DBRS Upgrades the Class A2 and A3 Floating Rate Notes Issued by Phoenix Funding 5 Limited

DBRS Ratings Limited (DBRS) has today upgraded the ratings on the Class A2 and A3 Floating Rate Notes issued by Phoenix Funding 5 Limited to AA (sf) from A (high) (sf). Phoenix Funding 5 Limited is an Irish residential mortgage-backed securities (RMBS) transaction.

The upgrade of the Class A2 and A3 Notes’ ratings is based on the following analytical considerations, as described more fully below:

-- Portfolio performance, in terms of delinquencies and defaults.
-- Portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Sovereign credit strength of the Republic of Ireland.
-- Current available credit enhancement to the Notes to cover the expected losses at the AA (sf) rating level.

The Phoenix Funding 5 Limited transaction closed in June 2012 and is a securitisation of first lien Irish residential mortgages originated between 1997 and 2012. The transaction’s current performance is in line with DBRS’s expectation.

As of 30 June 2015, loans more than 90 days delinquent as a percentage of the outstanding collateral pool balance have decreased to 4.77% from 5.12% a year ago. At the same time, loans more than 12 months delinquent have increased to 2.05% from 1.51%. Nevertheless, the ‘Deemed Loss’ provision feature within the transaction on those 12-months-plus delinquent loans can trap the transaction’s excess spread to provide protection against potential future losses. The cumulative repossession is 0.73% of the collateral pool balance at the transaction’s closing, and no loss has been realised.

As of 31 March 2015, around 33% of the outstanding loan balance in the transaction was restructured to assist borrowers with payment difficulties. The main types of restructuring were ‘interest only’ and ‘reduced payment’. DBRS did not receive loan by loan information on the modified loans. However, DBRS applied additional stress to the transaction’s overall exposure to the modified loans in its credit analysis.

Following the upgrade of Republic of Ireland’s sovereign rating to ‘A’ from A (low) on 13 March 2015 (http://dbrs.com/research/277813/dbrs-upgrades-republic-of-ireland-to-a-stable-trend.html), DBRS now applies reduced sovereign stress in the transaction.

The credit enhancement available to Class A2 and A3 Notes increased to 35.83% through transaction deleveraging. The sources of credit enhancement are the subordination of Class Z and the non-amortizing reserve fund currently at its target level.

The increased credit enhancement and the improved sovereign credit strength are the main drivers for today’s rating upgrades.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the ‘Master European Structured Finance Surveillance Methodology’, which can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted, as the documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/ published on 24 May 2011.

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

DBRS does not rely upon third-party due diligence in order to conduct its analysis. DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

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 21 July 2015, when the Class A1 Notes rating was discontinued.

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with 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 assets. 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 15.43% and 43.04%, respectively. At the AA (sf) rating level, the corresponding PD is 40.08% and the LGD is 65.51%.

-- 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 on the Class A2 Notes would be expected to remain be at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A2 Notes would be expected to be at AA (low) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Classes A2 Notes would be expected to be at BBB (high) (sf).

Class A2 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class A3 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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: 6 June 2012
Initial Rating Committee Chair: Erin Stafford

Lead Surveillance Analyst: Kevin Ma
Rating Committee Chair: Mary Jane Potthoff

DBRS Ratings Limited
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London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies

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

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrs.com/research/278375