OREANDA-NEWS. Fitch Ratings has affirmed five prime Italian RMBS transactions originated and serviced by Banca Monte dei Paschi di Siena (BMPS; B-/Stable/B). Four of them were previously on Rating Watch Negative (RWN) due to an ineligible swap counterparty.

The rating actions are as follows:

Siena Mortgages 07-5 S.p.A. (SM07-5)
Class A (ISIN IT0004304223): affirmed at 'AA+sf'; off RWN; Outlook Stable
Class B (ISIN IT0004304231): affirmed at 'Asf'; off RWN; Outlook Stable
Class C (ISIN IT0004304249): affirmed at 'BBB-sf'; off RWN; Outlook Stable

Siena Mortgages 07-5 S.p.A. Series 2 (SM07-5 Series 2)
Class A (ISIN IT0004353808): affirmed at 'AA+sf'; off RWN; Outlook Stable
Class B (ISIN IT0004353816): affirmed at 'Asf'; off RWN; Outlook Stable
Class C (ISIN IT0004353824): affirmed at 'BBB-sf'; off RWN; Outlook Stable

Siena Mortgages 09-6 S.r.l. (SM09-6)
Class A (ISIN IT0004488794): affirmed at 'AA+sf'; off RWN; Outlook Stable
Class B (ISIN IT0004488810): affirmed at 'Asf'; off RWN; Outlook Stable
Class C (ISIN IT0004488828): affirmed at 'BBB-sf'; off RWN; Outlook Stable

Siena Mortgages 09-6 S.r.l. Series 2 (SM09-6 Series 2)
Class A (ISIN IT0004520646): affirmed at 'A+sf'; off RWN; Outlook Stable
Class B (ISIN IT0004520687): affirmed at 'A-sf'; off RWN; Outlook Stable

Siena Mortgages 10-7 S.r.l. (SM10-7)
Class A3 (ISIN IT0004658289): affirmed at 'AA+sf'; Outlook Stable

KEY RATING DRIVERS
Effective Structural Remedial Actions
BMPS has implemented structural amendments to mitigate the exposure to interest rate risk resulting from the ineligibility of the swap counterparty (BMPS) in all transactions except SM10-7. Specifically, in its role as sole noteholder the bank amended the notes terms and conditions by applying maximum interest rates to the outstanding notes.

In its analysis, the agency modelled capped floating rate loans (between 16% of the current pool in SM07-5 and 29% in SM07-5 Series 2) at their cap rate in a rising interest rate scenario. At the same time, modular loans (between 3.5% in SM09-6 and 58% in SM07-5) have been assumed to switch to a fixed rate at the next available contractual switch date. Also, Fitch reduced the margin of floating loans to account for the basis risk between reference Euribor on mortgages and on the notes.

Fitch notes that in a rising Euribor scenario the new structures generate larger excess spread because the cost of the capped notes is significantly lower than the interest revenues generated by the underlying mortgages. As a result, the agency tested specific scenarios where it applied a cap also to the asset portfolios in order to reduce the benefit associated to the cap protection.
The adjustment had little impact on the ratings as the majority of the underlying pools comprise loans modelled as fixed rates in such interest rate scenario.

The analysis has shown that the structural amendments are effective in mitigating the interest rate risk at the current ratings.

Mitigated Payment Interruption and Commingling Risk
BMPS transferred EUR50m from the commingling reserve account of SM09-6 Series 2 to its cash reserve, replenishing the reserve to its new floor level of EUR55.6m. Fitch considers that the current liquidity available in the structure, combined with the appointed back-up servicer (Securitisation Services S.r.l.), is sufficient to mitigate payment interruption risk for at least one payment date under rising Euribor at the current rating.

The agency also found that the reduction of the static commingling reserve to EUR50m (3.1% of the current pool) from EUR100m has no effect on the mitigation of commingling risk.

Payment interruption and commingling risk are mitigated in all other transactions as a result of the sufficient cash and commingling reserves and appointed back-up servicer (Securitisation Services S.r.l.).

Diverging Asset Performance and Assumptions
The asset performance remains stable for SM07-5, SM07-5 Series 2 and SM10-7, whereas the pipeline of late stage arrears (loans with three or more instalments overdue) is between 1% of the current pool in SM07-5 and 1.6% in SM07-5 Series 2. The volume of outstanding net defaults ranges between 1.9% of the current pool in SM10-7 and 4.6% in SM07-5.

Asset performance has been more volatile in the other transactions where late stage arrears are currently at 2.2% in SM09-6 and 2.9% in SM09-6 Series 2 from respectively 1.4% and 1.8% 12 months ago. At the same time the volume of outstanding net defaulted assets ranges from 6.4% in SM09-6 to 7.4% in SM09-6 Series 2.

In Fitch's view, the asset performance is likely to become more stable in the following months in response to the improving macroeconomic environment. Combined with the adequate credit enhancement and mitigated payment interruption risk, this is reflected by the Stable Outlook on the notes.

In its analysis, Fitch found that the underwriting and servicing standards of BMPS were in line with its Italian peers. As a result, the agency applied a lender adjustment broadly in line with the market.

Fitch also found that recovery proceeds to date have remained limited due to lengthy recovery timing, which is common in Italy. For new defaults, Fitch has tested the transactions with a back-loaded recovery vector with a recovery lag up to 12 years (10 years since the default year for the existing defaulted loans). The agency factored in low recoveries in the analysis by applying a maximum recovery equal to 100% of the defaulted balance also to loans with a low current loan-to-value ratio.

Both assumptions had little impact on the ratings due to the adequate credit support and capped coupons on the notes.

Account Bank Rating in Breach
In SM09-6, SM09-6 Series 2 and SM10-7, the transaction account bank, Deutsche Bank AG (DB; A-/Stable/F1) is in breach of the documentation. This follows the downgrade of DB below the minimum Issuer Default Rating (IDR) of 'A'/'F1' set in the transaction documents. Fitch notes that after the downgrade the account bank has not undertaken any of the committed remedial actions such as counterparty replacement or finding a sufficiently rated guarantor. Nevertheless, as per Fitch's counterparty criteria, DB's IDR is sufficient to support a maximum rating of 'AA+sf' on the notes.

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

Deterioration in asset performance beyond Fitch's assumptions could also trigger negative rating actions.

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 pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolios 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 pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pools information relied upon for its initial rating analysis was adequately reliable.

Applicable to SM10-7
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of the originator'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, 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 European Data Warehouse dated October 2015 (SM07-5, SM09-6, SM09-6 Series 2 and SM10-7) and November 2015 (SM07-5 Series 2).
- Transaction reporting provided by BMPS as at October 2015 (SM10-7), November 2015 (SM09-6), September 2015 (SM09-6 Series 2) and December 2015 (SM07-5 and SM07-5 Series 2).