S&P: Ratings Raised On Italian RMBS Transaction Apulia Finance N. 2's Class B And C Notes After Following Review
Today's upgrades follow the application of our criteria for rating Italian residential mortgage-backed securities (RMBS criteria), our current counterparty 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, "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013, and "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016). In our credit and cash flow analysis, we used the most recent transaction information that we have received for the June 2016 payment date.
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 can therefore be rated 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 can 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 B notes. Following the full redemption of the class A notes on the March 2016 interest payment date (IPD), the class B notes is the senior most class of notes outstanding and are therefore eligible for a potential uplift of six notches above the rating on the sovereign. The maximum potential rating for the class C notes is 'A (sf)'.
In 2009, the cash reserve was drawn due to an increase in the quarterly defaults that peaked between 2010 and 2011. The issuer has been replenishing the reserve since the January 2012 IPD from available excess spread, following the reduction in defaults and arrears. The cash reserve is now at 83.32% of the transaction documents' €5.114 million target amount.
Under the transaction documents, the reserve is able to amortize if certain performance conditions are met and if it is fully replenished. However, if the reserve reaches the target amount, it will decrease to the €1.600 million floor, from the €5.114 million level. This would reduce the available credit enhancement for all classes of notes, particularly for the class C notes.
The transaction has a cumulative default trigger mechanism, which defers the payment of the class B and C notes' interest once the cumulative gross default ratio hits 18.30% and 12.20%, respectively. On the June 2016 IPD, the transaction's cumulative gross default ratio was 5.99%.
Since July 2014, available credit enhancement has increased to 96.20% from 59.64% for the class B notes, and to 29.03% from 17.47% for the class C notes.
Severe delinquencies of more than 90 days, at 0.70%, are on average lower 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 5.99%, 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) for each rating level, while the weighted-average loss severity (WALS) has remained stable for all rating levels.