DBRS Assigns New Ratings to Fastnet Securities 3 Limited

DBRS Ratings Limited (DBRS) has today assigned ratings to the following notes issued by Fastnet Securities 3 Limited (Fastnet 3):

-- AAA (sf) to €1,151,046,471 outstanding of the Class A1 Mortgage Backed Fixed Rate Notes (the Class A1 Notes), paying 1.5% coupon
-- A (low) (sf) to €2,336,900,000 outstanding of the Class A2 Mortgage Backed Fixed Rate Notes (the Class A2 Notes; combined the Notes), paying 1.5% coupon

Fastnet 3 is a securitisation of a portfolio of residential mortgage loans and secured by first-ranking lien mortgages on properties in the Republic of Ireland, originated by permanent tsb p.l.c. (PTSB; rated BB (low and R-4 with Negative trends). The transaction closed in December 2007 and has a seasoning of approximately seven years. During this time certain structural elements were amended in February 2011 and December 2012. The ratings are assigned to the current structure (as of the 10 September 2014 interest payment date) and based on the following analytical considerations:

-- The transaction capital structure as of the end of September 2014 provides 79.0% of credit enhancement to the Class A1 Notes and 36.5% to the Class A2 Notes through subordination and 2.3% to the Notes through the available reserve fund. Due to the sequential amortisation between the Notes, the Class A1 Notes and the Class A2 Notes can withstand severe loss scenarios that are in line with DBRS AAA (sf) and A (low) (sf) stresses.
--The liquidity in the transaction is provided by the reserve fund, which can be used to pay senior costs, interest and the principal deficiency of the Notes. Furthermore liquidity is made available by principal collections to pay for scheduled interest payments on the Notes in case the revenue funds should not have been sufficient.
-- The performance of mortgage loans in the Fastnet 3 portfolio has been improving over the past months. In DBRS’s view this has been driven by the improvement in the Irish economy and the housing market, more clarity on legal and regulatory treatments of highly delinquent borrowers and, consequently, a more active servicing by PTSB to solve high arrears cases. DBRS has considered these improvements in its Probability of Default (PD) and Loss Given Default (LGD) assumptions.
-- Non-performing loans (according to the DBRS definition: loans in arrears more than 12 months or loans that had been modified and in arrears for more than three months) still account for roughly 14% of the outstanding portfolio balance as October 2014. DBRS assumes that these loans will be enforced with the realised cash flows stemming from the sale price of the underlying property adjusted for DBRS market value declines.
--The transaction’s servicing arrangements consists of PTSB being the servicer of the transaction, Homeloan Management Limited (NR) acting as back-up servicer, BNP Paribas, London Branch (privately rated by DBRS) acting as back-up servicer facilitator and BNP Paribas Securities Services, London Branch (privately rated by DBRS) acting as back-up cash manager. In DBRS’s view this set-up can mitigate a potential servicer termination and therefore remedy potential interest shortfalls due to operational issues.
-- The Notes pay a fixed coupon of 1.5%, while most of the mortgage loans are referenced to the European Central Bank rate or PTSB standard variable rates. DBRS considered the un-hedged fixed-floating risk in its cash flow modelling assumptions.

Notes:
All figures are in euro unless otherwise noted.

The principal methodology applicable is:
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (August 2014).

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” at: http://www.dbrs.com/research/239786/the-effect-of-sovereign-risk-on-securitisations-in-the-euro-area.pdf

The sources of information used for this rating include PTSB and their agents. DBRS considers the information available to it for the purposes of providing this rating was 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

To assess the impact of potential changes in the transaction’s parameters on the ratings, DBRS considered in addition to its base case further stress scenarios for its main rating parameters PD and LGD in its cash flow analysis. The two additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determine the ratings (the Base Case):

• In respect of the Class A1 Notes and a rating category of AAA (sf), PD of 54.1% and the LGD of 76.6%.

• In respect of the Class A2 Notes and a rating category of A (low) (sf), PD of 43.2% and the LGD of 63.9%.

DBRS concludes that for the Class A1 Notes:
• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to AA (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to AA (high) (sf).
• A hypothetical increase of both, the PD and the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BBB (high) (sf).

DBRS concludes that for the Class A2 Notes:
• A hypothetical increase of the PD by 25% and constant LGD, ceteris paribus, would lead to a downgrade of the Class A2 Notes to BBB (low) (sf).
• A hypothetical increase of the PD by 50% and constant LGD level, ceteris paribus, would lead to a downgrade of the Class A2 Notes to BB (sf).
• A hypothetical constant PD and an increase of LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to B (high) (sf).
• A hypothetical constant PD and an increase of the LGD in 50%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to B (high) (sf).
• A hypothetical increase of both PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to B (high) (sf).
• A hypothetical increase of PD by 50% and a hypothetical increase of LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to B (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration 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.

Initial Lead Analyst: Sebastian Hoepfner
Initial Final Rating Date: November 4, 2014
Initial Final Rating Committee Chair: Erin Stafford
Lead Surveillance Analyst: Elisa Scalco

DBRS Ratings Limited
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Mincing Lane
London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960
The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

Legal Criteria for European Structured Finance Transactions
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations