result of the approach described above, the mean default assumption
was revised at 9% of current pool balance, which translates
into 3.7% on total securitised balance. The volatility
was adjusted to 46% compared to 53% at closing in October
2004. The split between the three sub-pools as of the last
reporting date in September is: 1.4% equipment,
0.6% auto and 98% real estate.
Due to the nature of the underlying borrowers, Moody's aimed to
complement its historical data analysis with a top-down approach
(similar to a standard SME deal) to determine the expected mean default
rate. However, due to limited information provided in the
transaction pool cut, this analysis could not be performed in details.
Moody's notes that the revised default assumption on the current balance
(and over the transactions' remaining life) is commensurate with an average
rating in the "B" range.
The recovery rate has been adjusted to 35%; a decrease from
the assumption of 60% at deal inception, to reflect the recoveries
experienced since closing. Additionally, Moody's considered
the potential effect of originator bankruptcy on the recoveries in the
transaction. The rating agency expects recoveries on defaulted
lease contracts following bankruptcy of the originator to be in the 10%
Moody's analysed sensitivities of cumulative default rates to test the
robustness of its rating. For instance, Moody's observed
that the quantitative/model-indicated rating outcome of the class
B notes would remain consistent with the revised rating if the mean default
assumption increased up to 10% (3.9% on total securitised
balance). In addition, a stress taking into account a deterioration
in credit quality of Unicredit Leasing to Baa1 would have no effect on
the quantitative/model indicated rating outcome of the class B notes.
The principal methodologies used in rating and monitoring the Notes were
The Lognormal Approach applied to ABS Analysis, published in July
2000, Multi-Pool Financial Lease-Backed Transactions
in Italy, published in June 2006, Moody's Approach to
Rating Granular SME Transactions in Europe, Middle East and Africa,
published in June 2006 and Revising Default/Loss Assumptions Over the
Life of an ABS/RMBS Transaction, published in December 2008.
Other methodologies and factors that may have been considered in the process
of rating these Notes can also be found on Moody's website.
Moody's used its excel based cash-flow model Moody's ABSROM™
as part of its quantitative analysis of the transaction. Moody's
ABSROM™ model enables users to model various features of a standard
European ABS transaction -- including the specifics of the
default distribution of the assets, their portfolio amortisation
profile, yield, or recoveries and replenishments during the
revolving period, as well as the specific priority of payments,
triggers, swaps and reserve funds on the liability side of the ABS
structure. Moody's ABSROM™ User Guide, available on
Moody's website, covers the functionality of the model and provides
a comprehensive index of the user inputs and outputs.
Additional research, including the pre-sale report for this
transaction 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.
Frankfurt am Main
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
VP - Senior Credit Officer
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
Moody's confirms one class of note issued by Locat Securitisation Vehicle 2 S.r.l.
An der Welle 5
Frankfurt am Main 60322
No Related Data.
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