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Fitch: Set-off, Servicer Impact Unlikely in Veneto Bank SF Deals
July 13, 2017 / 1:12 PM / a month ago

Fitch: Set-off, Servicer Impact Unlikely in Veneto Bank SF Deals

(The following statement was released by the rating agency) MILAN/LONDON, July 13 (Fitch) The recent liquidation of Banca Popolare di Vicenza and Veneto Banca does not create meaningful set-off risk in the structured finance deals originated by the two banks that Fitch rates. The banks were placed in liquidation under an Italian government law decree passed on 25 June 2017. Certain assets and liabilities are being sold to Intesa Sanpaolo (ISP), including customer deposits, senior bonds, performing loans, branches and staff, but not equity or subordinated bonds. Vicenza and Veneto are frequent originators of structured finance deals, with 19 outstanding transactions in the Berica, Claris and Apulia series rated by Fitch. We assess set-off risk, which arises if a borrower invokes a right to set off losses on deposits and bond holdings against debt they owe to a bank, as part of our initial rating analysis. We estimate that the average set-off exposure from borrowers holding both senior and subordinated bank debt was less than 0.8% of the portfolio balance at closing. With senior debt protected from losses, and few securitised borrowers holding the affected subordinated bonds, the potential loss is covered by credit enhancement, which is rising as the transactions amortise. The average percentage of loans exposed to set-off is higher in the two SME CLO transactions (1.2%) than in the 17 RMBS deals (0.7%) we rate, as Italian SMEs often invest their liquidity in bank debt. Set-off exposure in new RMBS deals has been falling since 2013. It may also have fallen over time in more seasoned deals as some bonds will have matured and some loans been partly or fully repaid or defaulted since closing. For example, no subordinated debt issued by the two banks before 2007 remains outstanding. <iframe allowfullscreen src="//e.infogram.com/veneto_bank_rmbs_set_off_exposure?src=embe d" title="Veneto Bank RMBS Set-Off Exposure" width="550" height="643" scrolling="no" frameborder="0"> The already low set-off risk from subordinated debt will significantly reduce, especially in the RMBS transactions, as the Italian government and ISP will allocate funds to the repayment of the subordinated bonds placed with retail customers after the banks' acquisition. If the decree law receives parliamentary approval and the transfer of bank branches proceeds as planned, there should be no servicing discontinuity risk resulting from the banks' liquidation. ISP will start servicing the Vicenza- and Veneto-originated sub-pools, while Banca Nuova (formerly part of the Vicenza group) and BancApulia (formerly part of Veneto) will continue servicing their originated sub-portfolios. All the transactions also have cash reserves covering payment interruption risk on the notes and most have back-up servicers. We tested the effect of a potential servicer disruption in our latest rating analysis and found that payment interruption risk would be mitigated for at least three months in each deal, and for six months in most of them. Commingling risk is mitigated through adequate reserves or available credit enhancement. We calculate the average commingling exposure as equal to 1.7% for RMBS transactions and 3.3% for SME CLOs. If the liquidated banks buy back the non-performing loans up to the liquidation date, (as happened after UBI Banca's acquisition of three smaller banks from the state bank resolution fund), issuers' near-term cash flows could increase by an amount up to the value of the defaulted loans. The impact would vary depending on the transactions' structural features, whether excess spread is trapped or not, and the repurchase price. Our most recent commentary and rating actions on all the relevant transactions, including an analysis of payment interruption and commingling risks, are available at www.fitchratings.com. Contact: Davide Nesa Associate Director, Structured Finance +39 02 87 90 87 207 Fitch Italia S.p.A. Via Morigi, 6 20123 Milan Domenico Graziano Analyst, Structured Finance +39 02 87 90 87 215 Ilaria Farina Senior Director, Structured Finance +39 02 879 087 242 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria Criteria Addendum: Italy (pub. 06 Jul 2017) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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