Fitch Ratings took action on SCIP 2, downgrading the 475 million ($618.6 million) Class B2 notes one notch to AA-' from double-A, following its review of the latest quarterly performance report and a credit analysis of the residual portfolio. The rating agency put the transaction's Class B2 and Class A5 notes on Rating Watch Negative last Nov. 7, but has now affirmed the 2.2 billion Class A5s at triple-A (ASR, 11/20/06).
The downgrade had been widely expected by industry sources following last week's investor report. However, the decision to take the A5 notes off rating watch comes as a surprise, said Societe Generale analysts, who expected the notes would remain on watch for downgrade.
Although collections showed an improvement in 4Q06, the average residential property sale price was slightly below the level achieved in the previous quarter - a value closely monitored by Fitch. Cumulative collections as of September 2006 were 1,855 million versus 2,089 million expected in the Offering Circular.
A key driver of underperformance has been the discounts given on certain tenanted residential assets resulting in an offer price of 85,000 versus 119,000. The sale prices of the residential units have been consistently lower than expected and the value of the portfolio outstanding continues to fall as a result, exposing the current notes to the risk of a shortfall.
But Fitch affirmed the Class A5 notes at AAA' and both classes were removed from Rating Watch Negative. Fitch said it is reassured by the continued existence of prestigious properties, which are not sold at a discount and have a higher-than-average value. There is also evidence that the remaining properties are likely to achieve higher average sales prices.
Deleveraging has also improved the credit enhancement, especially for the senior notes. Citigroup analysts estimated that the remaining pool value of 3.6 billion would be enough to cover the remaining 2.7 billion of outstanding notes, making a default unlikely.
Standard & Poor's reported that only 500 of the remaining 20,611 tenanted residential properties are eligible for the extra discount under Law Decree 41/2004, a much lower proportion than in the past, implying that the sale price achieved on tenanted residential properties should rise in the future.
In November, S&P affirmed the notes, citing that the pool quality was not the issue; instead, it was the longer-than-expected time it took for the offer and sale process, which could lead to an extended weighted average life.
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