DBRS Downgrades Rating on ResLoC IT S.r.l.’s Class A Notes

DBRS Ratings Limited (DBRS) has today downgraded the Class A Notes (the Notes) issued by ResLoC IT S.r.l. to A (low) (sf) from A (high) (sf).

The downgrade of the rating on the Notes is based on the following analytical considerations, as described more fully below:

-- Decrease in credit enhancement to the Notes when measured relative to the Adjusted Performing Portfolio Principal Balance (APPPB).
-- Increasing trend in delinquencies on the underlying portfolio.
-- Decrease in expected cash flows to cover expected losses as a result of modifications.
-- Incorporation of a sovereign-related stress component in the rating analysis to address the impact of macroeconomic variables on collateral performance.
-- Inability of the Notes to withstand expected losses at the current rating category due to stressed cash flows.

The Notes are backed by a portfolio of below-prime-quality Italian residential loans originated and serviced by Credito Fondiario (formerly Fonspa Bank). At the initial rating date in June 2011, credit enhancement to the Notes was 22.43% when measured relative to the APPPB. Prior to the previous downgrade of the Notes in June 2014, credit enhancement had decreased to 19.97% (as of the March 2014 payment date) as a result of insufficient cash flows to cover defaults. Credit enhancement has further declined to 16.38% (as of the March 2015 payment date) as the performance of the portfolio has continued to deteriorate.

Total delinquencies greater than 30 days in the portfolio (as a percentage of the APPPB) are trending at a high 16.11%, in line with 16.10% as at March 2014 versus 10.11% in December 2012. Delinquencies greater than 90 days are also trending upward and at a high of 8.77%, compared to 7.33% as at March 2014 and 4.12% in December 2012. Gross cumulative defaults are currently 13.08% of the original performing portfolio balance, up from 11.43% as at March 2014.

The servicer has been actively modifying loans in the portfolio through either a suspension of arrears, change of loan terms or interest rate reductions. Although the modifications may have reduced near-term defaults, the modifications affect the current cash flows as borrowers may return to near-term delinquent status and further delaying recoveries. Additionally, interest rate reductions reduce the interest income generated on the portfolio.

DBRS updated the portfolio default rate (PD) and loss given default (LGD) of the portfolio based on an updated loan file from the European DataWarehouse. DBRS applied a market value decline to property values of defaulted loans of 38.1% in the base case scenario and 51.3% in the A (low) scenario. Moreover, a recovery fee paid to the servicer was factored in. DBRS further analysed the transaction cash flows with the standard Italian cash flow stresses from the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.” To stress for the high level of delinquencies in the portfolio and high level of modifications, DBRS further stressed the cash flow analysis by assuming a constant delinquency rate of 20%. The weighted-average coupon on the portfolio was also reduced by 25 basis points to account for future interest rate reductions.

The swap counterparty for the transaction is Morgan Stanley & Co. International plc. The Account Bank is Citibank, N.A. London Branch. The DBRS private ratings of each entity is above the Minimum Institution Rating given the rating of the Notes as detailed in the “Derivative Criteria for European Structured Finance Transactions” and “Legal Criteria for European Structured Finance Transactions.”

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology.”

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. Review of the transaction legal documents since the most recent rating action was limited to an amendment agreement dated March 2015 with the effect of modifying the downgrade language for the Interim Collection Account Bank. Transaction documents have otherwise remained unchanged.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Investor Reports from Citibank and data from the European DataWarehouse.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

Data checks were performed and DBRS did not apply additional cash flow stresses in its scenarios.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 9 June 2014, when the ratings on the Class A Notes were downgraded to A (high) (sf) from AA (low) (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- DBRS expected a lifetime base case probability of default (PD) and loss given default (LGD) for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of mortgages for the Issuer are 19.19% and 27.60%, respectively. At the A (Low) (sf) rating level, the corresponding PD is 39.77% and the LGD is 41.45%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to be downgraded to BB (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Senior Loan would be expected to be downgraded to BB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to be downgraded to B (high) (sf).

Senior Loan Risk Sensitivity:

-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Administration in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Keith Gorman, Senior Vice-President, EU RMBS, Global Structured Finance
Initial Rating Date: 7 June 2011
Initial Rating Committee Chair: Claire Mezzanotte, Managing Director Global Structured Finance

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane
London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

Legal Criteria for European Structured Finance Transactions
Derivative Criteria for European Structured Finance Transactions
Master European Structured Finance Surveillance Methodology
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375