OREANDA-NEWS. Fitch Ratings has affirmed Leone Arancio Finance S.r.l., a prime Italian RMBS backed by residential mortgage loans granted by ING Bank NV (A/Stable/F1), Italian branch (ING), as follows:

Class A1 (ISIN IT0004643521): affirmed at 'AA+sf'; Outlook Stable
Class A2 (ISIN IT0004643976): affirmed at 'AA+sf'; Outlook Stable

KEY RATING DRIVERS
Stable Asset Performance
As of end-December 2015, loans in late arrears (more than three unpaid monthly instalments) represented 9bps of the outstanding collateral balance, down 3bps over the last 12 months. This outperformed the Italian RMBS index, which reported arrears at 1.7% of the aggregate asset balance in December 2015. The low level of arrears contributes to Fitch's expectation of stable asset performance, as reflected in the Rating Outlook.

As per transaction documentation, ING buys back all the loans classified as defaulted, among others. According to repurchase information from ING, cumulative gross defaults represent only 0.6% (+10bps yoy) of the original pool balance, significantly below the agency's Italian RMBS cumulative gross defaults index (4.5%). Even if all buybacks were defaulted loans or loans likely to default, the cumulative default rate would still be below the Italian index.

Although the number and volume of defaulted loans and late arrears is limited in this transaction, Fitch identifies as the main risk self-employed borrowers (20.1% of the performing portfolio vs. 34.8% of the arrears portfolio), broker-originated loans (30.1% vs. 42.9%) and re-mortgage loans (7% vs. 16%). As per criteria, Fitch applies more conservative default assumptions to these types of borrowers and products.

Payment Interruption risk Mitigated
Fitch tested the possibility of a disruption to contractual payments, following the default of ING as transaction servicer. The payment interruption risk is mitigated by a fully funded liquidity facility of EUR78m, which can cover senior fees and interest payments on the rated notes, under stressed Euribor assumptions, for more than one interest payment date. In addition, upon a downgrade of ING below 'A'/'F1', a back-up servicer will be appointed immediately.

Sufficient Credit Enhancement
The credit enhancement (CE) available to the class A1 and A2 notes, accounting for 16.6% of the outstanding portfolio balance as of end-December 2015, is sufficient to support the current rating levels. The agency notes that the consistent build-up in CE (+1.3pp yoy) is the result of sound collateral performance and the notes' steady amortisation.

Pro-rata Amortisation
After the end of the revolving period (September 2013), the class A1 and A2 notes started to amortise on a pro-rata basis.

Fitch understands from the prospectus that class A1 and A2 notes interest payments rank equally in seniority while principal repayments on the class A1 notes are senior to the class A2 notes. The agency has raised this with ING and is awaiting more clarification with respect to the correct pay-down mechanism. Nevertheless, Fitch deemed that this aspect was not material to the current rating action.

Loan Modifications
ING buys back all loans granted with payment holidays or loan modifications. The bank has communicated that the cumulative value of mortgages repurchased for such reason is EUR66.5m (1.28% of the original portfolio balance). Any loss due to loan modifications is covered by a dedicated cash reserve, currently amounting to EUR7.2m.

RATING SENSITIVITIES
Changes to Italy's Long-term Issuer Default Rating (BBB+/Stable) and to the rating cap for Italian structured finance transactions, currently 'AA+sf', could trigger rating changes to the rated tranches.

Increases in interest rates above Fitch's stressed assumptions could undermine the performance of those floating-rate loans originated, after January 2009, in a low interest rate environment (42% of the performing pool).

The liquidity facility required amount should be calculated as EUR78m multiplied by the ratio between the i) number of outstanding loans not classified as default and ii) the number of loans not classified as default as of the initial amortisation date. The application of the formula would currently result in a liquidity facility of EUR72.2m. ING (liquidity facility provider) confirmed that they will adjust the amount from the next payment date. Fitch notes that the amortisation of the facility could result in a failure to mitigate the payment interruption risk, which could imply negative rating actions on the notes.

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. Data on the borrowers' nationality was not included in the loan-by-loan tape. The findings were reflected in this analysis by assuming the same distribution observed during the last performance review. 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.

Prior to the transaction's closing, Fitch conducted a review of a small targeted sample of ING's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.

Overall and together with the assumptions referred to above, 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 provided by ING as at 1 October 2015
-Transaction reporting provided by ING as at 2 December 2015
-Loan repurchases details provided by ING as at 22 January 2016.