OREANDA-NEWS. Fitch Ratings has downgraded two tranches and affirmed 14 tranches of the Berica RMBS series, seven prime Italian RMBS transactions backed by loans originated and serviced by Banca Popolare di Vicenza (BB/Stable/B). A full list of rating actions is available at www.fitchratings.com or by clicking the link above.

KEY RATING DRIVERS
Diverging Portfolio Performance across the Series
Over the past 12 months, the more seasoned deals (Berica MBS 1, Berica 5 and Berica 6) have continued to show weak performance. Late stage arrears (loans with at least three monthly payments overdue) are reported between 3.4% (Berica 6) and 9.2% (Berica 5) of the current pool.

Defaulted claims, defined as loans whose borrower is classified in "Sofferenza" or permanently in distress (Berica MBS 1 and Berica 5) and/or loans in arrears for more than 12 months (Berica 6), have reached between 5.5% (Berica MBS 1) and 9.5% (Berica 6) of the initial portfolio balance.

Fitch notes that the portfolio deterioration can be ascribed to loans originated under more aggressive lending standards, with average original loan-to-value ratios between 70% and 72%, higher than the Italian market. The portfolios have significant exposure towards foreign borrowers (9.9% in Berica MBS 1, 16.3% in Berica 5 and 13.2% in Berica 6) and self-employed borrowers (25.6% in Berica MBS 1 and around 20% in the other two deals), which have been subject to volatile income streams as a result of unemployment. Given the more pronounced adverse characteristics, Berica 5 and 6 in particular are likely to experience further credit deterioration. This consideration is factored into the Negative Outlooks on the class C tranches of the three deals and reflected in the downgrade of the class A and B notes of Berica 6.

In contrast, the volume of defaulted claims, defined as loans in arrears for more than 12 months or classified in "Sofferenza" in the more recent transactions (Berica 8, Berica 9 and Berica ABS 2) is reported between 0.9% (Berica ABS 2) and 4.6% (Berica 8) of the initial pool. The pipeline of late stage arrears ranges between 0.8% (Berica 9) and 1.65% (Berica 8 and Berica ABS 2) of the current collateral balance, broadly in line with Fitch's Italian three-months-plus arrears index (1.6%). Fitch notes that the asset performance of Berica 8 has been particularly affected by the stronger concentration of borrowers located in Southern Italy. The effects of the recession are more pronounced in this region, which represents 30% of the current pool but accounts for half of the loans in arrears.

Berica ABS 3 closed in June 2014. Since then, only one loan has defaulted (equivalent to 4bp of the initial pool) while late stage arrears are at 0.7% of the current pool. The asset performance remains within the expectations set at closing.

Adequate Credit Support Except in Berica 6
All the transactions, except Berica 6, have built up substantial credit support following amortisation of the underlying portfolios or already benefited from strong credit enhancement at closing. This has resulted in the affirmation of the class A and B notes across the series as the available credit support adequately covers potential losses associated with the corresponding ratings. It is also reflected in the revision of the Outlook to Stable from Negative on the two senior tranches of Berica 5.

In Berica 6, the pro-rata redemption of the notes, which commenced at the end of 2011, has led to a modest increase in the credit support available to the senior and mezzanine notes . The combination of currently low credit enhancement, weak performance so far and further expected portfolio deterioration has led to the downgrade of the class A and B notes.

Expected Switch to Sequential Paydown in Berica 6
Over the next two payment dates, Fitch expects Berica 6's cash reserve to drop below its target level as a result of the rapid increase in defaults and associated provisioning. Consequently, the redemption of the rated notes is expected to switch back to sequential upon the breach of the pro-rata triggers. Fitch considers the return to sequential amortisation positive for the class A and B notes as more credit support will build up following portfolio amortisation. This is reflected in the Stable Outlooks on these tranches.

Sequential amortisation will restore the subordination of the class C notes, as it was the case before the pro-rata principal allocation started. As a result, the class C tranche will be exposed to delayed principal repayment and protected solely by the available cash reserve. This expectation, coupled with the further expected deterioration of the pool performance, is reflected in the Negative Outlook on the class C notes.

Servicer Default Event Mitigated
In Fitch's opinion, the combination of available cash reserves, appointed back-up servicers (Zenith Service in Berica ABS 3 and Credito Valtellinese in the other deals) and liquidity facilities in Berica MBS 1 and Berica 5 sufficiently mitigate payment interruption risk on the senior notes for more than one payment date even in a stressed Euribor environment.

RATING SENSITIVITIES
Changes to Italy's Long-term Issuer Default Rating (BBB+/Stable) and the rating cap for Italian structured finance transactions, currently 'AA+sf', could also trigger rating changes to the 'AA+sf' rated tranches in the series.

Deterioration of asset performance in excess of Fitch's assumptions, lower than expected recovery proceeds and associated cash reserve drawings may result in negative rating actions across the series, starting with the class C notes of the more seasoned transactions. This may also result in payment interruption issues especially in Berica 6, where no commingling or liquidity reserve is in place.

An abrupt increase in reference interest rates beyond Fitch's stresses would put pressure on the performance of the floating-rate loans originated in a low interest rate (after 2008) environment and with no built-in protection (eg caps) from interest rate increases, which may be the case for the more recent transactions in the series.