Fitch Affirms Berica RMBS Series

KEY RATING DRIVERS
Adequate Credit Enhancement
Credit support available to the outstanding notes has built up over the last year as a result of sequential amortisation (in Berica 6 pro rata pay-down ceased in April 2015) and swift repayment of the underlying portfolios, at an average annual rate between 11% (Berica 9) and 15% (Berica ABS 3). In addition, in Berica 9, Berica ABS 2 and Berica ABS 3, excess spread is fully retained within the structure and used to accelerate the redemption of the notes, which also explains the robust credit support. This explains the revision of the Outlook to Positive from Stable on the class B notes of Berica ABS 3.

In its analysis, Fitch found that the available credit enhancement is sufficient to withstand stresses associated with the current ratings, resulting in today's affirmation of the notes.

Diverging Asset Performance Continues
Over the last 12 months the more seasoned transactions, Berica MBS 1, Berica 5 and Berica 6, have continued to show weak asset performance, with the volume of defaulted assets increasing 1.1 pp in Berica 5 to 9.1% of the initial pool, 0.9 pp in Berica 6 to 10% and 0.6 pp in Berica MBS 1 to 5.9%.

At the same time, the proportion of late-stage arrears (loans with three or more monthly payments overdue) remained large, at 3.3% in Berica 6, 6.4% in Berica MBS 1 and 7.4% in Berica 5, higher than the Italian RMBS index of 1.6%. Fitch cannot rule out further underperformance going forward, especially in Berica 5 and, to a lesser extent, in Berica MBS 1, as the late-stage arrears include a large portion of loans in advanced arrears. Fitch factored this in the analysis of Berica MBS 1 by increasing the performance adjustment factor to 1. This is reflected in the Negative Outlook associated to the class C of Berica MBS 1, Berica 5 and Berica 6.

The other transactions have performed broadly in line with the market as the volume of defaulted mortgages ranges between 0.6% (Berica ABS 3) and 6.1% (Berica 8), while the proportion of late-stage arrears stands between 1% (Berica 9) and 2% (Berica 8). Fitch believes that Berica 8 may see further performance volatility due to its pronounced exposure to Southern Italy, where a large portion of delinquent loans are concentrated.

Adequate Structural Mitigants
Fitch found that payment interruption risk is sufficiently mitigated by the available mitigants providing adequate liquidity in case of servicer disruption for more than one payment date in a rising Euribor scenario. The transactions have a back-up servicer (Credito Valtellinese) or back-up servicer facilitator (Zenith Service). In addition, all the transactions except Berica 9 have a cash reserve, while Berica MBS 1 and Berica 5 have also a liquidity reserve, and Berica 9 has a dedicated liquidity reserve to cover only interest shortfalls.

Fitch also assessed commingling risk across transactions and found that the available commingling reserves in Berica 5, 6, 8, 9 and ABS 2 adequately cover this risk. As no commingling reserve is available in the other transactions and collections are concentrated in the last days of each month, Fitch reduced the available credit enhancement by the estimated one-month commingling loss (between 1.4% and 1.9% of the portfolio balance). The notes' ratings were found to be resilient to this stress.

Lengthy Recovery Timing
Recovery proceeds to date have remained limited due to lengthy recovery timing, typical in Italian RMBS. The transactions have been tested with a recovery lag of 12.5 years. The agency factored in low recoveries in the analysis by applying a maximum recovery equal to 100% of the defaulted balance also to loans with a low current loan-to-value ratio. The robust credit support meant the low recoveries had no effect on the ratings.

Interest Rate Step-up
Fitch reduced the available excess spread in Berica MBS 1, Berica 5, Berica 6, Berica ABS 3 and Berica ABS 4 to account for future note margin step-up. Margins will step up between July 2016 and July 2017 for Berica MBS 1, Berica 5 and Berica 6. The adjustment had no impact on the ratings of the notes.

Payment Holidays and Maturity Extensions
Berica MBS 1, Berica 5 and Berica 6 underlying portfolios include between 1.4% and 1.9% of loans in payment holidays. In the other transactions, payment holidays reach a maximum of 0.15% (Berica 9) of the underlying pool, while loans with an extended maturity do not exceed 1.7% of the portfolio (Berica 8). As no information on maturity extensions is available in Berica MBS 1, Berica 5 and Berica 6, Fitch conservatively assumed that 5% of the underlying pools were subject to this type of renegotiation.

Since payment holidays and maturity extensions are usually granted to borrowers in financial distress, Fitch has associated a higher probability of default (PD) to these loans. The adjustment had no effect on the ratings.

Account Bank Rating in Breach
In Berica 9, Berica ABS 2 and Berica ABS 3, the transaction account bank, Deutsche Bank (DB; A-/Stable/F1), following its recent downgrade, is in breach of the transactions' eligibility criteria of account bank of a minimum Issuer Default Rating (IDR) of 'A'/'F1'. Fitch also notes that, upon the downgrade, the account bank has not undertaken any of the committed remedial actions such as counterparty replacement or finding an eligible guarantor. Nevertheless, as per Fitch's counterparty criteria, the current IDR of DB is sufficient to support a maximum rating of 'AA+sf' on the notes,.

RATING SENSITIVITIES
Changes to Italy's Long-term IDR (BBB+/Stable) and the rating cap for Italian structured finance transactions, currently 'AA+sf', could trigger rating changes on the notes rated at that level.

Deterioration in asset performance beyond Fitch's assumptions could trigger negative rating actions, especially in Berica MBS 1, Berica 5 and Berica 6. Asset deterioration beyond Fitch's stresses may also trigger severe reserve fund draws, which would lead to unmitigated payment interruption risk exposure in Berica 6.

An abrupt increase in reference interest rates beyond Fitch's assumed stresses could have a negative impact on un-capped floating-rate loans originated in a low interest rate environment (between 37% in Berica ABS 2 and 68% of the current pool in Berica ABS 3).

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolios information or conducted a review of origination files as part of its ongoing monitoring.

Berica MBS 1, Berica 5, Berica 6 and Berica 8
Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Berica 9 and Berica ABS 4
Prior to the transactions closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.

Berica ABS 2 and Berica ABS 3
Prior to the transactions closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated errors or missing data related to the property value and valuation date information. These findings were not considered in this analysis as they are immaterial.
Prior to the transactions closing, Fitch conducted a review of a small targeted sample of the originators' origination files and found the information contained in the reviewed files to be adequately consistent with the originators' policies and practices and the other information provided to the agency about the asset portfolio.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by the European Data Warehouse as at end-September 2015 (Berica MBS 1, Berica 5 and Berica 6), end-October 2015 (Berica ABS 2), end-November 2015 (Berica 8, Berica 9, Berica ABS 3 and Berica ABS 4).
-Transaction reporting provided by Banca Popolare di Vicenza as at end-July 2015 (Berica MBS 1 and Berica 5), end-October 2015 (Berica 6), end-September 2015 (Berica 8 and Berica ABS 4), end-December 2015 (Berica 9 and Berica ABS 3), end-November 2015 (Berica ABS 2).