DBRS Assigns Provisional Ratings to Berica ABS 3 S.r.l.

DBRS Ratings Limited (‘DBRS’) has assigned the following provisional ratings to the Class A and Class B notes (together, ‘the Notes’) issued by Berica ABS 3 S.r.l. (‘Issuer’).

Class A – EUR 835,400,000 Residential Mortgage Backed Securities - AAA (sf)
Class B – EUR 93,900,000 Residential Mortgage Backed Securities - A (sf)

Class A notes are provisionally rated for timely payment of interest and ultimate payment of principal. Class B notes are rated for ultimate payment of interest and principal.

The Issuer is a limited liability company incorporated under the laws of the Republic of Italy in 2014.

This is the thirteen RMBS originated by Banca Popolare di Vicenza Group and the fourth rated by DBRS.

The Notes are backed by first lien, fully amortising mortgage loans originated by Banca Popolare di Vicenza S.c.p.a (‘BPVi’) and Banca Nuova (‘BN’, both ‘Originators’) with 69.04% of the properties underlying the mortgage loans in the north of Italy. The portfolio is considered granular with the average loan balance at approximately €115,828. The transaction has a low weighted average current loan-to-value (WACLTV) at approximately 59.21% (un-indexed). The original weighted average un-indexed (WAOLTV) was approximately 64.71%.

As of 1 April 2014 (‘Transfer Date’), the transaction portfolio consisted of 9,016 loans extended to the same number of borrowers. The loans in the transaction are granted to Bank of Italy SAE code 600, individuals (98.30%) and SAE code 615, small commercial borrowers (1.70%). The par balance of the loan portfolio at the Transfer date was €1044.3million.

The originators and servicers of the transaction are Banca Popolare di Vicenza S.c.p.a and Banca Nuova both part of Banca Popolare di Vicenza group. BPVi is also the master servicer. The Back-up servicer is Zenith Services S.p.a and the Back-up servicer facilitator is 130 Finance S.r.l. All transaction parties are suitably rated in accordance with the DBRS methodologies at the time of the provisional rating to allow for the Class A notes to be provisionally rated AAA (sf).

Credit enhancement for the Class A notes is calculated as 20%, provided by the subordination of the Class B notes and the Class J notes. Credit enhancement for the Class B notes is calculated as 11%, provided by the subordination of the Class J notes. The reserve fund will be established through a limited recourse loan provided by BPVi at the issue date at approximately €27.88 million (3.00% of the rated Notes) and can amortise during the life of the transaction to 3.00% of the outstanding of the rated Notes starting from the second payment date. The reserve fund has a floor at approximately €9.29 million. The reserve fund is available to pay the senior fees, the interest on the rated Notes and at the date in which the Class B notes will redeem in full, to pay principal on the Class B notes.

The Class A notes will pay interest at three-months Euribor plus a margin of [•] bps and the Class B notes will pay at three-months Euribor plus a margin of [•] bps. The Class A notes will have a step-up coupon at the payment date falling on [•]. The interest of the Class B notes will be deferred if the cumulative default of the portfolio is over 19.00%.The portfolio interest rate is mainly linked to three-months Euribor (approximately 83.5%) but also has exposure to fixed interest rates (approximately 14.89%) and residual to one-month Euribor (approximately 0.6%) and six-months Euribor (approximately 0.01%). Approximately 2.96% of the floating rate loans have a cap on their interest rate. The portfolio consists of 4.32% the loans that can switch the interest rate with difference frequency, 2.91% from fixed to floating and 1.41% from floating to fixed. Approximately 3.89% of the portfolio pays a fixed interest rate during the teaser period. The Issuer will enter into several hedging agreements with JP Morgan Securities Plc (‘Swap counterparty’) to mitigate basis and fixed interest rate risk. The transaction swap documents reflect DBRS swap methodology in respect to fixed to floating swaps, but is not in full compliance in respect to basis swaps. For the purpose of the cash flow analysis, DBRS has assumed that the basis risk in this transaction is unhedged. DBRS deems the impact of the basis swap to be limited. DBRS has modelled the interest rate basis risk associated with the mismatch between the interest rates on the assets and interest rate paid on the Notes using its Unified Interest Rate Methodology.

