Fitch Upgrades Atlante Finance S.r.l.
Class B notes (ISIN IT0004069040): upgraded to 'AA+sf' from 'AAsf'; Outlook Stable
Class C notes (ISIN IT0004069057): affirmed at 'BBsf'; Outlook revised to Stable from Negative
Atlante is a securitisation of a mixed portfolio comprising: loans to Italian SMEs backed by mortgages on residential and/or commercial properties (the commercial sub pool); residential mortgage loans to individuals (the residential sub-pool); and unsecured loans to Italian local public entities (municipalities, provinces and small companies or utilities owned by them). Loans were originated and are serviced by Unipol Banca.
At 31 December 2015, commercial loans accounted for 56.3% of the total pool balance (including defaulted loans), residential loans for 43.1% and loans granted to Italian public entities for 0.6%. At the same date, the portfolio outstanding balance (including defaulted loans) was EUR317.8m (21% of the initial portfolio balance at closing, in May 2006).
KEY RATING DRIVERS
Increased Available Credit Enhancement
The upgrade of the class B notes reflects an increase in credit enhancement (CE) over the last 12 months, following the transaction's deleveraging, and the short expected remaining life of the class B notes. Available CE for the class B notes, based on the total pool balance including the outstanding amount of defaulted assets, increased to 95.6% in January 2016 from 85.5% in April 2015. Based on the current amortisation of the portfolio, Fitch expects the class B notes to be repaid in full by year-end.
The affirmation of the class C notes and the revision of the Outlook to Stable reflect an increase in the class C available CE to 52.5% in January 2016 from 46.8% in April 2015 and the stabilisation of the deal performance since March 2015.
The class A notes were redeemed in full in January 2016 as a result of the de-leveraging in the underlying portfolio.
Atlante has had volatile performance over time, mainly due to the high single-obligor concentration in the commercial sub-pool. The proportion of loans past due for more than 90 days in the delinquent and performing outstanding portfolio peaked at 14.2% in December 2014 and then fell to 0.7% in March 2015, after the loans to the top two obligors defaulted in February 2015.
Between March and December 2015, 90-day+ delinquencies have been between 0.7% and 1% of the outstanding delinquent and performing portfolio and were 0.8% at end-December 2015. Cumulative defaults as a percentage of the initial portfolio balance at closing only marginally increased to 18.8% at 31 December 2015 from 18.7% at 31 March 2015.
In December 2015, the unpaid principal deficiency amount decreased to EUR84.9m from EUR97.3m in April 2015, due to the low new default rate and continued recovery inflows from March 2015. However, the amount of outstanding defaults, including loans that have been in arrears for more than six calendar months during the life of the deal or classified as non-performing by the servicer - and their percentage of the portfolio balance - remain high. At end-December 2015, outstanding defaulted loans accounted for 50% of the total outstanding balance, 83% of which related to the commercial sub-pool.
Recoveries from Outstanding Defaults
Atlante is benefitting from recoveries from existing defaults, albeit slowly. At 31 December 2015, cumulative recoveries over cumulative defaults since closing were 47.3%, up from 42.6% in March 2015, with most coming from the defaulted loans in the commercial sub-pool.
Under its SME criteria, Fitch gives some credit to recoveries on already defaulted assets if it receives data that allow it to identify where the assets are in the recovery process. Even though Fitch has not received this information, it has decided to give some credit to recoveries from existing defaults. This is a criteria variation that the agency deemed necessary to properly address a factor specifically relevant to this transaction, due to the large amount of defaulted loans in the Atlante portfolio.
Furthermore, unlike in other comparable SME securitisation transactions, all outstanding defaulted loans in Atlante are secured by mortgages on residential or commercial properties and the transaction has shown a good recovery performance over its 10 years' history. Fitch has therefore assumed in its analysis that the transaction will benefit from further recoveries on defaulted assets outstanding at 31 December 2015 at a rate of 3.1% a year for the next five years. The sum of recoveries to date and recoveries from existing defaults is in line with the recovery rate Fitch expects from new defaults.
Reduced Obligor Concentration
The high obligor concentration in the commercial sub-pool was the main reason for Atlante's volatile performance over time. However, obligor concentration has now reduced due to the amortisation and defaults of the largest obligors in the commercial sub-pool, and the increasing share of residential mortgage loans granted to individuals over the total performing and delinquent portfolio.
Fitch estimates the largest 10 obligor groups to account for 8.6% of the performing and delinquent portfolio balance at 31 December 2015.
Payment Interruption Risk Mitigated
The servicer of this portfolio is Unipol Banca, which is not rated. However, payment interruption risk is mitigated by a liquidity facility of EUR63.8m, which can be used by the issuer in case of payment shortfalls relating to interest due and payable on the rated notes and other items payable in priority thereto. The liquidity facility was fully collateralised after the downgrade of the liquidity facility provider (Royal Bank of Scotland, BBB+/Stable/F2) below 'F1' in May 2015, and the collateral is held in an account opened in the name of Atlante with BNP Paribas (A+/Stable/F1).
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 on the class B notes.
The class B notes are resilient to high-stress scenarios. Assuming no recoveries on outstanding defaults (ie no criteria variation) and increasing by 25% the probability of default of each obligor in the portfolio or haircutting by 25% recoveries on future expected defaults would not affect the class B notes' rating.
The class C notes' ratings are sensitive to the amount of recoveries expected to come from outstanding defaults. Assuming no recoveries on outstanding defaulted loans (ie no criteria variation) would result in a class C downgrade of two rating categories.
DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed 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 pool and the transaction. There were no findings material to this analysis. 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 did not undertake a review of the information provided on the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.
Overall, Fitch's assessment of the information relied on for its 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.
Servicer report dated 31 December 2015, provided by Unipol Banca.
Loan-by-loan data dated 31 December 2015, provided by Unipol Banca.
Investor report dated 28 January 2016, provided by BNP Paribas Securities Services, Milan Branch.