Structured Finance. S.C.I.P. S.r.l. - SCIP 2 Capital Restructuring. CMBS/RMBS/Italy New Issue

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1 CMBS/RMBS/Italy New Issue Ratings Class Amount (EURm) Final Maturity Rating A4 1,000 Apr 2013 AAA A5 2,895 Apr 2025 AAA B2 475 Apr 2025 AA Existing Notes Class Amount (EURm) Final Maturity Rating A3 1,743 Oct 2008 AAA B1 858 Oct 2008 AAA C 536 Oct 2008 AAA Analysts Federico Gronda Katie Moretti Performance Analytics Alessandro Gustapane Closing Update Closing occurred on 21 April 2005 Changes prior to closing: The issuance amount was reduced by EUR230 million following: the replacement of the cash reserve account designed to cover interest shortfalls on the new notes (funded by over-issuance) with a EUR190m liquidity facility (please refer to pages 3 and 10); and the higher than-expected amount of available funds in the collection account (EUR932m as of 12 April). SCIP represented in the Intercreditor Agreement that if a cumulative collection target of EUR2,705m is not reached by the collection period ending in March 2010, and if so requested by the Rating Agencies, it will enter into an additional hedging agreement in order to maintain the thencurrent rating of the notes then outstanding (please refer to page 10). Page 10: Fitch base case cumulative disposal proceeds. S.C.I.P. S.r.l. - SCIP 2 Capital Restructuring Summary This transaction is a restructuring of the Societá Cartolarizzazione Immobili Pubblici - S.r.l 2 ( SCIP 2 ) deal through the defeasance of the outstanding notes. Fitch Ratings has assigned ratings to the new floating-rate notes issued by Societá Cartolarizzazione Immobili Pubblici - S.r.l ( SCIP or the issuer ) as indicated at left. The ratings reflect available credit enhancement, provided in the form of overcollateralisation, and the transaction s financial and legal structure. The ratings address the likelihood of investors receiving timely payments of interest and ultimate repayment of principal by the legal final maturity date in April 2013 for class A4 notes and in April 2025 for class A5 and class B2 notes. In the SCIP 2 transaction, the Republic of Italy ( AA/F1+ ) securitised the proceeds from the disposal of over 62,000 residential and commercial real estate assets which were sold to the issuer by several public entities ( the contributors ). The securitisation, which closed in December 2002, involved EUR6.637 billion in floating-rate notes, EUR5.137bn of which remain outstanding ( the existing notes ) following the redemption of EUR1.5bn in class A1 bonds in July 2004 and of EUR2bn in class A2 bonds in April To date, the performance of the transaction has been impeded by a number of issues that have prevented the asset disposal process from functioning successfully. Difficulties arose mainly in the initial stages of the sale process, when the properties started to be included in the work flow, and in the preparation of the sale files, and these problems were, in turn, exacerbated by a variety of legal uncertainties. This restructuring is designed to overcome the problems faced by the issuer in meeting the amortization targets for the SCIP2 notes. The aim is to achieve this via the issuance of class A4, A5 and class B2 notes ( the new notes ) which will have a much longer maturity than the existing notes. The proceeds from this issuance will be mainly used to fully collateralise the existing notes by creating a reserve fund that will be used to pay any amounts due on the existing notes. Class B2 issuance amount may be subject to downwards adjustments depending on the amount of cash standing to the credit of the collection account as of the closing date. As of 31 January 2005, the collateral portfolio consisted of 37,228 primary residential units and 7,504 primary commercial assets with an estimated total value of approximately EUR6.67bn. The property identification process is reported to be fully completed and few units have yet to be valued by the Agenzia del Territorio ( AdT ). The asset managers have prepared the property files for the vast majority of the tenanted portfolio and are in the process of sending out the offer letters. By contrast, properties to be sold at auction are generally at an earlier stage of the disposal process: almost 60% of the files relating to vacant assets, which represent 9% of the total number of primary units, have yet to be completed. 3 May 2005

2 Structure Diagram Existing Notes New Notes Existing Swap Counterparties New Swap Counterparties Existing Interest Rate Swap New Interest Rate Swap S.C.I.P. Existing Real Estate Assets Notes Class A2 EUR2,000m Class A3 EUR1,743m Class B1 EUR858m Class A4 EUR1,000m Class A5 EUR3,100m Class B2 EUR500m Collection Accountant Bank of Italy Collateralisation of Existing Notes Class C1 EUR536m Source: Transaction documents As with the December 2002 issuance, this transaction will be executed according to the guidelines provided by Law Decree No , as converted into Law This provides the legal framework for securitising the proceeds obtained from the disposal of real estate properties held by public sector entities. Credit Committee Highlights Since December 2002, a number of issues repeatedly hindered the smooth functioning of the property disposal process (please refer to Appendix 1 for details). The most serious delays were caused by a change in the law in April 2004, which altered the determination of the offer price for residential tenanted assets. (Law Decree 41/2004). This caused a temporary suspension of the process and led to a back-log of revised offer letters that had to be re-sent to tenants. Following clarification