DBRS Confirms Rating on Azor Mortgages No. 2

DBRS Ratings Limited (DBRS) has today confirmed its rating of the Class A Mortgage-Backed Floating Rate Notes (the Class A Notes) of GAMMA – Sociedade de Titularização de Créditos, S.A. (Azor 2) at A (high) (sf).

The confirmation of the rating of the Class A Notes is based upon the following analytical considerations:
-- Portfolio performance, in terms of delinquencies and defaults, as of the January 2015 payment date.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Incorporation of a sovereign-related stress component to address the impact of macroeconomic variables on collateral performance given the long-term foreign and local currency rating of BBB (low) for the Republic of Portugal.
-- Current available credit enhancement for the Class A Notes to cover the expected losses at the A (high) (sf) rating level.

GAMMA – Sociedade de Titularização de Créditos, S.A. (Azor 2) is a securitisation of Portuguese residential mortgage loans originated by Banif – Banco Internacional do Funchal, S.A. (Banif). The assets supporting the notes are first ranking loans over residential properties located in Portugal. The transaction follows the Sociedade de Titularização de Créditos (STC) arrangement under the Portuguese Securitisation Law and closed in July 2008.

The mortgage pool is well-seasoned (over nine years) and it is geographically concentrated on the islands of the Azores. Additionally, about 49% of the current pool was originated in 2006 and 2007.

The portfolio is performing in line with DBRS’s expectations. The 90+ delinquency ratio (excluding defaulted loans) as a percentage of the performing balance of the portfolio has slightly decreased over the year and stayed at 0.66% in December 2014 (down from 0.98% in December 2013). The gross cumulative default ratio increased over the year reaching 1.53% in December 2014, but it is still below the DBRS’s base case default rate of 14.88%.

The Class A Notes are supported by the Class B Notes and an amortising Cash Reserve (currently equal to 4.35% of the outstanding principal balance of the Class A Notes). The credit enhancement for the Class A Notes increased to 25.15% in January 2015, up from 24.33% in January 2014. This has been the result of the amortisation of the Class A Notes.

The Cash Reserve is available to protect the Class A Notes against both interest and principal shortfalls on an ongoing basis. It is allowed to amortise over the life of the transaction if certain conditions are satisfied. The Cash Reserve is currently at the initial and target level of EUR 6.75 million.

HSBC Bank plc is the Account Bank for this transaction. DBRS’s private rating of HSBC Bank plc is at least equal to the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in DBRS’s Legal Criteria for European Structured Finance Transactions. Additionally, The Royal Bank of Scotland, London branch is the swap counterparty for this transaction. The swap documentation contains rating triggers related to collateralisation, replacement or the inclusion of an appropriately rated guarantor if breached consistent with DBRS’s Derivative Criteria for European Structured Finance Transactions.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the Master European Structured Finance Surveillance Methodology. 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’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include investor reports provided by HSBC Bank plc and data from the European DataWarehouse. 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.

The last rating action on this transaction took place on 14 March 2014, when DBRS confirmed the ratings of the Class A Notes at A (high) (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- DBRS expected a lifetime base case Probability of Default (PD) and Loss Given Default (LGD) for the pool based on a review of the current receivables. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of mortgages for the Issuer are 14.88% and 22.89%, respectively. At the A (high) (sf) rating level, the corresponding PD is 35.62% and the LGD is 38.99%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to fall to BBB (sf), assuming no change in the LGD. Furthermore, if both PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to BB (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) 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: Alastair Bigley
Initial Rating Date: 8 July 2011
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Erin Stafford

DBRS Ratings Limited
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London
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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
Master European Structured Finance Surveillance Methodology
Derivative 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