DBRS Assigns New Ratings to Notes Issued by Phoenix 6 DAC

DBRS Ratings Limited (DBRS) has today assigned ratings on the securitisation notes issued by Phoenix Funding 6 Designated Activity Company (Phoenix 6 or the Issuer) as follows:

-- EUR 579,600,000 Class A1 notes rated AA (high) (sf)
-- EUR 491,400,000 Class A2 notes rated AA (high) (sf)

The ratings on the Class A1 and Class A2 notes (together, the Class A notes) represent timely payment of interest and ultimate payment of principal.

Phoenix 6 is a securitisation of first lien mortgages originated by KBC Bank Ireland plc (KBCI; rated privately by DBRS). The provisional mortgage pool (as of October 31 2016) aggregates EUR 1.29 billion to 5,028 different borrowers with an average current balance of EUR 255,899. Upon closing of the transaction, the provisional pool was reduced through the random selection, such that the pool equates to EUR 1.26 billion. All loans are secured by residential properties located in Ireland and are euro denominated. KBCI will act as servicer of the mortgage loans in accordance with the transaction documents.

The Class A notes along with the Class Z loan fund the purchase of the mortgage portfolio. Additionally, the Issuer received a subordinated loan from KBCI, which is used to fully fund the reserve fund and cover the initial arrangement costs. The reserve fund is split into two separate ledgers: a non-amortising general reserve fund that will form part of available revenue funds, and a liquidity reserve fund available to cover Class A1 and Class A2 interest and senior fees after the application of available revenue funds and principal proceeds used to provide liquidity support.

The ratings are based on the following analytical considerations:

-- Transaction capital structure and form and sufficiency of available credit enhancement.

The transaction’s capital structure provides 16% of initial credit enhancement to the Class A notes, through subordination of the Class Z loan (15% in size) and a non-amortising fully funded cash reserve fund equal to 1% of the aggregate outstanding balance of the Class A notes and the Class Z loan as of closing. Principal amortisation between the Class A notes and Class Z loan is sequential; however, subject to certain Pro-Rata Amortisation Conditions, principal is paid on a pro rata and pari passu basis with the Class Z loan.

Interest payments on the Class A notes are supported by a fully funded liquidity reserve fund with a target balance of 1.5% of the outstanding balance of the Class A notes. The liquidity reserve fund is available after the use of revenue receipts, the general reserve fund and application of principal receipts. The liquidity reserve fund is available to cover shortfalls in interest on the rated notes.

-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated the probability of default (PD), loss given default (LGD) and expected loss outputs on the mortgage loan portfolio.

The provisional mortgage portfolio aggregates to EUR 1.286 billion (as of 31 October 2016). The mortgage portfolio comprises relatively new originations with a weighted-average seasoning of 1.47 years. As of 31 October 2016, no loans are delinquent. The weighted-average indexed current loan-to-value ratio (WACLTV (indexed)) is 66.35%, with no loans currently in negative equity. The mortgage portfolio has a small proportion of buy-to-let loans (1.12%), and all are scheduled to pay capital plus interest on a monthly basis. The loans are expected to benefit from a tightening of the originator’s underwriting criteria during 2010. Upon closing of the transaction, the provisional mortgage portfolio will be reduced through random removal of loans, such that the pool equates to EUR 1.26 billion.

As a result of the analytical considerations, DBRS derived a Base Case PD of 7.5% and an LGD of 16.0%, which resulted in an expected loss of 1.2% using the European RMBS Credit Model.

The transaction’s servicing arrangements will consist of KBC Bank Ireland plc being the servicer of the mortgage portfolio, with no back-up servicer being mandated.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay the lender according to the terms of the transaction documents. DBRS used front- and back-loaded default timing curves, rising and declining interest rates and low, mid and high prepayment scenarios. The transaction cash flows were modelled in Intex DealMaker using the portfolio default rates and LGD outputs provided by the European RMBS default model.

The Class A notes pay a coupon linked to three-month Euribor, and the loans in the mortgage portfolio pay interest linked to the either three-month Euribor (78%) or a short-term fixed rate, upon expiry of which the loans revert to a discretionary variable rate (22%). This gives rise to interest and basis risk that is not hedged in the transaction. DBRS considers the basis risk and interest rate risk mitigated by the high yielding nature of the loans. The portfolio has a current weighted-average coupon of 3.70%. Included in the documentation is a variable rate covenant, which states that the weighted-average variable rate of the portfolio cannot be set below three-month Euribor plus 2.00%. If the servicer sets the weighted-average variable rate below the floor, the servicer is required to remediate such a breach by paying a cash amount equal to the difference in revenue that would have been received if the rate had been at the covenant level.