of the matter, the asset managers are now able to operate more effectively, within a clearly defined legal framework. Fitch based its assumptions on two years of historical performance data. However, given the problems faced in the transaction s two years of history and the improvements to the framework implemented so far, the agency considers it unlikely that the sale procedure will be impeded to the same extent in the future. For this reason, historical data was filtered to exclude the impact of delays caused by one-off events from the analysis. The asset managers also share the view that the transaction is unlikely to undergo further periods of severe stress caused by procedural problems. During the meetings Fitch held with these entities as part of its rating process, they said they expected no additional delays to affect the transaction, except for some uncertainty surrounding the identification of pregio properties, which may potentially slow the disposal process for these assets. However, the agency has been advised that the AdT has been appointed to resolve the issue by preparing a definitive list of assets that fall into this category. Fitch took this potential delay into consideration, adopting a conservative assumption about the number of pregio assets processed in each period. Collections from sales of commercial assets and from auctions of residential units have so far performed well below expectations owing to difficulties in managing the auction process and the greater complexity of preparing the sale files for commercial assets. Since the transaction will become increasingly reliant on these sources of collections as it progresses, the agency has made careful assumptions with respect to both the timing of the disposal process for these properties and the number of assets that the asset managers will process in each period. Although more than 17,000 units have been sold, the collateral portfolio still benefits from a large and well-diversified pool of both residential and commercial properties. As of January 2005, all the units in the portfolio had been identified and nearly 90% (by number) had been valued. Furthermore, sale files had already been completed for approximately two-thirds of the remaining tenanted properties. The equivalent figure for vacant properties was much lower, at 42%, evidencing the longer delays in the disposal process for these units. The transaction is not credit-linked to the Italian Republic (rated AA by Fitch) as it relies upon the stability of the real estate markets in Italy. Its performance does, however, depend on the 2

3 Key Information Portfolio Characteristics Type of Properties: Residential and Commercial No. of Properties: 37,228 Residential, 7,504 Commercial Offer Price: EUR6,673,672,486 Structure Issuer: S.C.I.P. S.r.l. Asset Managers: Contributors Commercial Sales Manager: Fintecna S.p.A and Lazard & Co. Real Estate S.r.l. ( G1 ) Representative of Noteholders: Sanpaolo Fiduciaria S.p.A Collection Account Holder: Tesoreria Centrale dello Stato Programme Administrator: KPMG Business Advisory Services S.p.A. Hedging Counterparties: Barclays Bank PLC ( AA+/F1+ ) and UBS Limited ( AA+/F1+ ) Liquidity Facility Provider: Barclays Bank PLC Paying Agent: Deutsche Bank AG London ( AA- (AA minus)/f1+ ) Cash Manager: Deutsche Bank AG London Arrangers: Barclays Capital, Mediobanca S.p.A. and UBS Limited servicing capabilities of the contributors and the commercial sales manager. The transaction will benefit from a EUR190m liquidity facility designed to cover shortfalls in interest payments on the new notes. The asset manager agreements (in particular those referring to commercial assets) have been reviewed to improve the efficiency of the sales process. In April 2004 Banca OPI S.p.A and DEPFA ACS BANK granted SCIP a EUR800m fiveyear limited recourse loan following the enactment of LD 41/2004. Under the terms of the loan, the issuer is liable to pay interest and reimburse principal on the loan solely out of any sums otherwise payable as a deferred transfer price to the MEF once all the notes have been redeemed in full. Furthermore, prior to the issue date each lender confirmed that its non-petition obligations were extended up to one year and one day after full redemption of the new notes. In view of the above, the agency believes that the outstanding limited recourse loan does not have any impact on the transaction s cash flows. Summary of the Transaction The objective of the transaction is to restructure the SCIP 2 deal through the defeasance of the outstanding debt and without the transfer of any further real estate assets. On the issue date, SCIP issued three classes of notes and used the proceeds to collateralise the existing bonds. Part of the proceeds of the new notes issuance have been used, together with monies standing to the credit of the collection account as of the issue date, to fund a special reserve earmarked for the payment of amounts due on the existing notes ( the first notes reserve amount ). This reserve will be replenished on every interest payment date to ensure that its balance is always equal to the outstanding principal on the existing notes plus one quarter s worth of interest payments. Any issuance proceeds in excess of the amount required to fund this reserve will be used to pay some costs associated with the rebalancing of the existing hedging agreements and the winding down of the liquidity facility agreements. Interest and principal payments on the new notes will be funded for the most part using receipts from the disposal of the properties and, to a lesser extent, using rental income from the