OREANDA-NEWS. Fitch Ratings has affirmed the Mercurio RMBS series, as follows:

Mercurio Finance S.r.l. - Series 2008-3 (Mercurio 3)
Class A (ISIN IT0004372303): affirmed at 'AA+sf'; Outlook Stable

Mercurio Mortgage Finance S.r.l. - Series 2008-4 (Mercurio 4)
Class A (ISIN IT0004438542): affirmed at 'AA+sf'; Outlook Stable

Mercurio Mortgage Finance S.r.l. - Series 2009-5 (Mercurio 5)
Class A (ISIN IT0004516313): affirmed at 'AA+sf'; Outlook Stable

Mercurio Mortgage Finance S.r.l. - Series 2012-7 (Mercurio 7)
Class A (ISIN IT0004791981): affirmed at 'AA+sf'; Outlook Stable

The four prime Italian RMBS transactions are backed by loans originated and serviced by the Italian branch of Barclays Bank Plc (A/Stable/F1).

KEY RATING DRIVERS
Adequate Credit Support
Over the past 12 months, the steady repayment of the underlying portfolios, at an annual rate between 8.5% (Mercurio 3 and 5) and 41.8% (Mercurio 7), has helped build up adequate credit support available to the rated notes in all transactions. This is reflected in the affirmation of the senior notes as credit enhancement is sufficient to support the ratings.

Fitch notes that in Mercurio 7 the principal payment rate spiked on the last payment date due to a partial portfolio buy-back operated by the servicer (see: "Fitch: No Rating Impact on Mercurio 2012-7 from Partial Buyback" dated 21 January 2015 at www.fitchratings.com).

Weakening Performance Still Within Expectations
Over the past 12 months, the volume of late stage arrears (loans with at least three monthly instalments overdue) has remained broadly stable, between 1% (Mercurio 7) and 2.4% (Mercurio 5) of the current pool. Nevertheless, loans in more critical delinquency status have continued to roll through default, implying a weaker asset performance. Gross cumulative defaults (loans with more than 12 instalments overdue) increased to between 0.6% (Mercurio 7) and 2.5% (Mercurio 5) of the initial pool, compared with 0.3% (Mercurio 7) and 1.8% (Mercurio 5) 12 months ago. Despite this increase, the volume of defaulted claims in all transactions remains below the sector average, currently 4.3%.

Fitch believes that exposure to borrowers with more volatile income (self-employed and foreign borrowers) and less standard loans (liquidity and debt consolidation loans) are the main drivers of the recent weakening in performance. These portfolio characteristics are more prominent in Mercurio 5, which has the weakest asset performance of the series.

Reserve Fund Drawing in Mercurio 5
The more pronounced period defaults in Mercurio 5 caused a reserve fund drawing in the last period to provision the defaulted claims. The reserve now stands at 99.2% of its target, while the other deals feature fully funded cash reserves. Fitch believes that the cash reserves are adequate to mitigate payment interruption risk on the rated notes.

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 trigger rating changes on the notes.

An increase in the proportion of mortgage loans with adverse characteristics - especially loans granted to self-employed and foreign borrowers as well as for liquidity purposes, due to different amortisation profiles, defaults and buybacks - could result in weaker asset performance. Should this lead to a deterioration of the underlying pools credit quality beyond our expectations, we could take negative rating action.

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 environment (after 2009) and with no built-in protection (eg caps) from interest rate increases, which may be the case for Mercurio 7.