OREANDA-NEWS. Fitch Ratings has assigned Signum Finance II plc's EUR111.875m Series 2016-1 credit-linked notes (CLN) due 2054 (ISIN XS1391855795) a 'BBB-sf' rating with a Stable Outlook.

The notes are issued by Signum Finance II Plc, a repackaging note programme arranged by Goldman Sachs International with limited liability and incorporated under Irish law. Non-petition language included in the master programme stipulates that no party to any series will be able to petition for the winding-up of the issuer as a consequence of the default of any particular series. In addition, limited recourse clauses in the programme restrict the noteholder of a given series to only have recourse to the collateral assigned to this series.

KEY RATING DRIVERS

The rating addresses the repayment of the principal on the notes according to the terms and conditions of the documentation. The rating reflects the credit quality of three risk-presenting entities as well as the issuer's legal and financial structure. The three risk-presenting entities are Goldman Sachs International (GSI; A/Positive/F1), Republic of Italy (BBB+/Stable/F2) and Land Nordrhein-Westfalen (LNW; AAA/Stable/F1+).

At closing, the proceeds from the notes' issue were used to purchase two assets 1) 2.55% coupon Buoni del Tesoro Poliennal bond issued by Republic of Italy with maturity on 15 September 2041 (Asset 1) 2) a transferable Schuldschein loan borrowed by LNW with maturity on 15 July 2054 (Asset 2).

The issuer has entered into an asset swap with GSI. The swap counterparty ranks senior to the noteholders in all circumstances. The issuer will pay to the swap counterparty all interest and principal received on Asset 1 and the swap counterparty will pay the regular interest and principal amount to the issuer, who in turn will pay such amount to the noteholders.

The swap counterparty will pay an annual fixed 3.66% (notional ratio of 55.42% multiplied by 6.6%) coupon payment to the issuer who in turn will pay the investors from the issue date to and including the 2020 payment date. After this date, the investors will receive a leveraged variable coupon, the notional ratio multiplied by 2.405x the 30-year EUR swap rate.

However, should the 30-year EUR swap rate be higher than 5%, or should the 30-year EUR swap rate less the two-year EUR swap rate be less than 0.25%, the coupon would drop to 0%. The volatility of the note coupon is not addressed by the rating. Provided that no credit events (including default or restructuring) have been declared on the Buoni del Tesoro Poliennal bond, the note coupon will be paid by GSI.

The SPV will pass through the interest received from Asset 2 as additional interest amount to the noteholders. The Asset 2 could be redeemed early in full on 15 July 2034 and the redemption amount can be used to purchase a replacement Asset 2, subject to replacement eligibility criteria. If no replacement of Asset 2 has taken place, the notes would be partially redeemed by the Asset 2 notional amount and the maturity of the notes will be changed to the maturity of Asset 1 in September 2041.

The noteholders have a put option that they can exercise at any point until the notes' maturity date, with 20 business days' notice. If the put option is exercised, the noteholders will receive the notes cash redemption amount from the sale of Asset 1 and (Asset 2 or replacement Asset 2) less all expenses plus swap termination payments payable to the issuer (or less swap termination payments if payable by the issuer).

RATING SENSITIVITIES

Fitch monitors the performance of the underlying risk-presenting entities and adjusts the rating of the transaction accordingly. Fitch tested the impact of a one-notch downgrade of the weakest entity Republic of Italy and found this would lead to a downgrade of the notes by one notch.

DUE DILIGENCE USAGE

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