Fitch Upgrades Marche Mutui 4 & Affirms Marche M6
Class A (ISIN IT0004515794): upgraded to 'AA+sf' from 'Asf'; Outlook Stable
Class A1 (ISIN IT0004941271): affirmed at 'AA+sf'; Outlook Stable
Class A2 (ISIN IT0004941297): affirmed at 'AA+sf'; Outlook Stable
Class A3 (ISIN IT0004941305): affirmed at 'AA+sf'; Outlook Stable
The two Italian RMBS transactions comprise mortgage loans originated and serviced by Nuova Banca delle Marche (previously Banca delle Marche). MM4 includes SME loans (17.6% of the current portfolio balance), while MM6 is backed by a fully residential portfolio.
KEY RATING DRIVERS
Repurchase of NPLs by Originator
In December 2015, the Bank of Italy approved the incorporation of a special purpose vehicle - REV - Gestione Crediti (REV) - whose aim is to purchase non-performing loans (NPLs) from Nuova Banca delle Marche and the other three Italian rescued banks. Mortgage loans that had been securitised in MM4 and MM6 were supposed to be bought back by Nuova Banca delle Marche from the respective securitisation SPVs in order to be subsequently sold to REV.
Consequently, on 20 June 2016, Nuova Banca delle Marche repurchased those credits defined as "crediti in sofferenza" (ie, hard defaults or NPLs) for a nominal amount of EUR135.7m and EUR5.3m from MM4 and MM6, respectively. The NPLs have been repurchased by Nuova Banca delle Marche at par, ie at their nominal amount or gross value. This contributed to increasing the principal funds available for the notes' amortisation, which in turn has led to higher credit enhancement (CE), especially in MM4.
Sufficient CE Despite Under-collateralisation
Available excess spread, although fully retained in both transaction structures, has only partially covered period defaults, resulting in under-collateralisation of EUR81.1m (17.8% of the subordinated class J notes) in MM4 and EUR43.3m (9.2% of the class J notes) in MM6. In MM4 this is mainly due to substantial period defaults while in MM6 it is due to the high interest payable on the class A1 notes.
Nevertheless, CE available to the class A notes in MM6 (34.2% of the outstanding performing and delinquent portfolio) and MM4 (74.4%) is sufficient to withstand 'AA+sf' stresses, as reflected in the rating actions. The repurchase of NPLs by the originator contributed to a substantial CE increase, particularly in MM4.
Stable Asset Performance of MM6
As of the last reporting dates, late-stage arrears (loans with more than three unpaid monthly instalments) were reported at 0.9% of the outstanding portfolio balance, unchanged over the previous 12 months. Overall, late-stage arrears have ranged between 0.5% and 1.0% since closing in 2013. Cumulative gross defaults, calculated as a percentage of the original asset balance, increased 89bps over the same period but remained well below the Italian average default index (2.4% vs 4.7%). This comes despite a default definition (mortgages with more than six monthly instalments overdue), which is more conservative than in most Italian deals.
MM6's weighted average original loan-to-value (OLTV) ratio (59.5%) is at the lower end of Italian mortgages' OLTV (between 60% and 65%) and represents a major driver of the stable asset performance. Fitch believes self-employed borrowers are the main risk factor as they represent 23.3% of the performing borrowers but 45.0% of those in arrears.
SME Loans Drive MM4 Performance
Gross cumulative defaults (15.8%) increased 47 bps over the 12 months to August 2016 and late arrears stand at 2.0%, above the Italian RMBS market average of 1.6% despite the 56bps decrease over the year.
Although the original ratio between residential and SME secured loans was about 2:1, half of the historical defaults were in the SME sub-pool, which therefore represents the main risk for the transaction's performance. The agency consequently stressed default assumptions on SME loans, as outlined in Fitch's "Criteria Addendum: Italy - Residential Mortgage Assumptions".
Fitch notes that the residential-to-SME loans ratio has now moved in favour of the residential assets (about 5:1), hence we expect the performance to stabilise.
Payment Interruption Risk Mitigated
Fitch has assessed the transactions' ability to cope with the default of their servicer. A first mitigating factor is the appointment of Italfondiario SpA (RPS2+/RSS1-) as back-up servicer. The agency therefore believes that the disruption of servicing activities would affect only one interest payment date (IPD). The reserve funds, which can be used to cover interest shortfalls, account for 41.1% and 4.3% of the class A notes balance in MM4 and MM6, respectively. In Fitch's view, the size of the cash reserves is enough to guarantee the payment of senior fees and interests on the rated notes, under a stressed Euribor assumption, for at least one IPD.
Negligible Exposure to Central Italy Earthquake
The two deal are highly exposed to regional concentration in the Marche, Lazio, Abruzzo and Umbria regions (91.3% and 87.2% in MM4 and MM6, respectively), which were badly affected by the earthquake at the end of August 2016. Fitch has analysed the Italian RMBS universe hosted in the European DataWarehouse (EDW) and has found that the number of outstanding loans to borrowers with residence in the five most affected towns is very low. As the Marche series is a subset of the transactions in the EDW, Fitch has concluded that the exposure of MM4 and MM6 to these towns is negligible.
Changes to Italy's Long-term Issuer Default Rating (BBB+/Stable) and the rating cap for Italian structured finance transactions, currently 'AA+sf', could trigger rating changes to the transactions' notes.
In MM6, more than 70% of the current pool is represented by floating-rate loans originated after January 2009, hence in a low interest rate environment. The additional stress imposed on these loans by an interest rate increase, if resulting in a deterioration of their performance beyond Fitch's expectations, could also lead to negative rating action.
The large CE available to MM4's class A makes these notes' rating relatively non-sensitive to a deterioration of the asset performance.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. Some information that the agency uses as a key input for its models, namely the borrowers' nationality and occupancy type, was not provided in the loan-by-loan tape. This was reflected in the analysis by relying on the aggregate information provided by the servicer as of January 2016. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Fitch reviewed the results of third party assessments conducted on the asset portfolios information, which indicated no adverse findings material to the rating analysis.
Prior to the transactions closing, Fitch conducted a review of a small targeted sample of Banca delle Marche's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
Overall, and together with the assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by Nuova Banca delle Marche as at 30 April 2016 (MM4) and 30 June 2016 (MM6)
- Transaction reporting provided by Nuova Banca delle Marche as at 12 August 2016 (MM4) and 27 July 2016 (MM6)
- List of NPLs repurchased by the originator provided by Nuova Banca delle Marche as at 25 July 2016
The models below were used in the analysis. Click on the link for a description of the model.