properties. The disposal of the properties is subject to regimented processes managed by the contributors for the residential assets, and a consortium of commercial asset managers for the commercial assets. A few changes have been made to the process since December 2002 to make it more efficient; please refer to the Sale Process section for details. Law Decree No. 351 Converted into Law 410 and Security The issuer is an Italian registered special-purpose vehicle set up in accordance with law decree No ( LD 351 ). The transfer of properties to the issuer was effected by action of law rather than by contract. The law waives the requirement to deliver title documents to the issuer and pay any transfer taxes that would normally be due. LD 351 provides that the issuer may not dispose of the properties other than in accordance with the processes determined by the MEF (rated AA/F1+ by Fitch) and described in the Sales Process section of this report. The issuer, under English law, will grant a charge in favour of the representative of the noteholders on any amounts due to the issuer in respect of the 3

4 portfolio and any interests under the hedging agreements. Notes The existing notes are expected to be repaid on their respective expected maturity dates, mainly using funds standing to the credit of the first notes reserve amount. The new notes have a predominantly pass-through repayment structure and are subordinated to the payment of all amounts of interest and principal due under the existing notes. Payment of interest on all classes of notes will be made quarterly in arrears on 26 January, April, July and October. The interest margins on the class A4, A5 and B2 notes are subject to a step-up should these classes not be fully redeemed by April 2006, October 2008 and January 2009 respectively. Pre-Trigger Waterfall On each payment date prior to the delivery of a trigger notice, the cash manager will apply available funds in the following order: 1. to pay interest on the class A2 and A3 notes; 2. to pay interest on the class B1 notes; 3. to pay interest on the class C notes; 4. from the payment date falling in April 2005, to repay principal on the class A2 notes; 5. from the payment date falling in April 2006, to repay principal on the class A3 notes; 6. from the payment date falling in October 2007, to repay principal on the class B1 notes; 7. from the payment date falling in October 2008, to repay principal on the class C notes; 8. until full redemption of the existing notes, to credit the first notes reserve amount to the collection account; 9. to pay issuer expenses; 10. to pay amounts due to the noteholders representative, the cash manager, the programme administrator, the AdT, the asset managers, the commercial sales manager and the transaction account banks; 11. to pay sums due to the liquidity facility provider; 12. to pay sums due to the hedging counterparties; 13. to pay interest on the class A4 notes; 14. to pay interest on the class A5 notes; 15. to pay interest on the class B2 notes; 16. from the payment date falling in April 2006, to repay principal on the class A4 notes until fully redeemed; 17. following redemption of the class A4 notes, to repay principal on the class A5 notes; 18. following redemption of the class A5 notes, to repay principal on the class B2 notes; 19. until the payment date falling in April 2006, to credit any surplus amounts to the collection account; 20. junior payments (including swap and liquidity facility subordinated payments and the deferred purchase price to the MEF). Trigger Events If a trigger event occurs, the noteholders representative may serve a trigger notice to the issuer to commence the immediate repayment of principal and outstanding interest on the notes according to the post-trigger waterfall. These events include nonpayment by the issuer of interest on any payment date or principal by legal maturity, any breach of the issuer s obligations under the notes and issuer insolvency. Post-Trigger Waterfall Following a trigger event, available funds will be applied in the following order of priority: 1. interest and principal on the class A2 and A3 notes; 2. interest and principal on the class B1 notes; 3. interest and principal on the class C notes; 4. issuer expenses; 5. amounts due to the transaction parties; 6. sums due to the liquidity facility provider; 7. sums due to the hedging counterparties; 8. interest and principal on the class A4 and A5 notes; 9. interest and principal on the class B2 notes; 10. junior payments. Further Note Issues The issuer may issue further notes to fund the purchase of further portfolios from the contributors, or to fund prepayments to the MEF for deferred payments related to the transfer of the properties if confirmation is received by the rating agencies that the issuance of such further notes would not cause a downgrade of the then-outstanding bonds. Further notes may be repayable from collections and recoveries in respect of the portfolio, and the transaction documents may be amended or supplemented accordingly. Collateral Around 18,000 of the over 62,800 primary units in the portfolio as of December 2002 have been sold. The current portfolio therefore consists of approximately 44,700 primary properties, the bulk of which (77.5% of the portfolio by number) are residential non-pregio ( RnP ) assets. Commercial ( C ) assets form approximately 16.8% of the 4

