OREANDA-NEWS. Fitch Ratings has downgraded three tranches of Diamond Mortgage Finance 2006 and affirmed a further tranche. A full list of rating actions follows at the end of the rating action commentary.

The transaction is a securitisation of a portfolio of residential mortgage loans originated by Krefima N.V.

KEY RATING DRIVERS
Counterparty Exposure
On 19 May 2015, Fitch downgraded RBS to 'BBB+/Stable/F2', which performs the role of account bank, liquidity facility provider and interest rate swap provider in the transaction. As a result, RBS is no longer an eligible account bank, liquidity facility or interest rate swap provider for the senior and mezzanine rated notes as per Fitch counterparty criteria.

RBS is currently posting collateral in line with their documentation in regards to the trigger breach as an interest rate swap provider. On the other hand, Fitch has been informed that no remedial action will be taken regarding the account bank and liquidity facility provider, even though the transaction documents stipulate actions be taken upon a trigger breach of 'A'/'F1'. Given that there are no triggers regarding a downgrade of RBS below 'BBB+/F2' stipulated in the transaction documents Fitch has capped the ratings of the notes at the current rating of RBS (BBB+/Stable). It should be noted that no remedial action is expected if RBS is downgraded further as the notes are now credit-linked to RBS's rating.

High Arrears and Defaults
The loans in arrears by more than three months (including those more than five months, which are classified as defaults) have increased to 7.3% of the current portfolio balance, from 7% in June 2014 and almost half of these loans are in arrears by more than 12 months. The loans that have been foreclosed upon represent a limited loss of 0.22% of the initial pool balance.

The transaction provisions for losses and considering the high late-stage arrears and defaults levels, the junior tranche is more exposed to the losses. The pool has also amortised to 19.3% of the collateral amount, which implicates that the transaction becomes increasingly sensitive to tail risk and adverse selection, in turn having a negative impact on the recovery rate.

Fitch is of the opinion that the junior note is currently sufficiently protected against a deterioration of the performance through reserve fund triggers. On each payment date, the reserve fund is the higher of the minimum amount of EUR4.2m and 1.55% of the current outstanding balance plus 38% of the balance of the loans in arrears by more than 12 months. The reserve fund is further increased by 1% of the current portfolio balance, if the percentage of loans in arrears between three and 12 months exceeds 4.5% of the outstanding portfolio balance.

RATING SENSITIVITIES
Fitch will continue to monitor the performance of the transaction and will request information on the foreclosed properties on a quarterly basis. Declining recoveries achieved on the foreclosures below Fitch's expectations could result in negative rating action.

The rating of the notes is linked to RBS's rating as no remedial action is expected and therefore any deterioration in RBS's credit profile could consequently affect the rating of the tranches. Fitch will also monitor the ratings of RBS and collection account bank ING (A/Stable/F1) to assess any potential commingling exposure.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. 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 pool 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.

SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided Krefima as at 31 August 2015
-Transaction reporting provided by Intertrust as at 16 June 2015

MODELS
The model below was used in the analysis. Click on the link for a description of the model.
- EMEA RMBS Surveillance Model

Full list of rating actions
Class A (ISIN BE0002345172) downgraded to 'BBB+sf' from 'AAAsf'; Outlook Stable
Class B (ISIN BE0002346188) downgraded to 'BBB+sf' from 'AAsf'; Outlook Stable
Class C (ISIN BE0002347194) downgraded to 'BBB+sf' from 'Asf'; Outlook Stable
Class D (ISIN BE0002348200) affirmed at 'BBBsf'; Outlook Stable