Class A1 (ISIN IT0005352676), EUR 408.4m: definitive rating AAA_SF

Class A2 (ISIN IT0005352684), EUR 200.0m: definitive rating AAA_SF

Class B (ISIN IT0005352692), EUR 130.0m: definitive rating A+_SF

Class C (ISIN IT0005352700), EUR 75.0m: definitive rating BBB-_SF

Class J (ISIN IT0005352718), EUR 145.4m: not rated

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The transaction is a static true-sale cash securitisation of Italian lease receivables originated by Alba Leasing S.p.A. (Alba). The portfolio comprises leases mainly granted to Italian SMEs (79.2%), and smaller amounts to larger corporate borrowers (11.8%) and individual entrepreneurs (9.0%) used to finance transportation assets (21.9%), equipment (57.4%), real estate properties (19.2%) and air, naval & rail assets (1.5%). This transaction is not exposed to residual value risk because the assets’ residual value is not securitised.

Rating rationale

The ratings reflect the notes’ protection against portfolio losses, provided by the quality of the underlying collateral in the context of the Italian macroeconomic environment and by the transactions legal and financial structure.

Class A1 and A2 are protected by their senior position and benefit respectively from 57.4% and 36.5% of credit enhancement from subordination and a debt service reserve. Furthermore, the combined interest and principal priorities of payments ensures liquidity support beyond the debt service reserve for the payment of interest to all rated classes of notes.

Class B benefits from 23.0% of credit enhancement and the debt service reserve.

Class C mainly benefits from 15.2% of credit enhancement and the debt service reserve. The rating also reflects the subordination of Class C interest payments to Class B principal if cumulative portfolio defaults exceed 10% of the portfolio’s initial notional. All rated notes benefit from a mechanism linked to cumulative portfolio defaults, which traps excess spread to ensure sufficient collateralisation.

The ratings also address exposures to the key transaction counterparties: Alba as originator, servicer and cash manager; Citibank N.A., Milan branch as account bank and paying agent; and Securitisation Services S.p.A. as back-up servicer, calculation agent and noteholders’ representative. Scope considered counterparty replacement triggers implemented in the transaction and relied on publicly available ratings of Citibank N.A.

Key rating drivers

Static portfolio (positive). The portfolio will start to amortise immediately after closing, reducing the risk of performance volatility compared to revolving transactions.

Back-up servicer (positive). The transaction benefits from back-up servicer Securitisation Services S.p.A., which can take over within 30 business days if needed. Securitisation Services S.p.A. cooperates with two other back-up servicers, Agenzia Italia S.p.A. and Trebi Generalconsult S.r.l.

No residual value risk (positive). Investors are not exposed to the risk that obligors do not exercise the residual option, or to the possible loss of residual value upon the originator’s liquidation. The issuer benefits from interest paid on the residual value during the life of each lease contract, which gradually increases the excess spread available to cover defaults and losses.

Short lifetime exposure (positive). The portfolio of lease receivables has a relatively short remaining weighted average life of 3.1 years.

No set-off risk (positive). No borrowers have any deposits or derivative contracts with Alba.

Liquidity reserve (negative). The debt service reserve provides limited liquidity to support Class A coupon payments. Under the stressed assumptions of 1% servicer costs and a three-month Euribor at 2.5%, the reserve will only cover three months of interest for Class A notes. However, Scope does not anticipate a rapid rise in interest rates over the expected life of Class A. The combined waterfall gives additional support to interest payments on the notes and senior costs because principal collections can be used to pay such items in the waterfall.

Alba is a relatively new lessor (negative). Relevant historical data only exists from 2010 when Alba started operations. Scope’s default rate and coefficient of variation assumptions reflect both the performance of the leases originated by Alba and to some extent the legacy portfolio of lease receivables of former Italease S.p.A.

Unsecured recoveries (negative). Scope has relied on unsecured recoveries from obligors and guarantors because there is no guarantee that Alba’s bankruptcy estate will include asset sale proceeds from defaulted lessees.

Upside rating-change drivers

Better-than-expected performance of the assets, as well as faster-than-expected portfolio amortisation if credit enhancement builds up before credit losses crystallise, may positively impact the ratings.

