S&P: Rating Raised In Italian RMBS Transaction Apulia Finance N. 4's Series 2008-1 Following Review
Today's upgrade follows our credit and cash flow analysis of the most recent transaction information that we have received on the June 2016 interest payment date. Our analysis reflects our updated criteria for Italian residential mortgage-backed securities (RMBS criteria) and our structured finance ratings above the sovereign criteria (RAS criteria) (see "Italy And Spain RMBS Methodology And Assumptions," published on Sept. 18, 2014, and "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016).
Under our RAS criteria, we applied a hypothetical sovereign default stress test to determine whether a tranche has sufficient credit and structural support to withstand a sovereign default and so repay timely interest and principal by legal final maturity.
Our RAS criteria designate the country risk sensitivity for RMBS as moderate. Under our RAS criteria, this transaction's notes could therefore be rated up to four notches above the sovereign rating, if they have sufficient credit enhancement to pass a minimum of a severe stress. However, as all six of the conditions in paragraph 42 of the RAS criteria are met, we could assign ratings in this transaction up to a maximum of six notches (two additional notches of uplift) above the sovereign rating, subject to credit enhancement being sufficient to pass an extreme stress (see "Understanding Standard & Poor's Rating Definitions," published on June 3, 2009).
As our unsolicited foreign currency long-term sovereign rating on the Republic of Italy is 'BBB-', our RAS criteria cap at 'AA - (sf)' the maximum potential rating in this transaction for the class A notes.
The interest rate and basis swaps are not in line with our current counterparty criteria, so we gave no benefit to the swaps in our analysis at rating levels above our 'A' long-term issuer credit rating (ICR) on BNP Paribas on the swap counterparty (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). We considered appropriate cash flow stresses to address interest rate and basis risk in the transaction.
Credit enhancement has increased to 39.05%, from 33.09% in our previous review (see "Rating Affirmed In Italian RMBS Transaction Apulia Finance N.4's Series 2008-1 Following Application of Updated Criteria," published on Oct. 31, 2014).
This transaction features an amortizing reserve fund, which is fully depleted. The transaction has funded a liquidity reserve equal to 1.5% of the outstanding balance of the class A notes since June 2013. This is only available to pay senior fees, expenses, and interest on the class A notes. The transaction uses any debt cash reserve and liquidity reductions that the structure allows as principal funds to repay the rated notes.
Severe delinquencies of more than 90 days, at 6.89%, are on average higher for this transaction than our Italian RMBS index (see "Italian RMBS Index Report Q4 2015: Total Delinquencies Hold Steady In Q4 As Prepayments Rose Over 2015," published on April 29, 2016).
Cumulative defaults, at 16.52%, are also higher than in other Italian RMBS transactions that we rate. Prepayment levels remain low and the transaction is unlikely to pay down significantly in the near term, in our opinion.
After applying our RMBS criteria to this transaction, our credit analysis results show an increase in the weighted-average foreclosure frequency (WAFF) and a decrease in the weighted-average loss severity (WALS) for each rating level.