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May 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Carismi Finance, a prime Italian RMBS backed by mortgage loans originated by Cassa di Risparmio di San Miniato, as follows:
Carismi Finance S.r.l.
Class A2 (ISIN IT0004768294): affirmed at ‘AA+sf’; Outlook Stable
Weakening Asset Performance
Asset performance has weakened over the last 12 months as late-stage arrears, defined as mortgages with at least three installments overdue, have increased to 3.7% from 1.6% of the current pool. Also, the pipeline of cumulative defaults has risen by 1.6 percentage points to 2.2% of the initial pool balance.
This was mainly driven by the underperformance of foreign and self-employed borrowers, currently representing 10.9% and 30.7% of the pool respectively, although they account for 16.9% and 37.8% of total delinquencies, respectively. For this reason, Fitch believes that performance will remain volatile.
Nonetheless, credit enhancement available to the rated notes provides sufficient comfort to support the current ratings, resulting in today’s affirmation of the notes.
Ineligible Hedging Guarantor
In November 2013 Banca Popolare di Milano (BPM), the hedging guarantor, was downgraded to ‘BB+'/Negative/‘B’, thus becoming an ineligible counterparty to support the current ratings of the notes, according to Fitch’s counterparty criteria.
Although the hedging is still in place and BPM is collateralising the exposure, this is no longer an eligible remedial action. Hence, Fitch has analysed the transaction without giving credit to the hedging arrangement. Under rising interest rates, this may expose the notes to a mismatch between the interest cash flows received on the pool, composed of mortgages paying fixed rates (2.8%), floating rates (29.8%) and modular mortgages (loans with the option to switch to fixed or floating rate every five years on predetermined dates; 67.4%), and the interest payable on the floating-rate notes.
In its analysis, Fitch factored in potential losses due to interest and reset risk under a stressed Euribor scenario, commensurate with the class A2 current rating, in which all modular loans are assumed to switch to fixed rate at the first available date, and found that the available credit enhancement sufficiently absorbs such losses. This has led to the affirmation of the notes.
The rating of the notes is at the ‘AA+sf’ cap for Italian structured finance transactions, which is six notches above the sovereign’s Long term Issuer Default Rating of ‘BBB+'. A change to Italy’s sovereign rating could result to a change in the notes’ rating.
An increase in the proportion of mortgage loans with adverse characteristics - especially loans granted to self-employed and foreign borrowers - due to different amortisation profiles, defaults and buybacks - could result in a weaker asset performance. Should this lead to a deterioration of the portfolio’s credit quality beyond Fitch’s expectations, negative rating actions may be taken.
An abrupt increase in reference interest rates would jeopardise the affordability of borrowers with fixed instalment/variable maturity mortgages and loans originated after 2009, in a low interest rate environment. Furthermore, due to rising interest rates, the majority of modular loans may switch to fixed-rate, heightening the interest rate mismatch between the portfolio yield and the floating-rate notes.