5 portfolio while the remaining 5.7% are residential pregio ( RP ) assets. Approximately 91% of the primary units in the portfolio are currently tenanted, with the remaining 9% being vacant. Pregio assets are defined by the law decree of 31 July 2002 as assets that are either located in the historical centre of a city, are valued at more than EUR3,750 per square metre ( sq m ), are considered to be luxury assets and are larger than 240 sq m, or assets with artistic, historical or aesthetic value. The average value of the pregio assets is approximately EUR320,000. By comparison, the average value of the standard residential units is much lower, at around EUR151,000 (prior to applicable discounts). The entire portfolio had been valued by the AdT prior to December Based on a representative sample of over 10,000 units, an independent valuation company then provided an opinion that the valuation methodology applied by the AdT was consistent with international standards, and that the resulting valuation of the portfolio did not exceed the then current market value of the portfolio. The independent appraiser has now revalued the same sample of properties (excluding those that have been sold in the meantime) and has confirmed that price increases in the real estate market in the past two years have caused the positive difference between the current market value of the assets and the AdT valuation to widen further. Although Fitch s analysis did not give any credit to the increased value of the underlying properties, the agency believes this to be a positive feature of the transaction. The proportion of vacant assets to the total number of units in the portfolio rose by 0.5% compared to December 2002 while commercial properties now represent around 17% of the portfolio compared to the previous 14.1%. With the exception of these two marginal changes, all the other portfolio s main characteristics remained consistent with those of the pool at closing in December Fitch does not, therefore, expect future performance to diverge significantly from the performance to date as a result of any negative selection in the portfolio of assets. Sales Process The asset disposal process is defined by LD 351 and detailed in the asset manager agreements. Some changes have been made to the process since SCIP 2 closed in December 2002, to make it more efficient and accommodate certain legal challenges brought against the issuer by some tenants. The flow chart below illustrates the disposal process, which includes one stage at which tenants are offered an option to buy, and another at which any Collateral Portfolio as of 31/01/2005 Residential Commercial Total Portfolio Number of Primary Units 37,228 7,504 44,732 Number of Secondary Units 35,209 2,421 37,630 Total Offer Price of Tenanted Units 4,275,243,634 1,644,958,242 5,920,201,876 Average Offer Price of Tenanted Units 122, , ,271 Total Market Value of Vacant Units 357,610, ,859, ,470,611 Average Market Value of Vacant Units 150, , ,358 Breakdown by Contributor ENPALS 14,746,711 33,504,513 48,251,224 INAIL 760,758, ,900,685 1,211,659,285 INPDAI 1,790,537, ,524,522 2,206,061,962 INPDAP 1,696,658, ,054,699 2,674,712,883 INPS 342,569, ,153, ,723,609 IPOST 1,322,320 26,245,645 27,567,965 IPSEMA 6,841,167 15,954,726 22,795,893 STATO ITALIANO 11,853,816 45,849 11,899,665 Geographical Breakdown North 1,359,521, ,501,527 1,849,022,536 Centre 2,870,899,635 1,275,675,045 4,146,574,681 South 389,192, ,882, ,075,270 Process Completion Status (% of Total Primary Units) Identified Valued Sale File Completed Offer Letter Sent Offer Accepted Offer Rejected Auction Auction Auction 3 Source: Transaction documents 5

6 remaining properties are sold through auction. Vacant properties are only processed in the auction phase. The most significant modification from the original sale process relates to the disposal of tenanted commercial assets. These are no longer offered at public auction following the preparation of the sales files but are instead initially offered (at no discount) to the tenants, as happens with the occupied residential units. Disposal of Tenanted Assets Offer Process The first step of the disposal process is to identify the units. The majority of the properties in the portfolio had been identified by the asset managers as of end-january Information on the property is then sent to the AdT so that it can value the asset. The AdT is an autonomous public body established to provide real estate-related technical services throughout Italy, including real estate valuations. Following valuation, the sale files are prepared by the asset managers prior to sending offer letters to the tenants. Standard residential units are initially offered to the current tenants at a discount to market value of 30% (potentially increasing to 37% and to as much as 40.5% depending on the percentage of tenants in the same building who accept the offer). No discount on the vacant possession value is granted on Pregio residential units and commercial properties. The tenants have an obvious incentive to exercise their option to buy, since failure to do so will result in the auctioning of the property and the termination of the tenancy. Furthermore, the substantial discount to market value offers the tenants an excellent opportunity to purchase their own homes. An agreement set up with a number of banks makes subsidised financing available to tenants who are willing to purchase the properties. After an initial period of delays in the granting of these mortgages caused by poor co-ordination between the parties, the process is now reported to be working efficiently. Delays in the completion of sales have been caused by ineffective co-ordination between the contributors and the notaries. Despite some improvements in this respect, the agency believes this to be one of the areas where efficiency could still be improved. Any