The servicing agreement allows for a limited number of loans, to be renegotiated. The renegotiations can be related to spread/interest rate reduction up to predefined limit or both capital and interest payment holidays. Maturity extensions until ten years before the final maturity of the Notes are also allowed. DBRS has modelled the possible impact of these renegotiations in its cash flow analysis.

The provisional ratings are based upon DBRS review of the following analytical considerations:

• Transaction capital structure and form and sufficiency of available credit enhancement.
• The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to terms in which they have invested.
• The transaction parties’ capabilities with respect to originations, underwriting, servicing, and financial strength.
• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.
• Incorporation of a sovereign related stress component in our stress scenario due to the rating assigned by DBRS to the Republic of Italy’s to ‘A (low)’ - Negative Trend.

DBRS credit analysis is performed on a loan-level basis and includes a probability of default and loss given default assessment, an originator and servicer specific historical performance review, an analysis of loan default data, a Italian housing market and property price trend evaluation. A cash flows analysis has been done based on the following assumptions:

• front- and back- loaded defaults and recoveries
• upward and downward interest rate scenarios
• prepayment rate assumption at 0% - 5% - 10% - 20%

DBRS assessed the two year probability of default, utilising BPVi’s definition of defaults (sofferenze) as defined by the Bank of Italy.

Note:
All figures are in Euro unless otherwise noted.

The principal methodologies applicable are Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include working papers and data on the Italian economy and housing market provided by: ECB, Eurostat, Bank of Italy, Nomisma, Istituto Nazionale di Statistica (ISTAT). DBRS conducted an operational review on the origination and servicing practices of BPVi. The Originators provided loan-level data and historical performance of mortgage portfolio dating back to 2004. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances.

This is the first DBRS rating on these financial instruments.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of a change in the transaction parameters (probability of defaults and/or loss given default) on the rating of Class A Notes and Class B Notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• In respect of Class A Notes and a rating category of “AAA (sf)”, the Probability of Default (“PD”) of 38.26%, a 25% and 50% increase on the PD.
• In respect of Class A Notes and a rating category of “AAA (sf)”, Loss Given Default (“LGD”) of 39.12%, a 25% and 50% increase on the LGD.
• In respect of Class B Notes and a rating category of “A (sf)”, the Probability of Default (“PD”) of 27.87%, a 25% and 50% increase on the PD.
• In respect of Class B Notes and a rating category of “A (sf)”, Loss Given Default (“LGD”) of 29.29%, a 25% and 50% increase on the LGD.

DBRS concludes that for the Class A Notes:
• A hypothetical increase of the PD by 25%, ceteris paribus, would lead to downgrade the Class A Notes to AA (sf).
• A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class A Notes to AA(high) (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class A Notes to AA(low) (sf).
• A hypothetical increase of the PD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to A(high) (sf).
• A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to AA(low) (sf)
• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class A Notes to A (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to A (sf).
• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to A(low) (sf).

DBRS concludes that for the Class B Notes:
• A hypothetical increase of the PD by 25%, ceteris paribus, would lead to downgrade the Class B Notes to BBB(high) (sf).
• A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class B Notes to A(low) (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class B Notes to BBB (sf).
• A hypothetical increase of the PD by 50%, ceteris paribus, would lead to downgrade the Class B Notes to BBB (sf).
• A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class B Notes to BBB(high) (sf)
• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class B Notes to BBB(low) (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class B Notes to BBB(low) (sf).
• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class B Notes to BB(high) (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Davide Nesa
Initial Provisional Rating Date: 06/16/2014
Initial Provisional Rating Committee Chair: Claire Mezzanotte

Last Rating Date: Not applicable as this is a new rating.

DBRS Ratings Limited
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The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

Legal Criteria for European Structured Finance Transactions
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations
Derivative Criteria for European Structured Finance Transactions