Fitch Assigns Phoenix Funding 6 Designated Activity Company New Ratings
EUR579,600,000 Class A1: 'AA+sf', Outlook Stable
EUR491,400,000 Class A2: 'AA+sf', Outlook Stable
EUR189,000,000 Class Z: Not rated
This transaction is an RMBS securitisation of owner-occupied (98.9%) and buy-to-let (BTL) mortgages (1.1%) originated in Ireland by KBC Bank Ireland (KBCI).
The ratings are based on Fitch's assessment of the underlying collateral, available credit enhancement (CE), KBCI's origination and underwriting procedures, its servicing capabilities and the transaction's financial structure. Fitch has based its analysis on the provisional pool with a cut-off date as at 31 October 2016. Fitch understands that no loans were in arrears as at 30 November 2016 and expects to receive the final pool within one week of closing.
KEY RATING DRIVERS
All of the originations in the pool are from 2011 and onwards, thereby benefiting from tighter underwriting criteria compared to pre-crisis originations. The weighted average (WA) seasoning is 17.7 months with the majority of the originations from 2014 to 2016. Fitch considers KBCI's underwriting standards to be in line with comparable prime lenders in the Irish market, benefiting from considerably tighter lending criteria compared with pre-2011 originations.
Around 71% of the loans are concentrated in Dublin, which is higher than typically seen in Irish transactions. Any concentration within a particular region means the portfolio is more likely to be exposed to regional economic declines or natural disasters. Since the concentration of loans in Dublin is more than two times the population concentration, Fitch applied an upward adjustment to the foreclosure frequency of 15% for all loans in this region.
At close, around 22% of the mortgages pay a fixed rate of interest. Since no hedging agreement is in place, the structure is exposed to interest rate risk arising from the mismatch between the fixed rate assets and the floating rate liabilities, which is further compounded by the ability for borrowers to product switch given certain conditions. This contributes to the increasing interest rate assumption being the most stressful for the transaction.
A default provisioning mechanism is in place, benefiting the transaction's cash flows by recognising losses likely to be incurred in the future. The losses are recognised when the loan is 12 months in arrears. This is helpful for Irish RMBS, given the length of time required to complete repossession activity since the transaction can recover the losses through excess spread.
Material increases in the frequency of defaults and loss severity on defaulted receivables producing losses greater than Fitch's base case expectations may result in negative rating actions on the notes. Fitch's analysis revealed that a 30% increase in the WA foreclosure frequency, along with a 30% decrease in the WA recovery rate, would imply a downgrade of the class A1 notes to 'AAsf' from 'AA+sf'.
More detailed model implied ratings sensitivity can be found in the new issue report, which is available at www. fitchratings. com
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
Fitch was provided with a loan-by-loan data template and most of the relevant fields were provided. KBCI was unable to provide data on prior mortgage arrears, court judgements and prior bankruptcy orders. Fitch evaluated the lending policy with respect to adverse credit and decided to not make any further adjustments. KBCI was also unable to provide data over re-mortgages for the purpose of debt consolidation or equity release. Due to this missing data, Fitch classified 50% of re-mortgages cases as for debt consolidation or equity release, which leads to an increase in the FF for those loans of 50%.
Annual performance history data was provided on KBCI's residential owner-occupied and BTL originations covering 2011 to 2016. The performance history displayed good performance for the new originations, which was in line with Fitch's expectations of improved underwriting standards compared with older originations.
Fitch conducted a review of a small targeted sample of KBCI's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, and concluded that there were no findings that affected the rating analysis.
Overall and together with the assumptions referred to above, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by KBCI as at 31 October 2016
- Loan enforcement details provided by KBCI as at 30 June 2016
- Loan performance data provided by KBCI as at 30 June 2016