RATINGS RATIONALE
"Today's rating action reflects the low levels of credit enhancement in the transactions given our negative forecast and severe downside scenarios for Italian leasing performance, as well as deteriorating performance in some of the affected transactions," said Sebastian Schranz, a Moody's Analyst for some of these affected transactions. "Our decision follows the placement of the ratings on review because of counterparty risk, our reassessment of the necessary credit enhancement levels in the three transactions and performance deterioration in the Italian leasing market," adds Mr. Schranz.
-- PERFORMANCE AND KEY REVISED ASSUMPTIONS: CUMULATIVE DEFAULT, VOLATILITY AND RECOVERY
F-E Gold S.r.l.
F-E Gold S.r.l. was originated by Fineco Leasing, a subsidiary of Unicredit (Baa2/P-2) in 2006 and generally performs worse than Moody's Italian lease delinquency index. Although performance has shown signs of stabilisation over the last year, delinquency rates have started to rise over the last few months at a much higher rate than the market. Total delinquencies now stand at 9.12% of current pool balance in October 2012 compared with 6.27% for the market.
Moody's consequently increased its default assumption to 16% on current balance, which corresponds to an average pool rating in the low B category with an estimation of the remaining weighted-average life of 2.5 years. When converting this number into a cumulative mean default rate of original balance, the revised expected cumulative default rate is 10.4%, up from 9.7%, which Moody's previously assumed for the life of the deal. Moody's now assumes a 45% recovery rate. At the same time the rating agency increased its assumed volatility level to 55%, from 45%, which reflects the increased uncertainties on future deal performance in the current environment.
LSV4
LSV4 was originated by Unicredit Leasing (Baa3/P-3) in 2006 and performs in line with Moody's Italian lease delinquency index. The transaction's performance has improved since delinquencies peaked in 2011. Although delinquency rates have again started to rise slightly over the last few months, the increase has been at a lower rate than the market. Total delinquencies stood at 4.29% of current pool balance in October 2012 compared with 6.27% for the market.
Moody's now assumes a cumulative default rate of 12% on current balance, which corresponds to an average pool rating of B2 with an estimation of the remaining weighted-average life of 2.5 years. When converting this number into a cumulative mean default rate of original balance, the revised expected cumulative default rate is 9.5%, compared with 9.2%. Moody's maintains its recovery rate assumption at 35%, as this rate has been proven by historic recovery data. The rating agency also increased the volatility level to 56% from 50%, which reflects increased uncertainties in the future performance in Italy.
Vela Lease S.r.l.
Vela Lease S.r.l. was originated by BNP Paribas Lease group, a subsidiary of BNP Paribas (A2/P-1) in 2005. Vela Lease's performance is slightly worse than Moody's Italian lease delinquency index, with a sharp increase in delinquencies over the last few months. Total delinquencies have increased from 2.74% in March 2012 to 8.34% on the last reporting date in September 2012.
Moody's has therefore revised its mean default assumption on current balance to 11%, which corresponds to an average pool rating in the low B category with an estimation of the remaining weighted-average life of 1.8 years. Taking into account the cumulative defaults occurred until today (5.67%), the new revised assumption of 11% on current balance translates into a cumulative default assumption on original balance of 7%, which is consistent with the revised assumption in 2011. Moody's has also increased the volatility level to 79% from 47%, considering the increased uncertainties for further deal performance deterioration in the current economic cycle.
-- COUNTERPARTY RISK
As part of the review, Moody's has taken into account the recent downgrades of the originators at the end of Q2 2012 and the beginning of Q3 2012.
Italian lease ABS are linked to the credit profile of their originators to a certain extent, as they are exposed to legal uncertainties associated with recoveries on defaulted lease contracts following originator insolvency. If an originator becomes insolvent, asset-sale proceeds could form part of the insolvency estate. Moody's assesses the impact of the legal risks by assuming a stressed recovery rate. Moody's takes this linkage into account by reducing the recovery assumption on defaulted lease contracts to a 15% range in case of an originator default. The likelihood of an originator default scenario occurring increases following the lowering of the rating on the originator or its parent.
During its review, Moody's also considered potential risk arising from counterparties to the transaction in the role of issuer account bank, servicer and swap provider. None of the reviewed transactions is currently exposed to further risk arising from the counterparties acting in these roles.
SENSITIVITY ANALYSIS
Moody's analysed various sensitivities of default rate, recovery rates and volatility levels to test the robustness of its revised ratings. In particular, if the rating agency were to revise volatility levels by a further 3.5%, the model outcome for all tranches in F-E Gold and LSV4 would show no change in the model indicated rating, while there would be a one-notch deterioration for the class B notes in Vela Lease.
On 21 August 2012, Moody's released a Request for Comment seeking market feedback on proposed adjustments to its modelling assumptions. These adjustments are designed to account for the impact of rapid and significant country credit deterioration on structured finance transactions. If the adjusted approach is implemented as proposed, the rating of the notes affected by today's rating action should not be negatively affected. See "Approach to Assessing the Impact of a Rapid Country Credit Deterioration on Structured Finance Transactions", (http://www.moodys.com/research/Approach-to-Assessing-the-Impact-of-a-Rapid-Country-Credit--PBS_SF294880)for further details regarding the implications of the proposed methodology changes on Moody's ratings.
LIST OF AFFECTED RATINGS Issuer: F-E Gold S.r.l. ....EUR749M A2 Notes, Downgraded to Baa1 (sf); previously on Aug 2, 2012 Downgraded to A2 (sf)
....EUR56M B Notes, Downgraded to B1 (sf); previously on Aug 2, 2012 Ba1 (sf) Placed Under Review for Possible Downgrade
....EUR10.2M C Notes, Downgraded to Caa2 (sf); previously on Aug 2, 2012 B2 (sf) Placed Under Review for Possible Downgrade
Issuer: Locat SV S.r.l.
....EUR152M B Notes, Confirmed at Baa3 (sf); previously on Aug 2, 2012 Baa3 (sf) Placed Under Review for Possible Downgrade
....EUR64M C Notes, Downgraded to Caa2 (sf); previously on Aug 2, 2012 Caa1 (sf) Placed Under Review for Possible Downgrade
Issuer: Vela Lease S.r.l. (Series 2)
....EUR60.35M Series 2 B Notes, Downgraded to Baa2 (sf); previously on Aug 2, 2012 Downgraded to A2 (sf) and Placed Under Review for Possible Downgrade
....EUR25.15M Series 2 C Notes, Downgraded to B1 (sf); previously on Aug 2, 2012 Baa3 (sf) Placed Under Review for Possible Downgrade
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings were "Moody's Approach to Rating Multi-Pool Financial Lease-Backed Transactions in Italy", published in June 2006 and "Moody's Approach to Rating CDOs of SMEs in Europe", published in February 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Moody's used its excel-based cash flow model, Moody's ABSROM[TM], as part of its quantitative analysis of the transaction. Moody's ABSROM[TM] model enables users to model various features of a standard European ABS transaction including: (1) the specifics of the default distribution of the assets, their portfolio amortisation profile, yield or recoveries; and (2) the specific priority of payments, triggers, swaps and reserve funds on the liability side of the ABS structure. Moody's ABSROM[TM] User Guide is available on Moody's website and covers the model's functionality as well as providing a comprehensive index of the user inputs and outputs.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's did not receive or take into account a third party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of these transactions in the past six months.
Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.
Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Iris ThateAsst Vice President - Analyst Structured Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Carole Gintz VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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