Though downgrades of Trevi Finance No. 1 and International Credit Recovery 5 (ICR 5) have hit the market in succession, market analysts said that the transactions' recent fate should not be viewed as a bellwether for performance of Italian non-performing loans going forward.

Both deals are part of a series of transactions: three deals total for Trevi and two for ICR5. Within its series, both the Trevi 1 deal and ICR 5 are so far the only ones to be affected by delayed collections on payment.

"As more surveillance data becomes available on NPL deals it appears that performance is pool-specific rather than servicer-specific," said analysts at Dresdner Kleinwort Wasserstein. "Trevi 1 and ICR 5 have the same servicers as all other deals in their respective series and it seems to be factors specific to their pools that are responsible for their underperformance."

Trevi Finance

According to Dresdner, at the beginning of March this year several NPLs reported data for the first time that indicated performance was at par or exceeded expectations. At that point, the collections for Trevi 3 had been performing very well.

Both Trevi 1 and Trevi 3 are composed of similar mortgage pools but reports indicated that the Trevi 1 deal had been underperforming significantly due to the mutui fondiari (first-lien mortgages with an LTV below 80%) claims. However, said Dresdner, while collections from the mutui fondiari were similar in the older vintage deal, in Trevi 3 the ordinary claims were shown to be performing very well and hence displayed a better recovery level.

As a result, Moody's Investors Service responded to the underperformace of the Trevi 1 transaction earlier this month and downgraded the EURO408.2 million Class A tranche to A1' from Aa3'; and the EURO155 million Class B tranche to Baa2' from A2'. According to the rating agency, the mutuai fondari claims faltered because: the foreclosure proceedings were unexpectedly longer; the period from July to September 2001 saw the closure of certain courts in Rome; and there were higher than expected differences between forced sale prices at auctions and market prices for the underlying real-estate properties.

Going forward, however, issuer Banca di Roma has pledged to improve its recovery control as well as its monitoring procedures, which should help alleviate the current performance rates, said one source familiar with the deal.

ICR 5

Late last week the long-awaited decision by both Fitch Ratings and Moody's revealed that although the underperforming ICR 5 had recently received a EURO15 million cash injection by its Equity Sponsor Morgan Stanley Real Estate Fund, it would not be enough to sustain current ratings.

One analyst said: "The problems behind ICR 5 go beyond the EURO15 million, especially within the junior class of the transaction; it's certainly not the one thing that is needed to avoid a downgrade. Instead it's more of a token gesture by the equity sponsor because from our expectations there isn't just EURO15 million in underperformance."

The notes were downgraded, respectively, by both Fitch and Moody's: The Class B notes to single-A-plus from double-A; the Class C notes to triple-B from single-A; and the Class D notes to double-B from triple-B. Both of the rating agencies affirmed the triple ratings on the Class A1 and A2 tranches.

Sources familiar with the situation said analysts did take the additional equity into consideration but it was not enough to assure that the interest would be repaid on a timely basis and it did not assure that principal would be paid by legal maturity in 2010. According to Dresdner, the fact that around 40% of the properties in the pool have turned out to be of lower quality than assumed means the rating agencies fear that future recoveries may be less than expected.

The negative collecting trends are attributed to a delay in file transfers from the originator, San Paolo IMI, to the servicer, SIB; a delay in setting up REOCO, which is a company that was established to bid for properties at auction, from June 2000 until March 2001; and reorganization and staffing of SIB. Moody's also noted the revised business plans and said that as a result it had produced a lower- than-expected recovery value than previously expected.

Nonetheless, a delay in recoveries does not necessarily equate to expected default, as the deal has no amortization schedule. Analysts at Morgan Stanley reported: "The key thing for investors to remember is that the shortfall versus business plan does not represent a loss but a delay in collecting the cashflow. That is to say, the shortfall has not been lost - it just has not been collected yet."

If interest payments are made on a timely basis and all principal is returned before 2010, which is the legal final maturity, the bonds would not default - an aspect of the transaction that at least swayed Standard & Poor's to affirm ratings on all tranches.

Analysts at S&P affirmed the ratings after having reviewed the revised business plan and the EURO15 million commitments from the equity sponsor; the rating agency then re-ran its analysis. According to S&P, this analysis, which was based on performance at stressed levels, indicated the future potential for cash shortfall; however, the recent equity injection meant that it was likely that the transaction would meet interest and principal payments due on Sept. 15.

In the future, analysts said that it is important to note that the Italian NPL market requires that every transaction be viewed individually, particularly because these pools have regional concentrations, which means that deals would be exposed to different court procedures in addressing claims. "In some courts you can expect it to be quick but in others it can take eight to nine years to get a claim through," said one analyst, adding that last year the market was dominated by three upgrades. "I wouldn't say you will have more of one than the other, but just as there exists this potential for downgrades, we can expect the same otherwise."

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