OREANDA-NEWS. This announcement corrects the version published on 27 May 2016 to include the Counterparty Criteria for Structured Finance and Covered Bonds and the corresponding Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds.

Fitch Ratings has affirmed Pharma Finance 3 S. r.l.'s (PF3) notes, as follows:

EUR36.1m class A floating-rate notes: affirmed at 'CCCsf'; Recovery Estimate: lowered to 65% from 90%

EUR6.1m class B floating-rate notes: affirmed at 'CCsf'; Recovery Estimate: 0%

EUR9.5m class C floating-rate notes: affirmed at 'AAAsf'; Outlook Stable

KEY RATING DRIVERS

Continuous Deterioration of Asset Performance

Until the June 2013 payment date, there were no reported arrears or defaults. However, EUR6.9m of defaults were posted in 2Q13. Since then, defaults have rapidly built up to EUR44.2m (20.4% of the original portfolio balance plus subsequent purchases) on a cumulative gross basis. The total number of contracts reported as defaulted are 58 on a total of 132 still outstanding loans. A further 29 loans are reported as delinquent. Moreover, the loans in arrears have not been cured, with delinquencies migrating to default status due to protracted payment delays.

Back-Up Servicer Stepped In

Comifin S. p.A. (Comifin) has handed over responsibilities for servicing the portfolio under management to the back-up servicer, Selmabipiemme Leasing S. p.A. in September 2015. Due to the peculiar nature of the collection process, which requires processing cash flows coming from both debtors and the ASLs (Italian healthcare units), Comifin still acts as sub-servicer in charge of daily collections, as agreed by the transaction parties. Fitch will monitor the new servicer's collection performance, and in particular its ability to redirect ASL payments to the issuer.

Lack of Visibility on Future Recoveries

The transaction is currently under-collateralised, with rated notes of EUR51.7m against performing collateral of EUR34.5m. The repayment of the notes is now heavily dependent on future recoveries. Fitch has made a number of assumptions on future recoveries which can impact the Recovery Estimate, the most important of which is a base case life time recovery rate assumption of 30%.

The servicer would be able to extract recoveries from non-performing assets in different ways: from bankruptcy proceedings, payment arrangements with the borrowers, or claims on ASL payments. However, the overall uncertainty regarding recovery sources and timing is a driving factor of the ratings of the class A and B notes. Should the new servicer be unable to generate a flow of recovery payments in line with the agency's assumption, a default of the notes would become more likely.

PDL Build-Up Drains Liquidity

The principal deficiency ledger (PDL) has increased considerably to EUR38.9m (or 75% of the rated notes) from zero in mid-2013. Until the PDL is fully cleared, the cash reserve balance will remain zero, exposing the transaction to increased payment interruption risk should the receipt of collections be interrupted due to the default of the appointed servicer. Furthermore, unlike most Italian ABS transactions, principal collections cannot be used to cover interest shortfalls.

As long as the PDL is left uncleared, the step-up margin on the rated notes will not be paid. Non-payment of these items is not an event of default of the notes and payment of the step-up margin is not covered by Fitch's ratings. We can no longer verify the degree of disclosure given to investors beyond its rating report and transaction documentation at the time of issuance and therefore the transaction documents may not have the disclosure as prominent as the standards of our criteria, which constitutes a variation to Fitch's Criteria for Rating Caps and Limitations in Global Structured Finance Transactions.

Rising Obligor Concentration Risk

The performance deterioration has increased the obligor concentration risk, which was already high due to the few securitised loans left in the pool (132). The decrease in credit enhancement due to the inability to fully provision for the numerous defaults increases the exposure of the noteholders to defaults in this concentrated pool.

RATING SENSITIVITIES

Further deterioration of the pool performance and the ensuing increase of uncleared PDL could put further downward pressure on the class A and B notes' ratings resulting in a possible default.

Conversely, any future evidence that the recovery sources available to the new servicer can post significantly higher recovery rates than Fitch currently expects could result in upward pressure on the notes' ratings and/or Recovery Estimates.

The rating of the class C notes is linked to the European Investment Fund's rating (AAA/Stable/F1+), which guarantees the payments under those notes: any changes in the guarantor's rating would be reflected by a change in the class C notes' rating.

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 as provided in the servicer report as at 4 March 2016

- Latest servicer report dated 17 March 2016 and provided by Selmabipiemme Leasing S. p.A.

- Latest investor report dated 29 March 2016 and provided by Deutsche Bank