properties where the options are exercised but the sale does not complete are put up for auction along with vacant properties and those where the option has been rejected. If the highest bid at the auction is below the price offered to the tenants through the option process, the tenant is granted a pre-emption right. However, no such right is offered if the highest bid at the auction exceeds the option price. Disposal of Vacant Assets Auction Process The first three steps of the disposal process for vacant assets (identification, valuation and preparation of the sale file) are identical to those performed on the tenanted units. Following the preparation of the sale files, assets are then offered at public auction. Disposal Process Identification T1 AdT Valuation T2 Preparation of the Sale File T3 Sending of the Offer Letters T4 Acceptance of the Offer T5 Cash Identification AdT Valuation V2 Preparation of the Sale File V3 TA1 Rejection of the Offer TA2 Auction 1 V6 V1 V4 Auction 2 V5 Auction 3 V6 V6 Cash Cash Cash Source: Transaction documents 6

7 The asset managers are responsible for organising the auction of residential units, while a consortium comprising Fintecna S.p.A and Lazard Real Estate ( G1 ) has been appointed to manage the sale of commercial assets. The assets are initially offered individually in auctions, subject to the reserve prices listed in the table below. Auction Reserve Prices % Value Unit Type Auction 1 Auction 2 Auction 3 Tenanted Residential No reserve Non-pregio Tenanted Residential No reserve Pregio Vacant Residential No reserve Commercial Source: Transaction documents The second stage of the process targets larger investors, as the assets are offered at auctions in portfolios rather than individually. Assets are offered in the second and, eventually, the third auction at increasing discounts. If a fourth auction is required, the assets will be offered with no reserve (except in the case of commercial assets, where a 50% reserve continues to apply). The auction process has been improved to increase efficiency. This was the purpose of introducing a mechanism ( the Residual Offer ) whereby professional bidders could be assigned a specified maximum number of units that had not obtained a specific individual offer at the base auction price. However, a recent discussion between Fitch and the commercial asset managers has confirmed the agency s view that the issues that have hitherto hindered disposals of commercial assets via auction have yet to be resolved. Several changes have been made to the commercial asset manager agreement aimed at increasing the frequency of the auctions. Furthermore, G1 was put in charge of the entire disposal process for commercial properties. Given the transaction s increasing reliance on collections from commercial assets and residential auctions, as well as the low volume of collections from these asset classes to date, Fitch has been particularly cautious when setting its base case assumptions with respect to both the speed and the volumes of these sales. Credit Analysis Fitch analysed two years of available historical performance data to formulate its base case assumptions for the disposal process. Forecast proceeds were stressed to reflect a AAA rating scenario and were then compared with the note liabilities to confirm that timely interest and ultimate principal payments were achievable. When analysing the historical data, the agency focused in particular on: the time it has taken for the asset managers to manage the files in each phase of the disposal process; the volume of files that have been processed on a monthly basis; the percentage of tenants accepting the offer to buy the property; the percentages of assets sold at the different stages of the auction process; and each property s current position in terms of phases of the disposal process. To determine assumptions about timing, Fitch looked at the transaction s actual performance and, contrary to the approach taken at the time of rating the original SCIP 2 issuance, did not give credit for any minimum performance requirements set by law for the completion of certain steps of the sale process. This is because, based on the transaction s history to date, none of these provisions has yet been met or enforced. Given the transaction s seasoning, most of the phases of the sale process have now been tested and improvements to the framework have been Timing Assumptions (Months) Base Case AA AAA Residential Commercial Residential Commercial Residential Commercial Valuation Preparation of Sale File Tenanted Properties Sending Offer Letter Acceptance of the Offer Cash Settlement Vacant or Rejected Properties Time between each Auction Source: Fitch 7

8 implemented. Therefore it is less likely the transaction will undergo further periods of severe stress caused by legal challenges to the sale procedure similar to those experienced in the first two years of its history. Fitch filtered out the effect of the delays caused by these problems when determining its base case timing assumptions for the affected phases of the process. Instead the agency focussed more on the periods of recent performance since the resolution of the previous legal challenges as an indicator for expected future collections. Overall, the agency has substantially increased its timing assumptions from the levels applied in its initial analysis. Fitch believes these new timing assumptions now correctly reflect the sustainable performance of the asset managers as demonstrated by the recent collections performance. Fitch assumed that the time required to organise an auction will not vary across different