Rating Assigned To Italian RMBS Transaction Valconca SPV S.r.l.

Stocks and Financial Services Press Releases Thursday June 28, 2018 12:20
MILAN--29 Jun--S&P Global Ratings

MILAN (S&P Global Ratings) June 28, 2018--S&P Global Ratings today assigned its 'AA (sf)' credit rating to Valconca SPV S.r.l.'s class A residential mortgage-backed floating-rate notes. At closing, Valconca also issued unrated class J notes (see list below). The transaction is a securitization of a pool of Italian residential mortgages that Banca Popolare Valconca S.C.P.A. (BP Valconca) sold to the issuer and that the originator granted to individuals in Italy. This is the first securitization of BP Valconca's Italian performing mortgages that we have rated.

Our 'AA (sf)' rating on the class A notes reflects our assessment of the pool's credit and cash flow characteristics, as well as our analysis of the transaction's exposure to counterparty and operational risks. Our analysis indicates that the credit enhancement available to the class A notes is adequate to mitigate the credit and cash flow risks to the 'AA (sf)' rating level.

Operational risk

Under our operational risk criteria, we consider prime residential mortgage-backed securities (RMBS) as having low severity and portability risks, and as such, these criteria do not cap the maximum achievable rating in the transaction (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published on Oct. 9, 2014).

The originator has good knowledge of the Italian mortgage market and is an experienced servicer, in our view. Our ratings on the class A notes reflect our assessment of BP Valconca's origination policies and our evaluation of its ability to fulfil its role as servicer under the transaction documents, among other factors.

Our cash flow model incorporates a stressed servicing fee that we deem to be sufficient to provide an economic incentive for a new servicer to step in. In addition, a back-up servicer facilitator has been appointed, which will support the issuer if a replacement servicer is needed.

Credit risk

The collateral comprises a static pool of residential loans backed by first-lien mortgages granted to individuals in Italy. We have analyzed credit risk by applying our European residential loans criteria (see "Methodology And Assumptions: Assessing Pools Of European Residential Loans," published on Aug. 4, 2017).

Our projected weighted-average foreclosure frequency (WAFF; the weighted-average probability of default of loans in the collateral pool) assumption is 23.49% when we stress the class A notes at a 'AA' rating level. Our projected weighted-average loss severity (WALS; the weighted-average loss likely to be experienced on defaulted loans in the collateral pool as a proportion of the loan amount) assumption is 17.39% at a 'AA' rating level. We have based our assumptions on our loan-level analysis and our latest view on Italy's macroeconomic conditions (see "Outlook Assumptions For The Italian Residential Mortgage Market," published on Aug. 4, 2017).

Structural features/cash flow analysis

Our ratings on this transaction reflect our assessment of its structural features set out in the transaction documents, in particular taking into account the credit enhancement, amortization, and reserve fund available in this transaction.

In our modeling, we ran several different scenarios at each rating level, combining different interest rate patterns with various prepayment rates. Additionally, we have decreased the margin received under the portfolio to account for the basis risk related to the lack of hedging, or the possibility of a reduction in yield. This is linked to the fact that higher-yielding loans may have a higher propensity to default or prepay. We also tested the effects of permitted variations allowed under the transaction documents that relate to the loans' margin/rate and to the maturity dates.

Our analysis indicates that the level of credit enhancement available to the class A notes is sufficient to withstand credit and cash flow stresses that we apply at a 'AA' rating level.
Counterparty risk

We consider that the documented replacement and remedy mechanisms adequately mitigate the transaction's exposure to counterparty risk. We have analyzed counterparty risk by applying our current counterparty criteria (see " Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). The documented minimum long-term rating required for the bank account provider is 'A-'. Since our current counterparty criteria consider the transaction's exposure to bank account risk to be limited, the maximum potential rating on the class A notes is 'AA (sf)'.

Sovereign risk exposure

Our structured finance ratings above the sovereign (RAS) criteria designate the country risk sensitivity for RMBS as moderate, and therefore the maximum differential above the rating on the sovereign for this transaction is four notches (see "Ratings Above The Sovereign- Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016). Moreover, we were able to show that all conditions in paragraph 42 of the criteria are met meaning that the transaction could achieve a rating up to six notches above the rating on the sovereign.

To determine the final ratings for the transaction we apply a RAS stress, i.e., hypothetical stresses which would be equivalent to 'AA' and 'AAA' stresses with benign starting conditions. The final rating we assign is the lower of (1) the rating assigned when applying the RAS benign 'AA' or 'AAA' stresses, and (2) the rating derived by applying our European residential loans criteria with our current base-case assumptions. The class A notes are the most senior notes and they can achieve a rating that is up to six notches above the sovereign.

Legal risk

The issuer is a special-purpose entity (SPE) established to issue securitization notes. This is the fourth issuance made out of this SPE. The transaction documents allow further securitizations, but they are subject to rating agency confirmation. We consider the issuer to be in line with our legal criteria for bankruptcy-remoteness (see "Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).


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