OREANDA-NEWS. April 22, 2016. Fitch Ratings has downgraded three tranches of Magellan Mortgages No. 1, a Portuguese RMBS comprising mortgage loans originated and serviced by Banco Comercial Portugues (BCP; BB-/Stable/B). A full list of rating actions follows at the end of this rating action commentary.

No Remedial Actions on Counterparty
The downgrades reflect the transaction's exposure to Royal Bank of Scotland (RBS; BBB+/Stable/F2) as issuer account bank, liquidity facility provider and hedge provider, after no counterparty remedial actions have been taken following RBS's downgrade (see Fitch Downgrades Royal Bank of Scotland Group to 'BBB+' Upgrades VR to 'bbb+', dated 19 May 2015 at www.fitchratings.com at www.fitchratings.com).

In line with Fitch's structured finance counterparty criteria, the bank is therefore no longer deemed eligible to perform the duties of a direct support counterparty under a stress scenario commensurate with the prior 'A+sf' ratings of the class A and B notes.

Based on Fitch's materiality assessment, which assumes transaction cash reserves and drawn liquidity facility held at RBS as account bank to be lost, senior class A and B notes will be exposed to payment interruption risk in the event of a servicer disruption event. Therefore, the class A and B notes' ratings are capped at RBS's Issuer Default Rating (IDR) of 'BBB+'.

On October 2015 Fitch placed both the class A and B notes on Rating Watch Negative (RWN) to reflect the transaction's exposure to RBS, noting that resolution of the RWN would depend on the implementation of appropriate remedial actions (see: Fitch Takes Multiple Actions on 3 Portuguese RMBS, dated 26 October 2015).

Commingling Exposure
Fitch believes the transaction is exposed to a commingling loss in the event of default of the collection account bank as there is no certainty regarding the timely cessation of further payments into the commingled accounts. The agency has captured this additional stress in its analysis.

Uncertain Cash Flows Recoveries
The transaction's track record of cash flows recoveries is weak, considering the balance of defaulted assets in litigation of EUR7.7m as of end-March 2016 and no evidence of recoveries since the first recognition of assets in litigation dating from 2004. The downgrade of the class C notes is mainly driven by Fitch's assessment of uncertain recoveries on existing and future defaults.

Because the ratings of class A and B notes are capped at RBS's IDR in the absence of sufficiently robust remedial actions on RBS as ineligible counterparty, changes to RBS's ratings could trigger an equivalent rating change to the class A and B notes.

If the counterparty exposure to RBS is sufficiently mitigated, the ratings of the class A and B notes could be upgraded to the maximum achievable 'A+sf' rating for structured finance in Portugal, given current and projected CE and our transaction performance expectations.

The class C notes' rating could be upgraded if cash flows recoveries on defaulted assets materialise.

Fitch believes the class A and B notes' ratings are able to withstand additional sensitivity stresses such as higher quick sale adjustment (QSA) of 50% and longer recovery timing of six years, versus our assumptions of 40% and four years within our Portuguese RMBS criteria, due to their current and projected CE.

No third party due diligence was provided or reviewed in relation to this rating action

Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

The information below was used in the analysis.
-Loan-by-loan data provided by:
BCP and sourced from European Data Warehouse with the following cut-off dates:
-29 February 2016

Transaction reporting provided by:
BCP for:
-Magellan 1 since close and until March 2016

The following models were used in the analysis. Click on the link for a description of the model.


EMEA RMBS Surveillance Model.

Cash Flow Model.

List of rating actions

Magellan Mortgages No. 1 Plc:
Class A (ISIN XS0140415836): downgraded to 'BBB+sf' from 'A+sf'; off RWN, Outlook Stable
Class B (ISIN XS0140416057): downgraded to 'BBB+sf' from 'A+sf'; off RWN, Outlook Stable
Class C (ISIN XS0140416214): downgraded to 'BB+sf' from 'BBB+sf'; Outlook Stable