DBRS Confirms Class A Notes and Upgrades Class B Notes of Berica ABS 3 S.r.l.

DBRS Ratings Limited (DBRS) has today taken rating actions on the Notes issued by Berica ABS 3 S.r.l. (Berica 3) as follows:

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to A (high) (sf), previously A (sf)

Today’s rating actions are based on the following analytical considerations, as described more fully below:

-- Portfolio performance, in terms of delinquencies and defaults.
-- Portfolio probability of default (PD), loss given default (LGD) and expected loss assumptions for the remaining collateral pool.
-- Current credit enhancement available to the rated Notes to cover the expected losses at their respective rating levels.

Berica 3 closed in June 2014, and is a securitisation of a portfolio of Italian first-lien mortgage loans originated and serviced by Banca Popolare di Vicenza SpA (BPVi) and Banca Nuova S.p.A (the Servicers). BPVi also acts as the Master Servicer in the transaction.

BPVi’s DBRS Senior Long Term Debt and Deposit rating was downgraded to B (high) on 27 May 2016. DBRS assessed the likely impact on the Notes in the event of the Servicers’ defaults. DBRS concludes that there is sufficient liquidity provided through the Cash Reserve in the transaction. In addition, there is a back-up servicing arrangement and an independent cash manager in place to mitigate the payment disruption risks. The Cash Reserve is currently at its target level of 3.00% of the rated Notes balance and the funds are deposited with Deutsche Bank, London. Deutsche Bank S.p.A. is the independent cash manager to the transaction. Back-up servicing is arranged through a Back-Up Servicer Facilitator, 130 Finance S.r.l. and a Back-Up Servicer, Zenith Service S.p.A.

The portfolio is performing within DBRS’s expectations. As of 31 May 2016, loans more than 90 days delinquent as a percentage of the outstanding non-defaulted collateral pool balance were at 2.24%, and loans more than 30 days delinquent were at 4.08%. The cumulative default ratio as a percentage of the collateral pool balance at the transaction closing was 1.09%. The transaction’s weighted-average unindexed current loan-to-value has decreased slightly to 57.1% from 59.3%, as the transaction deleverages. DBRS has updated the base case PD and LGD assumptions for the remaining collateral pool to 7.27% and 8.25%, respectively.

The credit enhancement (CE) available to the rated Notes has increased as the transaction deleverages. The CE increased to 32.45% and 19.40% for the Class A and B Notes, respectively, as of 30 June 2016. The CE to the Notes is provided through the subordinated Notes and the overcollateralisation.

DBRS placed Italy’s sovereign rating Under Review with Negative Implications on 5 August 2016 (http://www.dbrs.com/research/297987/dbrs-places-italy-a-low-under-review-with-negative-implications-on-heightened-risks.html). Following the sovereign rating action, DBRS applied additional stresses in the cash flow analysis to test the ratings on the rated Notes in the event of a sovereign rating downgrade. DBRS concludes that the likelihood of a downgrade on the rated Notes in these stressed scenarios is remote.

Deutsche Bank, London is the Account Bank to the transaction. DBRS’s private Long-Term Critical Obligations Rating on the Account bank meets the Minimum Institution Rating criteria given the AAA (sf) rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. The transaction’s Reserve Funds are separately deposited at Barclays Bank PLC, Milan Branch.

J.P. Morgan Securities plc is the swap counterparty to the transaction. DBRS’s private rating on J.P. Morgan Securities plc meets the swap counterparty rating requirement given the ratings assigned to the Class A Notes, as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology. In addition, JPMorgan Chase Bank, N.A. (rated AA (low)/R-1(middle)) is acting as the swap guarantor in the transaction.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the 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 the investor reports provided by Deutsche Bank AG, London Branch and the loan by loan data from European Data Warehouse GmbH.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be 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 last rating action on Berica 3 took place on 26 June 2015, when DBRS confirmed its AAA (sf) rating on the Class A Notes and its A (sf) rating on the Class B Notes. The lead responsibilities for this transaction have been transferred to Kevin Ma.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- DBRS expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- The base case PD and LGD assumptions for the Berica 3 remaining pool of mortgages are 7.27% and 8.25%, respectively. At the AAA (sf) rating level, the corresponding PD is 29.92% and the LGD is 33.01%. At the A (high) (sf) rating level, the corresponding PD is 21.39% and the LGD is 24.88%.

-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to be at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to be at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to be at AAA (sf).

Class A Notes Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class B Notes Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Authority (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, Senior Financial Analyst
Initial Rating Date: 16 June 2014
Initial Rating Committee Chair: Claire Mezzanotte, Group Managing Director

Lead Surveillance Analyst: Kevin Ma, Assistant Vice President
Rating Committee Chair: Quincy Tang, Managing Director

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

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

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375