European leasing companies have been turning more and more to the securitization market, according to a recent report by Moody's Investors Service. Italy is the most active participant in this sector, accounting for an overwhelming 80% of all transactions made.
According to Moody's, what makes it interesting is that the majority of Italian lease-backed offerings that have come to market thus far have been backed by a portfolio comprising of several sub-pools. The sub-pools are usually made up of a combination of auto vehicle, equipment and real estate assets, each of which carries different characteristics and risks to be analyzed. Additionally, they have also largely comprised financial lease contracts, rather than operating leases. This is why they are referred to as multi-pool financial lease-backed transactions. Moody's recent report explained the methodology employed by the rating agency for this type of deal.
"Each of the three sub-pools in a typical Italian lease-backed deal presents markedly different characteristics, which results in different kinds of risk to be analyzed," Moody's analysts wrote in the report. "In all of the transactions originated in Italy to date, the securitized portfolios have been fully cross-collateralized. Therefore, in addition to analyzing each of the sub-pools separately, Moody's will also look at the portfolios as a whole, taking into consideration elements such as debtor, geographical and industry concentration."
The rating agency also looks at the relevant contract information to decide whether any provisions could affect the performance of the portfolio, according to the report. Evaluating credit enhancement levels and expected loss of the notes in question also involves analyzing the transaction quantitatively. This analysis includes evaluating the lessor/originator's credit quality and effect on the notes' expected loss, determining the portfolio's default distribution. It makes a scenario analysis of relevant transaction cash flows.
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