RATINGS RATIONALE
"Today's rating action reflects the weakening credit quality of the three transactions' swap counterparty, Dexia Crediop, and the increased risk of payment disruptions should Dexia Crediop fail to make payments or breach other obligations under the swap agreements," says Alix Faure, a Moody's Assistant Vice President and analyst of the transaction ."While the transaction documents provide for measures to reduce linkage to Dexia Crediop acting as swap counterparty, these have not been fully implemented to date as no swap counterparty replacement or guarantor has been appointed," adds Ms. Faure.
Dexia Crediop has been acting as:
(1) one of the interest-rate and cross-currency swap counterparties on notes 1, 2, 3 and 4 in Cartesio 2003 (hedging 12% of the cross-currency risk exposure and 9% of the interest-rate risk exposure over a weighted average life of approximately 16 years);
(2) one of the interest-rate risk swap counterparties in the note issued by Posillipo (hedging one third of the interest-rate risk exposure over a weighted average life of approximately 14 years); and
(3) one of the interest-rate risk swap counterparties in the note issued by D'Annunzio (hedging 22% of the interest-rate risk exposure over a weighted average life of approximately 5 years).
Although Dexia Crediop is not a swap counterparty for note 5 in Cartesio 2003, all notes rank pari passu in the priority of payments. Therefore, they would share losses resulting from any swap counterparty default.
Exposure to cross-currency or interest-rate swaps over a long time horizon creates high rating linkage between the transaction rating and the swap counterparty, as both cross-currency and interest-rate risk can significantly increase the loss severity incurred by noteholders in a situation of swap counterparty default. The absence of liquidity mechanisms and lack of credit enhancement in Cartesio 2003, Posillipo and D'Annunzio also increased the linkage between the rating of the notes and the rating of Dexia Crediop.
Currently, Dexia Crediop follows its obligation to post collateral in the account banks of each transaction (Deutsche Bank AG, London Branch (A2/(P)P-1) for Cartesio 2003; Citibank N.A. (A3/P-2) for Posillipo and BNP Paribas (A2/P-1) for D'Annunzio). However, Dexia Crediop has not been replaced or guaranteed as contemplated in the swap documentation of the three transactions.
In its analysis, Moody's has therefore added the losses incurred by the transactions in the event that Dexia Crediop defaults under the swap agreements to the assets' expected loss (assumed to equal the expected loss of the Baa3-rated Italian regions that the underlying loans are exposed to). Moody's differentiated the loss depending on the swap type (interest-rate or cross-currency) and the time horizon of exposure.
To a lesser extent, the downgrade of the notes also reflects the increased risk of additional losses that could arise either from other swap counterparties default or from swap termination costs in a situation where the issuers themselves defaulted. If the regions failed to pay the amount due under the health care receivables in a timely manner, the issuers could then default - following a domino effect - on their obligations under the swap agreements. As the structure in the transactions do not benefit from credit enhancement and given the current market conditions, the termination costs payable by the special purpose vehicles (SPVs) to the swap counterparties could represent significant losses to the transactions. This risk has increased following the rating downgrade of the Italian regions. See "Moody's downgrades Italian sub-sovereign ratings following sovereign downgrade", 16 July 2012 (http://www.moodys.com/research/Moodys-downgrades-Italian-sub-sovereign-ratings-following-sovereign-downgrade--PR_250041).
Moody's has conducted limited cash flow analysis, as the ratings of the notes issued by the three transactions are predominantly linked to the ratings of the different Italian regions in which assets are located (i.e., the Region of Lazio (Baa3) for Cartesio 2003, the Region of Campania (Baa3) for Posillipo and the Region of Abruzzo (Baa3) for D'Annunzio). Moody's stress scenarios include the failure of any counterparty to perform on its obligation, resulting in losses to the transactions irrespective of the performance of their collateral.
PRINCIPAL METHODOLOGY
Moody's methodology for rating these transactions considers a full linkage to the rating of the regions in which they are located (i.e., Lazio, Campania and Abruzzo), as (1) the assets are unsecured, direct obligations of the Italian regions; and (2) the rated securities do not benefit from credit enhancement or liquidity support.
Other factors used in this rating are described in "Framework for De-Linking Hedge Counterparty Risks from Global Structured Finance Cashflow Transactions," published in October 2010.
LIST OF AFFECTED RATINGS
Issuer: Cartesio S.r.l. - Series 2003-1
....EUR200M Tranche 1 Bond, Downgraded to Ba2 (sf); previously on Jul 20, 2012 Downgraded to Baa3 (sf) and Remained On Review for Possible Downgrade
....EUR200M Tranche 2 Bond, Downgraded to Ba2 (sf); previously on Jul 20, 2012 Downgraded to Baa3 (sf) and Remained On Review for Possible Downgrade
....US$450M Tranche 3 Bond, Downgraded to Ba2 (sf); previously on Jul 20, 2012 Downgraded to Baa3 (sf) and Remained On Review for Possible Downgrade
....GBP200M Tranche 4 Bond, Downgraded to Ba2 (sf); previously on Jul 20, 2012 Downgraded to Baa3 (sf) and Remained On Review for Possible Downgrade
....EUR141M Tranche 5 Bond, Downgraded to Ba2 (sf); previously on Jul 20, 2012 Downgraded to Baa3 (sf) and Remained On Review for Possible Downgrade
Issuer: D'Annunzio S.r.l.
....EUR327M A Notes, Downgraded to Ba1 (sf); previously on Jul 20, 2012 Downgraded to Baa3 (sf)
Issuer: POSILLIPO FINANCE S.R.L.
....EUR453M Series 2007-1 Asset-Backed Floating Rate Notes due 2035 Certificate, Downgraded to Ba2 (sf); previously on Jul 20, 2012 Downgraded to Baa3 (sf)
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's did not receive or take into account a third party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of these transactions in the past six months.
Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.
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Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
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Yuezhen Wang Associate Analyst Structured Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Carole Gintz VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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