asset types and subsequent phases in the process; when calculating its base case assumptions for stages TA2, V4 and V5 it therefore used step V3 as a proxy (the different phases are detailed in the Disposal Process diagram on page 5). This assumption is based on the limited significance of data regarding the later phases of the auction process, since few properties have reached these stages. However, the agency draws comfort from the fact that timing assumptions about steps V4 and V5 appear to be sufficiently conservative in light of the performance to date. As with timing, Fitch did not take into consideration the minimum performance requirements contained in the asset management agreements regarding the number of files processed by the asset managers in each period. Instead, the agency focused on the historical performance of the entities involved in the transaction and, in the stressed scenario, decreased the volume of files assumed to be processed. Since the asset managers are in the process of sending out the offer letters for most of the tenanted properties, Fitch took into consideration the capacity limits of the entities, placing a cap on the number of letters sent per month. It also placed a further cap on the number of auctions conducted each month to account for the difficulties asset managers have hitherto encountered with respect to this aspect of the disposal process. Furthermore particularly given the short legal final maturity of the class A4 notes Fitch verified that temporary slow-downs in collections caused by periods of low activity in specific periods of the year would not have a critical impact on the transaction s cash flows. Base case assumptions about the percentage of tenants accepting the offers and the rate of success in selling the assets at the different stages of the auction process were also calculated on the basis of the transaction s actual performance, and then stressed to reflect a AAA rating scenario. Acceptance levels for all types of properties have been consistently high since closing. As there are no signs of a reversal in this trend, Fitch increased its assumptions in this respect by 10%, as detailed in the table below. The agency calculated the discount at which a property will be sold to the tenant based on its assumptions regarding the percentage of accepted offers. Tenants are granted an initial discount of 30% to market value. This discount is then increased to 37% and 40.5% according to the percentage of tenants living in the same building who accept the offer. In its base case scenario, Fitch assumed that the tenants would be granted the maximum discount, while in a AAA scenario given the lower acceptance level the discount was assumed to be 37%. On top of this discount, Fitch added for non-pregio residential tenanted properties only a further discount related to Law 104 April As advised by the MEF, the agency assumed that, in a base case scenario, approximately 35% of these assets would be subject to a further 25% reduction in market value. The number of properties subject to this further discount was then stressed to 65% in a AAA scenario. Assumptions Summary Base Case AAA AA RnP RP C RnP RP C RnP RP C Offers Acceptance Levels (%) Reduction in Mkt Value for Opted Properties (%) Reduction in Mkt Value for Auctioned Properties (%) Percentage of Success at Auction: Auction 1 (%) Auction 2 (%) Auction 3 (%) Max Number of Letters Sent Monthly Max Number of Auctioned Properties per Month Source: Fitch 8

9 The tenanted properties that are not purchased by the tenants will be put up for auction. Fitch applied market value declines ( MVDs ) to the current value of the properties to estimate the income derived from such sales. The MVDs are consistent with those the agency uses to analyse conventional Italian RMBS transactions and were derived from research into the impact on the Italian residential market of the last recession. In a AAA recession they represent an overall 39.6% and 43.6% decline in value for residential and commercial properties, respectively. MVD assumptions formed part of the analysis used to determine the point in the auction process at which each property is expected to sell, in that the stressed values were compared with the reserve prices at each of the auctions, as set out in the transaction documents. The agency has given partial credit to cash flows from rental income on the portfolio. The asset managers will be obliged to pay the issuer 85% of rent received on the portfolio of assets. Fitch has given credit to this income since the asset managers will have to pay these amounts regardless of whether or not they actually receive the rents from the tenants. The amount of rental income available from the portfolio will decrease over time as a result of property sales and lease expiries. However, it is impossible to predict the rate of decrease, as the timing of the inclusion of each asset in the sale process is not known. Fitch has assumed that, in each scenario, as the portfolio value falls as a result of sales the same ratio of rental income to value will be maintained throughout the life of the transaction. Asset Managers The underlying properties have been transferred to SCIP by the Republic of Italy and by seven public social security entities (IPSEMA, INAIL, INPDAP, INPS, IPOST, ENPALS, INPDAI and Agenzia del Demanio). For detailed information on the specific activities of each entity, please refer to the new issue report S.C.I.P. S.r.l. (SCIP2), dated December 2002 and available at In January 2003, INPDAI was wound up, and its structures and functions transferred to INPS. The merger of the two