OREANDA-NEWS. Fitch Ratings has downgraded six and affirmed eight tranches of various AyT RMBS series. The agency has also revised the Outlook on two tranches to Stable from Negative. A full list of rating actions is available at the end of this commentary.

The transactions are part of a series of RMBS transactions that are serviced by: Kutxabank, S.A. (Kutxabank; BBB/Positive/F3) for AyT Kutxa Hipotecario I and AyT Kutxa Hipotecario II, Bankia S.A. (Bankia; BBB-/Negative/F3) for AyT CGH Caixa Laietana I and Banco Mare Nostrum S.A (BMN; BB+/Negative/B) for AyT CGH Caja Granada.

KEY RATING DRIVERS

Varied Credit Enhancement
The notes in AyT CGH Caja Granada, AyT CGH Caixa Laietana and AyT Kutxa Hipotecario II are currently paying sequential. As the reserves are not at target and delinquencies are above the trigger levels a switch to pro-rata is not expected in the near future. In some cases the credit enhancement (CE) available in these structures has not been sufficient to support the ratings, as reflected in the downgrades. In the case of AyT CGH Caja Granada the reserve was fully depleted on November 2014 causing a principal deficiency ledger (PDL) on the class D of 0.7% of the collateral balance to be recorded.

For AyT Kutxa Hipotecario I the stable performance has led to a switch to pro-rata amortisation, as delinquencies remain low and the reserve fund is currently at its target. For this reason a reversal to sequential is not expected.

Stable Asset Performance
AyT CGH Caja Granada and AyT CGH Caixa Laietana have shown weaker asset performance compared to the other Spanish transactions. The level of three-months plus arrears (excluding defaults) as a percentage of the current pool balance was 2.6% and 8.2% respectively. Although these numbers are decreasing, they remain significantly above Fitch's index of three-months plus arrears (excluding defaults) of 1.6%.

Cumulative defaults, defined as mortgages in arrears by more than 18 months, are currently below the average for the sector, but have increased sharply in recent periods. Fitch notes that more mortgages have advanced to later arrears buckets (more than six months) over the past 12 months and believes that this will lead to further increases in gross cumulative defaults.

As for the AyT Kutxa Hipotecario deals, AyT Kutxa Hipotecario I has shown stable arrears levels, at 0.1%, and also low levels of gross cumulative defaults, currently at 0.5% of the initial pool balance. For AyT Kutxa Hipotecario II arrears levels are higher at 1.2% of the current pool and gross cumulative defaults continue to rise, currently at 5.1%. This number has remained above the Spanish average of 4.6% since 2010. Fitch believes that the level of defaults may continue to rise although the decreasing level of arrears will prevent any sharp increases in defaults in the future.

Fitch considers that the different performance of the two Kutxa Hipotecario deals has been mainly explained by the higher proportion of loans that are linked to the IRPH interest rate index in AyT Kutxa Hipotecario II (originally 61%%) than in AyT Kutxa Hipotecario I (originally 0%%). With an IRPH of 2.4% versus the 0.2% 12 month-Euribor as of March 2015, the debt service charge on IRPH loans has been far higher than that of Euribor-linked loans.

Reserve Fund Draws
The reserve fund for AyT CGH Caja Granada is now fully depleted, while the reserve fund for AyT CGH Caixa Laietana and AyT Kutxa Hipotecario II are currently at 48.2% and 11.2% of their respective targets. Fitch expects the performance deterioration and low excess spread to cause these reserve funds to be fully utilised in the next 12 to 18 months. This is reflected in the downgrade of the full capital structure of both AyT CGH Caja Granada and AyT Kutxa Hipotecario II.

In contrast AyT Kutxa Hipotecario I has a fully funded reserve fund. Given the low level of arrears Fitch believes the transaction will continue to amortise its reserve fund until it reaches its floor of EUR6.7m.

High Mortgage Prepayments
Both AyT CGH Caja Granada (13.5% per annum) and AyT CGH Caixa Laietana (12.8% per annum) have reported high mortgage prepayments, significantly above the market average (4.6% per annum). As these rates are not consistent with the current macroeconomic environment and levels observed in the market, Fitch cannot rule out the possibility that some prepayments are the result of originator support for troubled borrowers by means of refinancing. In fact, most of the prepayments came from loans in arrears. If refinancing in such circumstances has been offered in the past, it may not be sustained indefinitely. This will explain the recent defaults' rise.

Payment Interruption Risk
Even when the swap documents enable deferral of the swap payments Fitch considers that the reserve fund is not sufficient to sustain ratings above the 'Asf' category for AyT CGH Caixa Laietana I and AyT CGH Caja Granda, given the absence of other liquidity means to cover for payment interruption. For AyT Kutxa Hipotecario II a dynamic cash reserve has been constituted, this reserve is sized to cover for two payment dates worth of interest on tranche A and senior fees. However Fitch considers this cash reserve plus the utilised reserve fund balance insufficient to fully cover the payment interruption risk so even if the transaction's performance improves in the future, the ratings will not be upgraded more than three notches above the rating of Kutxabank (currently implying a cap of 'Asf').

In contrast AyT Kutxa Hipotecario I has sufficient liquidity to cover for payments due to the relevant counterparties in case of default of the servicer and collection account bank. This liquidity is in the form of a fully funded reserve fund.

RATING SENSITIVITIES
A worsening of the Spanish macroeconomic environment, especially employment conditions, or an abrupt shift in interest rates might jeopardise the ability of the underlying borrowers to meet their payment obligations.

More volatile arrears patterns and a rapid increase in defaults, beyond Fitch expectations, could trigger negative rating actions.

The rating actions are as follows:

AyT CGH Caixa Laietana I:
Class A notes (ISIN ES0312273487): Affirmed at 'A+sf'; Outlook revised to Stable from Negative
Class B notes (ISIN ES0312273495): Affirmed at 'BBBsf'; Outlook Negative
Class C notes (ISIN ES0312273503): Affirmed at 'BBsf'; Outlook Negative
Class D notes (ISIN ES0312273511): Affirmed at 'CCCsf' ; RE 55%

AyT CGH Caja Granada:
Class A notes (ISIN ES0312273164): Downgraded to 'A-sf' from 'Asf'; Outlook Negative
Class B notes (ISIN ES0312273172): Downgraded to 'Bsf' from 'BBsf'; Outlook Negative
Class C notes (ISIN ES0312273180): Downgraded to 'CCCsf' from 'Bsf'; RE 50%
Class D notes (ISIN ES0312273198): Downgraded to 'CCsf' from 'CCCsf'; RE 0%

AyT Kutxa Hipotecario I:
Class A notes (ISIN ES0370153001): Affirmed at 'AA+sf'; Outlook Stable
Class B notes (ISIN ES0370153019): Affirmed at 'Asf'; Outlook Stable
Class C notes (ISIN ES0370153027): Affirmed at 'BBBsf'; Outlook Stable

AyT Kutxa Hipotecario II:
Class A notes (ISIN ES0370153001): Downgraded to 'Asf' from 'AA-sf'; Outlook Stable
Class B notes (ISIN ES0370153019): Downgraded to 'BBsf' from 'BBBsf'; Outlook Negative
Class C notes (ISIN ES0370153027): Affirmed at 'CCCsf'; RE 60%