-- 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.”

Representations and warranties are provided by KBCI (as the Originator and Seller) in relation to the mortgage portfolio and future substitutions. The representations and warranties in the documentation are standard for Irish RMBS transactions. A breach of representations and warranties would require KBCI to indemnify the Issuer for such breaches via repurchase or substitutions of the respective loans from the Phoenix 6 mortgage portfolio.

The transaction documents allows for certain mortgage conversions in order to account for treatment of arrears and pre-arrears cases. In so far as a loan has a term extended beyond the interest payment date falling in September 2051, KBCI is obliged to repurchase the loans. In other cases, KBCI retains the right to repurchase loans from the collateral pool that either are unable to receive full arrears treatment because of the servicing agreement, comprise a PDL debit balance, or result in a claim of the Issuer as a result of the servicing agreement.

Under the terms and conditions on the notes, the Issuer is allowed to purchase further advances, retention advances and redraws that have been disposed by KBCI. These purchases will be funded from available redemption funds, subject to availability, and must abide by the strict criteria, which are outlined in the documents.

-- The relevant counterparties, as rated by DBRS, are appropriately in line with DBRS legal criteria to mitigate the risk of counterparty default or insolvency.

The mortgage portfolio is serviced by KBC Bank Ireland plc (rated privately by DBRS). Monthly mortgage payments will be collected and deposited into trust accounts at BNP Paribas, Dublin Branch (privately rated by DBRS) for loans that pay under a direct debit mandate, and Ulster Bank Ireland DAC (privately rated by DBRS) for loans where borrowers use form of payment other than direct debit. Payments are swept from the trust accounts to the issuer account at KBC Bank NV, Dublin Branch within one business day for direct debits and two business days for other payment forms.

An account will be held in the name of the issuer at KBC Bank NV, Dublin Branch, which is privately rated by DBRS. The minimum rating thresholds and downgrade provisions in the transaction documents leads DBRS to conclude that KBC Bank NV, Dublin Branch meets the criteria to act in such a capacity in accordance with DBRS’s Legal Criteria for European Structured Finance Transactions methodology.

DBRS received deposit set-off data (as of 15 October 2016). Further set-off risk arises from the flexible loan features of the mortgage loans. DBRS analysis deems the set-off exposure to be minimal.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the Master European Residential Mortgage-Backed Securities Rating Methodology and Irish Addendum.

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

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

The sources of information used for this rating include KBC Bank Ireland plc and investor reports of publicly rated Irish RMBS transactions. DBRS considers the information available of satisfactory quality for the purpose of this rating.

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

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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):

In respect of the Class A1 Notes, a PD of 27.6% and LGD of 48.7% corresponding to a AA(high) rating scenario.

In respect of the Class A2 Notes, a PD of 27.6% and LGD of 48.7% corresponding to a AA(high) rating scenario.

DBRS concludes the following impact on the Class A1 notes:

-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to maintain the rating at AA (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to maintaining the rating AA (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to maintaining the rating at AA (high) (sf)
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to maintaining the rating at AA (high) (sf)
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to maintaining the rating at AA (high) (sf)
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to AA (sf).
-- A hypothetical increase of the base case PD by 50% and increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to AA (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus would lead to a downgrade of the rating to AA (sf).

DBRS concludes the following impact on the Class A2 notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to downgrade of the rating to AA (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the rating to A (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to downgrade of the rating to A (low) (sf).
-- A hypothetical increase of the base case PD and LGD by 25%, ceteris paribus, would lead to downgrade of the rating to A (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25% would lead to downgrade of the rating to A (sf).
-- A hypothetical increase of the base case PD and LGD by 50% would lead to downgrade of the rating to BBB (sf).

For further information on DBRS historical 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.

Lead Analyst: Asim Zaman, Assistant Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Lead Surveillance Analyst: Kevin Ma, Assistant Vice President
Initial Rating Date: 14 December 2016

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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

Methodologies applied are:
-- Master European Mortgage-Backed Securities Rating Methodology and Irish Addendum (2 November 2016)
-- Legal Criteria for European Structured Finance Transactions (14 September 2016)
-- Unified Interest Rate Model Methodology for European Securitisations (2 November 2016)
-- Operational Risk Assessment for European Structured Finance Servicers (14 October 2016)
-- Operational Risk Assessment for European Structured Finance Originators (14 October 2016)

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