entities operating procedures took approximately one year, during which INPDAI s ability to dispose of the real estate properties was severely hindered. Following resolution of its operating issues, the entity s performance is now in line with that of the other contributors. All these entities are responsible for the disposal of their respective residential properties. The G1 consortium, formed by Fintecna and Lazard & Co. Real Estate, is responsible for the disposal of commercial assets, both through the offer letter mechanism and the auction process. Warranty and Indemnity Agreement The MEF has made certain representations and warranties in relation to the portfolio s characteristics and ownership, and in relation to the status of the contributors. In particular, it represents and warrants that the portfolio is in existence, that certain data regarding the portfolio is up to date and accurate, and that the properties are saleable. The MEF has agreed to indemnify the issuer and the noteholders representative in connection with the warranties if they are shown to be untrue. If it is not possible to sell a property because of problems related to ownership or legal requirements, such as environmental or health and safety regulations, MEF will be obliged either to transfer substitute properties to the issuer, subject to rating agency confirmation that this would not affect the then-outstanding ratings on the notes, or make a compensatory cash transfer representing 100% of the substituted property value. In its analysis of this transaction, Fitch has, to a large extent, relied upon the information and warranties provided by the MEF. The representations and warranties provide a significant degree of comfort to the agency that if the information provided proves to be materially incorrect, the MEF will provide remedies to protect the transaction from significant additional risks. This proved to be the case in April 2004, when, following the enactment of LD 41/2004 (granting a specific category of tenants the right to purchase at a higher discount than was contractually foreseen), the MEF reimbursed SCIP through the arrangement of a EUR800m facility. Cash Manager The issuer and noteholders representative appointed Deutsche Bank AG, London Branch (rated AA-(AA minus)/f1+ ) cash manager for the transaction. Disposal receipts and rental income will be paid into the collection account, which is maintained with the Tesoreria Centrale dello Stato, acting through the Bank of Italy. Two days prior to each payment date, all funds standing to the credit of the collection account will be transferred to the transaction account held with Deutsche Bank AG. The cash manager will direct payments to be made from this account according to the priority of payments. Hedging Agreements The issuer entered into interest rate swap agreements with two counterparties to mitigate the risks 9

10 associated with its floating-rate payment obligations under the notes. The swap counterparties will pay the issuer three-month EURIBOR on the outstanding notes and will, in return, receive fixed amounts from the issuer. The swap contract is structured as a flexi swap, where the notional is equal to the principal amount outstanding under the new notes, subject to a predefined upper and a lower band. Although the upper swap band closely mirrors Fitch s AAA repayment profile, as the transaction progresses, there is a risk that the notes will become underhedged, since the upper swap band reduces more rapidly than the rate of repayment on the AAA notes in Fitch s analysis. To mitigate this potential risk, a trigger has been put in place whereby if a cumulative collection target of EUR2,705m is not reached by March 2010, and if so requested by the rating agencies, the issuer will enter into an additional hedging agreement to maintain the then-current rating on the outstanding notes. The trigger level was set such that, if collections exceeded EUR2,705m, further hedging would not be needed to cover the issuer against interest rate risks under the agency s stress scenarios. If the ratings of a swap counterparty are downgraded below A+ (Long-term) or F1 (Short-term) it will, within 30 days, either: i) be replaced by a suitably rated counterparty; ii) obtain a guarantee from a suitably rated counterparty; or iii) provide mark-tomarket collateral consistent with the thenoutstanding ratings of the notes. Programme Administrator The issuer has appointed KPMG Consulting S.p.A. as programme administrator to undertake performance monitoring, reporting and auditing activities on the portfolio. Furthermore, the programme administrator will assist the contributors with their reporting obligations. Liquidity Facility On the issue date, the issuer unwound the existing liquidity facility agreement, as protection from interest shortfalls on the existing notes is achieved through the first notes reserve amount. On the same date, the issuer entered into a EUR190m liquidity facility agreement with Barclays Bank Plc to provide liquidity support for the new notes. The amount available under the liquidity facility will reduce as the notes are repaid, although it will remain approximately equal to one year s interest payments on the outstanding balance of the new notes. If the liquidity facility provider is downgraded below F1, the issuer must find a replacement liquidity facility provider with a rating of at least F1 or draw the remaining undrawn portion of the entire facility. Performance Analytics Fitch will continue to monitor the transaction on a regular basis and as warranted by events. Its structured finance Performance Analytics team