OREANDA-NEWS. Fitch Ratings has affirmed Zephyros Finance S.r.l.'s (Zephyros) class A1 and upgraded class A2 notes as follows:

Class A1 (IT0004395635): affirmed at 'AAAsf'; Outlook Stable
Class A2 (IT0004395643): upgraded to 'BBBsf' from 'BBsf'; Outlook Stable

Zephyros is a securitisation of receivables arising from mixed finance lease contracts (real estate, equipment, industrial vehicles, autos) originated in Italy by Commercio e Finanza S.p.A. Leasing e Factoring (CFLF), which is owned by Cassa di Risparmio di Ferrara S.p.A. (Carife). CFLF is under the Bank of Italy's special administration. The deal closed in 2008 and had a 15-month revolving period that ended in October 2009. As of 1 August 2015, total performing and delinquent loans amounted to EUR43.5m (11.4% of its initial securitised balance).

KEY RATING DRIVERS
Strong Credit Enhancement
The upgrade of the class A2 notes reflects an increase in credit enhancement (CE) available to the rated notes.

CE - excluding residual value (RV) - has increased to 84.5% (in August 2015) from 43.7% (in August 2014), mainly due to a rise in recoveries (and the consequent reduction of the un-provisioned outstanding principal deficiency ledger (PDL) and to the prepayments of some real estate lease contracts (and the consequent amortisation of the notes) in 3Q15.

Given the quarterly scheduled principal payments from the portfolio, the class A1 and A2 notes are expected to be redeemed in full within the next 12 months.

Weak but Stabilising Performance
As of 1 August 2015, the cumulative default rate reached 25.9% (up from 23% in August 2014) while the 90-plus days delinquencies decreased to 2.2% (from 7.3%). Fitch has maintained in its analysis a five-year annual average probability of default (PD) expectation, unchanged from last year, of 8.5% (based on a 180-days past due (dpd) default definition). This corresponds to a remaining base case default expectation of 29.2% on the outstanding performing and delinquent portfolio as of 1 August 2015. Life-time base case default expectations have therefore been revised up to 28.5% from 25%.

Hike in Period Recoveries
Period recoveries have increased during 3Q15 due to the repossession and sale of some real estate assets backing defaulted lease assets. As a result, as of 1 August 2015, cumulative recoveries increased to 17.9% of cumulative gross defaults (from 17.5% in August 2014). Fitch has revised its life-time base case recovery expectations to 18% (from 15%). This reflects the Bank of Italy's special administration's efforts at preserving the on-going business of CFLF and that the portfolio is still being serviced.

Due to the substantial amount of period recoveries, the annualised quarterly gross excess spread ratio jumped to 40% in 3Q15, leading the un-provisioned PDL to decrease to EUR32.6m in August 2015 (34.2% of the unrated class J notes) from EUR40.2m (42.2% of class J) a year ago.

Legal Uncertainty on Residual Value
The exposure to RV was EUR14.5m in August 2015 (33.4% of the performing and delinquent collateral), down from EUR16.7m in August 2014. Fitch did not give credit to RV in its analysis. This is because, should the originator default, there is uncertainty under the Italian law on whether the transfer of the RV payments collected after the default of the originator would be effective and enforceable against the originator's insolvency receiver. Likewise, claims represented by proceeds from the sale of the underlying leased assets that have not yet arisen at the time of the originator default might not be effective and enforceable against the insolvency receiver of the originator. This uncertainty is reflected in Fitch's recovery assumptions above.

Real Estate and Obligor Concentration
The increasing share of real estate leases (100% of the performing and delinquent portfolio as of 1 August 2015) due to on-going amortisation of the shorter leases has significantly reduced the portfolio's diversification, increasing the vulnerability to defaults of large obligors.

According to Fitch's calculations on the loan-by-loan data provided by CFLF, as of 1 August 2015, the largest obligor and the top 20 obligor groups accounted for 3.4% (up from 2.7% in August 2014) and 31.2% (up from 27.8%), respectively, of the performing and delinquent portfolio. Obligors individually representing more than 0.5% accounted for 62.8%.

European Investment Fund Guarantee
The class A1 notes benefit from an irrevocable and unconditional guarantee by the European Investment Fund (AAA/Stable/F1+) with respect to interest and principal. The class A1 notes rating is therefore supported by a floor at the rating of the guarantor.

Potential Class A2 Rating Constraint
Royal Bank of Scotland (RBS, BBB+/F2) acts as swap counterparty and liquidity line provider. Following the downgrade of RBS to 'BBB+'/Stable/'F2' in May 2015, no remedial actions have been taken with reference to either the liquidity line or the swap. Fitch believes that the swap is not providing substantial support to the rated notes because the collateral and the notes are both paying interests linked to the same index rate, and the structure would only be exposed to reset risk, should the swap counterparty default.

On the contrary, as the liquidity line is the only mitigant to payment interruption risk for the class A2 notes, the rating of RBS is seen by Fitch as a potential constraint to the class A2 notes' maximum achievable rating. The liquidity line, which cannot amortise due to the un-provisioned PDL, assures coverage of stressed interest rates on the notes for a long period.

RATING SENSITIVITIES
The class A1 notes' rating is linked to the European Investment Fund (AAA/Stable/F1+) rating. A downgrade of the European Investment Fund will result in a downgrade of the class A1 notes' rating.

The liquidity line is the only mitigant to payment interruption risk for the class A2 notes and the liquidity line has not been collateralised following RBS downgrade to below 'F1' in May 2015. A downgrade of RBS to below 'BBB' will result in a downgrade of the class A2 notes' rating.

The class A2 notes are able to withstand a 25% increase to the probability of default of each obligor in the pool or a 25% reduction in the loan-level recovery rates without their ratings being affected. This is because the current CE makes the transaction resilient to more adverse default or recovery assumptions.

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.
-Servicer report dated 1 August 2015 and loan level data dated 31 July 2015 provided by CFLF.
-Investor report dated 28 August 2015 provided by U.S. Bank Global Corporate Trust Services.

MODELS
The models below were used in the analysis. Click on the links for a description of the models.
-Fitch Portfolio Credit Model
https://www.fitchratings.com/jsp/creditdesk/ToolsAndModels.faces?context=2&detail=117