Downside rating-change drivers

Worse-than-expected performance of the assets as well as a deterioration of the Italian macroeconomic environment could negatively impact the ratings.

Quantitative analysis and key assumptions

Scope has performed a cash flow analysis, considering the portfolio’s characteristics and the transaction’s main structural features. Scope has applied its large homogenous portfolio approximation approach when analysing the granular collateral pool and projecting cash flows over its amortisation period. The cash flow analysis considers the probability distribution of each segment’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche.

Scope analysed the transaction assuming three distinct asset segments: i) Transport & Air, Naval and Rail; ii) Equipment; and iii) Real Estate. The original pool included four portfolio segments: Transport, Equipment, Real Estate and Air, Naval & Rail. Scope adjusted the composition of the portfolio by grouping together the Transport segment with the Air, Naval & Rail segment.

For the three segments i) Transport & Air, Naval and Rail, ii) Equipment and iii) Real Estate, Scope assumed, respectively, mean default rates of 4.0%, 5.0% and 11.5% and coefficients of variation of 70.0%, 60.0% and 85.0%. The respective segments’ base case recovery rates are 30.0%, 20.0%, and 8.0%. On an aggregate portfolio basis, the mean default rate is 6.0%, the coefficient of variation is 70.4% and the base case recovery rate is 17.2%.

Scope calibrated its assumptions on default rates and coefficients of variation using 2008-2018 vintage data for each portfolio segment, which reflects both the performance of the lease book originated by Alba since 2010 and the legacy lease book originated by Italease S.p.A. before 2003 and assigned to Alba in 2010.

Scope considered the 2008-2018 vintage data period to be sufficiently long to cover more than one full economic cycle, as it includes the severe recessions which Italy suffered during 2008-2009 and 2012-2014. It can further be noted that the performance of Alba’s lease receivables improved during the recession in 2012-2014 suggesting an improvement in origination policies that cannot be linked to the economic cycle. Scope did therefore not consider the use of different point-in-time or long-term reference default distributions.

Scope assumed an average recovery of 17.2% for the portfolio. This assumption was adjusted with rating-conditional haircuts resulting in average recovery assumptions of 10.3%, 13.0%, and 14.4% for the Class A, B and C notes analysis, respectively. Recovery assumptions only take into account unsecured recoveries from the lessees and guarantors.

Scope adjusted the vintage data in order to reflect the adjusted composition of the pool by grouping together the vintage data available for the Transport segment with the data available for the Air, Naval & Rail segment.

Scope considered the assets’ amortisation characteristics and assumed a default timing reflecting a constant default intensity. Scope incorporated 50 bps margin and interest rate stresses in its cash flow analysis in order to address: i) lower excess spread via prepayments, amortisation and defaults; ii) flexibility available to the servicer to modify the lease; and iii) interest rate mismatches between assets and liabilities.  

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Rating sensitivity
Scope tested the resilience of the ratings against deviations of the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

Class A1: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches.
Class A2: sensitivity to probability of default, two notches; sensitivity to recovery rates, zero notches.
Class B: sensitivity to probability of default, four notches; sensitivity to recovery rates, one notch.
Class C: sensitivity to probability of default, three notches; sensitivity to recovery rates, one notch.

Methodology
The methodologies used for these ratings, the ‘General Structured Finance Rating Methodology’, the ‘Auto ABS Rating Methodology’, and the ‘Methodology for Counterparty Risk in Structured Finance’ are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
Scope analysts are available to discuss the details of the rating analysis and the risks to which this transaction is exposed.

Solicitation, key sources and quality of information
The issuer of the rated instruments and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the issuer of the rated instruments, the issuer’s agents, third parties and Scope internal sources. Scope considers the quality of information available to Scope on the issuer of the rated instruments and instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has relied on a third-party asset due diligence/asset audit. The audit review has no negative impact on the credit rating.
Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and the principal grounds on which it is based. Following that review, the rating was not amended before being issued.

Regulatory and legal disclosures
These credit ratings are issued by Scope Ratings GmbH.
The rating analysis was prepared by Leonardo Scavo, Analyst.
Responsible for approving the rating: Guillaume Jolivet, Managing Director
The ratings were first release by Scope on 29.11.2018.
The ratings concern financial instruments, which have been rated by Scope for the first time.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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