DBRS Upgrades Class A Notes Issued by Phoenix Funding 2 Limited

DBRS Ratings Limited (DBRS) has today upgraded the Class A Notes issued by Phoenix Funding 2 Limited to A (high) (sf). Phoenix Funding 2 Limited is an Irish residential mortgage-backed securities (RMBS) transaction.

The upgrade of the Class A Notes is based on the following analytical considerations:

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

The Phoenix Funding 2 Limited transaction, which closed in June 2008, is a securitisation of Irish residential mortgages originated between 2004 and 2008. The transaction’s current performance is in line with DBRS’s expectation.

As of 30 August 2015, loans greater than 90 days delinquent as a percentage of the outstanding collateral pool balance have decreased to 22.21% from 25.95% at a year ago. The cumulative repossession rate is 4.95%, as a percentage of the closing date collateral pool balance, and a small loss of 0.09% has been realised.

As of 31 March 2015, approximately 57.6% of the outstanding loan balance in the transaction was restructured to assist borrowers with payment difficulties. The primary 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 stresses on 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 a reduced sovereign stress in the transaction and lowered the 2-year probability of default assumption on the transaction to 2.87% from 3.00%.

The house prices in Ireland have shown signs of recovery since DBRS first rated the transaction in 2013. As of July 2015, house prices have recovered by 17.2% from the low point in March 2013 outside Dublin and by 45.7% from the low point in August 2012 in Dublin according to the Central Statistics Office. Consequently, DBRS has reduced its loss given default or loss severity assumption at the “B” rating level to 44.85% from 54.70%.

The credit enhancement available to Class A Notes increased to 44.29% through transaction deleveraging. The sources of credit enhancement are the subordination of Class B Notes and the reserve fund currently at its target level. The reserve fund is currently non-amortising because the outstanding mortgage balance more than 3 months in arrears is more than 3%.

The increased credit enhancement, the improved sovereign credit strength, and the reduced loss severity assumption are the primary drivers for the rating upgrade.

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’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary 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 23 October 2014, when the Class A Notes rating was confirmed.

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 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 39.15% and 44.85%, respectively. At the A (high) (sf) rating level, the corresponding PD is 53.09% and the LGD is 63.86%.

-- 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 A Notes would be expected to be downgraded to BB (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to be at BB (high) (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 below B (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of Below B (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: Kali Sirugudi
Initial Rating Date: 16 July 2013
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Kevin Ma
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane, 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
-- Derivative Criteria for European Structured Finance Transactions

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