ensures that the assigned ratings remain, in the agency s view, an appropriate reflection of the issued notes' credit risk. For this transaction, the agency s performance analysis will focus on the number of letters sent to tenants, as this is an important indicator of the rate of collections in subsequent periods and, therefore, the de-leveraging of the transaction. Furthermore, particular attention will be paid to the sale process for commercial properties and, in more general terms, to the auction disposal mechanism. This is because the transaction becomes increasingly reliant on collections from commercial assets and from residential auctions to meet payments under the notes as it progresses. The graph below compares Fitch s base case collection assumptions with the issuer s target. Fitch Base Case Collections (EURm) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Fitch Base Case Issuer Target Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Jul 19 Jul 20 Jul 21 Jul 22 Jul 23 Jul 24 Source: Fitch & Transaction documents Details of the transaction s performance are available to subscribers at Further information on this service is available at Please call the Fitch analysts listed on the first page of this report for any queries regarding the initial analysis or the ongoing performance. 10

11 Appendix 1 Major Issues Impeding Efficient Performance Period Issue Action Taken Status Jan-Jun 2003 Delays in the processing of files owing to Introduction of a detailed manual that precisely Resolved the lack of co-ordination in the flow of identified the tasks and responsibilities for the documents between the asset managers and AdT, and the fact that the KPMG performance of these activities; and reorganisation of the KPMG Database database prevented the efficient exchange of information between the parties. Jan-Sep 2003 Since Closing Jan-Jun 2003 Jan-Jun 2003 Jan-Sep 2003 Jan-Apr 2004 Mar-Jun 2003 INPDAI s merger into INPS in January 2003 caused the temporary suspension of the entity s disposal activity owing to management and organisational issues. Delays in the processing of commercial files caused by poor coordination in the flow of documents between asset managers and the G1 consortium (since 2003, only four auctions have been arranged). Delays in the sale of properties caused by the length time it took to finalise the mortgage loan framework agreement with the banks. Lack of efficiency in managing the auction procedures on residential properties owing to an underestimation of the risk of deserted auctions. A legal challenge to the commercial asset sale process resulted in the temporary halt of commercial asset sales until a change in law was effected in the third quarter of Delays in the offer and sale process for tenanted residential assets occurred in the first half of 2004 owing to uncertainty regarding the offer price for tenants who expressed their willingness to buy prior to October 2001 and pending clarification of the exact wording to be incorporated in the new offer letters. Delays in the processing of pregio assets caused by the termination of the mandate of the entity responsible for identifying these properties. The entity resumed disposal activities in the fourth quarter of 2003 after nine months of inactivity. At issue date, various changes to the G1 contract terms are expected to be introduced. These should give G1 greater independence to complete the files and give it greater incentives in the sales process. Implementation of an agreement with the banks. The introduction of the "Residual Offer" mechanism now allows professional bidders to be assigned a specified maximum number of units where the properties received no specific individual offer at the base auction price. Law Decree 269 of 30 September 2003 modified the disposal process for commercial assets, allowing for an option right in favour of commercial tenants similar to the procedure already used for occupied residential properties. This amendment simplified the disposal process for the commercial portfolio, avoiding the need to hold auctions on tenanted commercial properties, a step that was previously required before tenants could exercise their pre-emption rights. Law Decree 41/2004 granted these tenants the right to purchase the relevant property at 2001 prices. Eligible tenants who purchased prior to the enactment of the law were also granted the right to be reimbursed by the asset managers. The disposal process was resumed in May 2004 but its temporary halt created a bottle-neck, given the backlog of revised offer letters that had to be re-sent. The MEF reimbursed SCIP for the lower value of the properties through the arrangement of an EUR800m facility is in the form of a five-year zero-coupon bank financing. This must be repaid in April 2009 in a single interest and principal instalment, and on a limited recourse basis from the portfolio s deferred transfer price. AdT is now responsible for this role and is shortly expected to deliver a list identifying the assets definitively falling into the pregio category. However, the process is not yet complete and may potentially slow the disposal activity of asset managers with a higher concentration of pregio assets in their portfolio. Resolved Ongoing Resolved Resolved Resolved Ongoing Ongoing Since Closing Availability and collaboration of notaries Ongoing 11

12 Copyright 2005 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY Telephone: , (212) Fax: (212) Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided as is without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. 12

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