Fitch Upgrades Argo Mortgage 2 Junior Notes to 'BBB sf'
Argo 2 is a prime Italian RMBS originated and serviced by Banca Carige (B/Stable/B).
KEY RATING DRIVERS
Robust Credit Support
Credit support available to the rated notes has increased over the past 12 months, as a result of portfolio redemption, which has averaged 18.5% per annum, and a large cash reserve (17.1% of the current note balance and 99.9% of its target balance). To date credit enhancement (CE) has been sufficient to withstand the current rating stresses for the senior and mezzanine notes. In the case of the junior notes, the recent build-up in CE is sufficient to support higher rating stresses, as reflected in the upgrade of the notes to 'BBB+sf'.
Cumulative Default Trigger
As per transaction documentation, class C interest will be deferred once net cumulative defaults reach 8% of the initial pool balance. Fitch believes that the servicer's calculation of the cumulative default trigger is more conservative compared with our interpretation of the thresholds defined in the transaction documentation.
The servicer estimates the current balance of net cumulative defaults (defined as gross cumulative defaults net of recoveries) at 7.5% of the initial pool, higher than Fitch's estimate of 5.75%. This is because, according to the servicer, only principal recoveries are deducted from gross defaults in their calculation. Based on these figures, the agency believes that payment of the class C interest is likely to be deferred in the next 24 months.
Account Bank Creditworthiness
Fitch evaluated the risk associated with the unrated account bank (Deutsche Bank S.p.A.), where the cash reserve is currently held and considered in its analysis the relationship with its ultimate parent, Deutsche Bank AG (A/Negative/F1). As the junior tranche credit enhancement is provided solely by the cash reserve held with Deutsche Bank S.p.A. the rating of the tranche will be limited by the strength of the account bank.
Asset Performance within Expectations
Over the last 12 months loans in arrears for more than 30 days have remained broadly stable at 3.8% of the current portfolio balance, while gross cumulative defaults (defined as loans with more than six instalments overdue) increased 15bp to 8% of the initial pool.
The high portfolio seasoning (135 months) and low average original and current loan-to-value ratios, respectively 66.5% and 35.4%, in Fitch's view, imply that asset performance will remain stable.
RATING SENSITIVITIES
Changes to Italy's Long-term Issuer Default Rating (BBB+/Stable) and the rating cap for Italian structured finance transactions, currently 'AA+sf', could trigger rating changes on the notes.
Deterioration in asset performance beyond Fitch's standard assumptions would also trigger negative rating actions.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.
Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by European Data Warehouse at end-March 2015.
-Transaction reporting provided by Banca Carige at end-April 2015.
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