DBRS Confirms the Ratings on Phoenix Funding 2 Limited

DBRS Ratings Limited (“DBRS”) has today reviewed Phoenix Funding 2 Limited (the “Issuer”) and has confirmed the ratings on the Class A Notes at ‘A’ (sf).

The confirmation of the ratings of the Class A Notes is based upon the following analytical considerations, as described more fully below:

• Portfolio performance, in terms of delinquencies and defaults, as of the July 2014 payment date.
• Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
• Incorporation of a sovereign related stress component in the rating analysis to address the impact of macroeconomic variables on collateral performance given the long-term foreign and local currency rating of ‘A’ (low) for the Republic of Ireland.
• Current available credit enhancement for the Class A Notes to cover the expected losses at the ‘A’ (sf) rating level.

Phoenix Funding 2 Limited is a static securitisation of first lien residential mortgage loans secured by properties located in Ireland. The loans were originated by KBC Bank Ireland plc and are serviced by KBC Bank NV, Dublin Branch.

The portfolio is well-seasoned (just under 8 years) and 60% of the loans in the current pool have been originated between 2006 and 2007. Additionally, 37% of the portfolio is geographically concentrated in the Dublin area.

The ratio of the cumulative mortgages repossessed to the original portfolio balance increased to 2.61%, up from 1.11% at rating in July 2013. The 90+ delinquency ratio reached 24.42% in July 2014, up from 21.43% at rating in July 2013. Data provided by KBC Bank Ireland plc shows that loans in arrears for more than 90 days are making partial payments.

The Class A Notes are supported by subordination of the Class B Notes and an amortising Reserve Fund. Credit enhancement for the Class A Notes (as a percentage of the performing portfolio) increased to 44.32% in July 2014, from 42.65% in July 2013 when the transaction was first rated by DBRS.

The Reserve Fund is available to cover senior payments (including swap payments due and payable by the Issuer and interest under the Class A Notes) as well as any principal loss debited to the Class A Principal Deficiency Ledger. The Reserve Fund is allowed to amortise with the balance of the Notes if certain conditions are met. The Reserve Fund is not amortising and it is currently at the target level of EUR 621.60 million (approximately 10.26% of the outstanding balance of the Notes).

KBC Bank NV, Dublin Branch is the Account Bank for the transaction. The DBRS private rating of KBC Bank NV, Dublin branch is at least equal to the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in the DBRS Legal Criteria for European Structured Finance. Additionally, KBC Bank Ireland plc acts as swap counterparty for the transaction. The DBRS private rating of KBC Bank Ireland plc complies with the DBRS Derivative Criteria for European Structured Finance Transactions given the rating assigned to the senior most notes. KBC Bank NV, Dublin Branch is the guarantor for the obligations of the swap counterparty.

Notes:
All figures are in Euro unless otherwise noted.
The principal methodology applicable is Master European Structured Finance Surveillance Methodology. 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 monthly investor reports provided by KBC Bank Ireland Plc and data from the European DataWarehouse. 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 last rating action on this transaction took place on 16 July 2013, when DBRS assigned the ratings of ‘A’ (sf) to the Class A Notes.

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

To assess the impact of the 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 Probability of Default (PD) and Loss Given Default (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 of the current pool of mortgages for the Issuer are 38.27% and 54.70%, respectively. At the ‘A’ (sf) rating level, the corresponding PD is 56.01% and the LGD is 69.47%.
• 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 of the Class A Notes would be expected to fall to BB (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to fall to BB (low) (sf), assuming no change in the LGD. Furthermore, if both PD and LGD increase by 50%, the rating of the Class A Notes would be expected to drop to CCC (sf).

Class A Notes Risk Sensitivity:
• 25% increase in LGD, expected rating of BBB (low) (sf)
• 50% increase in LGD, expected rating of BB (sf)
• 25% increase in PD, expected rating of BBB (low) (sf)
• 50% increase in PD, expected rating of BB (low) (sf)
• 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
• 25% increase in PD and 50% increase in LGD, expected rating of B (sf)
• 50% increase in PD and 25% increase in LGD, expected rating of B (sf)
• 50% increase in PD and 50% increase in LGD, expected rating of CCC (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: Kali Sirugudi
Initial Rating Date: 16 July 2013
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Claire Mezzanotte

DBRS Ratings Limited
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London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960

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
Derivative Criteria for European Structured Finance Transactions
Master European Structured Finance Surveillance Methodology
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