OREANDA-NEWS. Fitch Ratings has affirmed Italfinance Securitisation Vehicle 2 Series 2007-1's (Italfinance 2007-1) Series 1-A notes and upgraded the Series 1-B, Series 1-C and Series 1-D notes. The agency has also removed the notes from Rating Watch Evolving (RWE) and assigned a Stable Outlook. The rating actions are as follows:

EUR91.9m Series 1-A: affirmed at 'AAsf'; off RWE; Outlook Stable

EUR18.1m Series 1-B: upgraded to 'A-' from 'BBBsf'; off RWE; Outlook Stable

EUR12.2m Series 1-C: upgraded to 'BBB+sf' from 'BBsf'; off RWE; Outlook Stable

EUR4.0m Series 1-D: upgraded to 'BBB-sf' from 'B+sf'; off RWE; Outlook Stable

The transaction is a securitisation of receivables arising from Italian finance lease contracts. While the pool initially contained mixed leases, it is now for more than 99% composed of real estate leases. The leases were originated by Banca Italease, which in March 2015 was merged into parent Banco Popolare (BB/Negative/B).

KEY RATING DRIVERS

Improved Transaction Reporting

Since the last review in December 2015, Fitch has been provided with an updated servicer report and loan-by-loan tape. In 2Q16, the annualised default rate (ADR) increased to 12.9% from 2% in the previous quarter. The reason for this spike is deemed to be technical due to the reclassification of delinquent loans, such that the servicer report better reflects the loan-by-loan data. Fitch complements its rating analysis with loan-by-loan information to properly address the concentrated nature of the remaining portfolio.

Fitch had previously placed the notes on RWE, reflecting delays in obtaining this updated loan-by-loan information. The updated file still contains slight discrepancies to the servicer report in reporting 30+ day delinquencies, since the latter uses a definition different from transaction documents (number of months past due in the report rather than number of days in the loan-by-loan information and in the legal documentation). However, we believe delinquency data can be sufficiently reconciled and that the new servicer reports provide an adequate reflection of the data.

Recent Performance Improvement

There has been a general improvement in recorded 30+ day delinquencies and, excluding 2Q16, an improvement in recorded defaults since the last review. The upgrade of all mezzanine notes reflects both the recent improvement and the build-up in credit enhancement due to cash trapping.

Fitch based its asset analysis on its portfolio credit model (PCM). A floor probability of default (PD) of 3% as per criteria was applied and each class of notes was tested using its proprietary multi asset cash flow model, with the driving scenario being low prepayments, front-loaded defaults and rising interest rates. However, in Fitch's view, the PD floor does not take actual recent default performance into account, leading to a significant overstatement of new expected defaults.

Adjustments to Model Assumptions

Further to the adjustment to the transaction PD mentioned above, the interest earned on any residual values has not been modelled due to lack of information, but will provide an additional source of revenue particularly in the tail of the transaction, when the weight of the residual value over the total exposure is typically high, and in a rising rate scenario. Fitch therefore decided to assign ratings higher than the best pass ratings produced by its cash flow model, by two categories in the case of class A and B. This was further supported by PD and interest rate sensitivity testing. This approach introduces a variation to Fitch's Criteria for Rating Granular Corporate Balance-Sheet Securitisations (SME CLOs).

Support from Originator

The originator has been repurchasing defaulted receivables since October 2008 (EUR132m as of May 2016), supporting the transaction. The reason for these repurchases is to avoid breaching the pro-rata amortisation trigger of 2.75% cumulative losses. If breached, it would lead to a sequential amortisation of the notes.

Cash Trapping

Due to the high level of defaults in the past years and despite the support from the originator the cash trapping trigger was breached in January 2012. As a consequence, interest payments to the unrated class 1-E notes are deferred so that all excess spread is trapped in the transaction's collection account. Due to the originator's support, the net excess spread has been significant, so that the transaction benefits from EUR19.3m of trapped cash, which together with the floor level of the cash reserve (EUR6.7m), provides a considerable boost to available credit enhancement for all rated notes.

Concentration Risk and Pro-Rata Amortisation

The portfolio consists of more than 99% of real estate leases. The top 50 obligors currently account for 42% of the portfolio. The pro rata amortisation of the rated notes slows the build-up of class 1-A notes' credit enhancement (currently at 51.5%).

RATING SENSITIVITIES

Model-implied impact upon the notes' rating of increased defaults (Class 1-A/1-B/1-C/ 1-D). Please note that these sensitives have been applied to the raw model output and do not take into account Fitch's application of the criteria variation mentioned above:

Increase base case defaults by 10%: 'BBB-sf'/'BB+sf'/'BBsf'/'BB-sf'

Increase base case defaults by 25%: 'BB+sf'/'BBsf'/'BB-sf'/'B+sf'

Model-implied impact upon the notes' rating of decreased recoveries Class 1-A/1-B/1-C/ 1-D):

Reduce base case recovery by 25%: 'BBBf'/'BB+sf'/'BBsf'/'BB-sf'

Model-implied impact upon the notes' rating of increased defaults and decreased recoveries Class 1-A/1-B/1-C/ 1-D)

Increase default base case by 10%; reduce recovery base case by 10%: 'BBB sf'/'BB+sf'/'BBsf'/'BB-sf'

Increase default base case by 25%; reduce recovery base case by 25%:

'BB+sf'/'BBsf'/'B+sf'/'B+sf'

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

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 that were 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 about 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 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 dated 31 March 2016 provided by Banco Popolare

-Latest servicer report dated 09 April 2016 and provided by Banco Popolare

-Latest investor report dated April 2016 and provided by Securitisation Services S. p.A