OREANDA-NEWS. Fitch Ratings says significant differences exist between static vintage default data and empirical default rates used to validate internal rating models for Italian SME borrowers. Vintage data typically tends to understate the default figures compared with empirical default data.

Recent examples of this trend were observed by Fitch during its rating process for:

-Multi Lease AS, a securitisation of lease receivables to Italian SMEs originated by Sardaleasing S.p.A. and closed on 22 February 2016. The vintage default data suggested an annual default rate of 3.4%, whereas the annual 90 day past due (dpd) default rates observed for the last five years averaged 6.5%, almost twice the vintage default rates;

-Siena Lease 16-2, a securitisation of lease receivables to Italian SMEs originated by Monte dei Paschi di Siena Leasing & Factoring S.p.A. and closed on 28 January 2016. The vintage default data indicated an annual default rate of 3.7%, whereas the observed 90 dpd default rates averaged 6.7%;

-Claris SME 2015 transaction, a securitisation of loans granted to Italian SMEs by Veneto Banca S.c.p.a and its subsidiary bancApulia S.p.A., and closed on 30 October 2015. The vintage default data suggested 0.7%, compared with an observed 90 dpd rate of 6% per annum. In this particular case the vintage default data captured only bad loans (sofferenze) without taking into account delinquent loans, and would have implied a cure rate of 88%.

Fitch usually bases its analysis on observed default rates. In the case of Multi Lease AS, the most recent Italian SME deal rated by Fitch, the transaction had a weighted average life of 5.2 years. Using the 6.5% observed default rate per year, Fitch calculated a life time expected default rate of 22.9%. Factoring in borrowers that return to performing status (cures), the expected foreclosure rate was 18.3%. For high investment-grade ratings, Fitch would ensure the structure can withstand a significant multiple over the default expectation, and give limited credit to cure rates.