DBRS Upgrades Class A2 and A3 Floating Rate Notes of Phoenix Funding 5 Designated Activity Company

DBRS Ratings Limited (DBRS) has today upgraded the ratings on the Class A2 and A3 Floating Rate Notes (the Notes) issued by Phoenix Funding 5 Designated Activity Company (Phoenix 5) to AAA (sf) from AA (sf).

The upgrades on the Notes reflect an annual review of the transaction and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies and defaults.
-- Portfolio default rate (PD), loss given default (LGD) and expected loss assumptions for the remaining collateral pool.
-- The Republic of Ireland’s sovereign credit strength.
-- Current available credit enhancement (CE) to the Notes to cover the expected losses at AAA (sf) rating level.

Phoenix 5 closed in June 2012 and is a securitisation of first-lien Irish residential mortgages originated and serviced by KBC Bank Ireland plc. On 28 July 2016, Phoenix 5 was converted to a Designated Activity Company from a Limited Company under the Companies Act 2014.

The mortgage collateral pool has performed well since the last DBRS rating review. As of 31 May 2016, loans more than 90 days delinquent as a percentage of the outstanding mortgage portfolio balance were 4.67%, down from 4.98% 12 months prior. Loans more than 30 days delinquent were 5.41%, down from 5.71% 12 months prior. Cumulative repossessions as a percentage of the mortgage portfolio balance on the transaction closing date increased slightly to 0.90% from 0.72% 12 months prior while cumulative realised losses remained low at 0.04%.

Ireland’s house prices continue to recovery over the past 12 months. As of June 2016, the house prices have increased by 4.46% in Dublin and 8.62% outside Dublin, although the prices for both regions were still down by about 35.50% from their most recent peak. The improved houses prices have reduced the loan-to-value ratios and the loss severity of the mortgages.

Following the collateral analysis, DBRS has updated the base-case PD and LGD assumptions on the remaining collateral pool to 13.53% and 30.62%, respectively.

DBRS upgraded Ireland’s Long-Term Sovereign Rating to A (high) from “A” on 11 March 2016 (http://www.dbrs.com/research/291773/dbrs-upgrades-republic-of-ireland-to-a-high.html). Following the sovereign upgrade, DBRS now applies less sovereign stress in the transaction analysis by reducing the transaction’s 2-Year PD assumption to 2.26% from 2.31%.

The CE available to the Notes increased to 39.33% as of the June 2016 payment date as the transaction continues to deleverage. The sources of CE are the subordination of the Class Z notes and the non-amortising reserve fund, which is currently at its target level.

KBC Bank NV, Dublin Branch (KBC Dublin) is the Account Bank to the transaction. Currently, DBRS’s private rating on KBC Dublin meets the Minimum Institution Rating criteria given the AAA (sf) rating assigned to the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology (the Legal Criteria). However, the Account Bank replacement rating trigger is set at BBB (high) according to the transaction legal documents, not being aligned with the “A” replacement threshold required, as described in DBRS’s Legal Criteria. In such situations, exposure of the transaction to the Account Bank needs to be further analysed and DBRS has factored into its rating analysis structural features as well as the current rating of the Account Bank. DBRS has also incorporated additional stress scenarios simulating the event of an Account Bank default in its cash flow analysis.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the Master European Structured Finance Surveillance Methodology.

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.

These 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/

The sources of information used for this rating include the monthly investor reports from KBC Bank Ireland Plc, and the loan by loan data from European Data Warehouse GmbH.

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 to be 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 4 September 2015, when DBRS upgraded the ratings of the Notes to AA (sf).

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 to the parameters used to determine the rating (the “Base Case”):

-- The base case PD and LGD assumptions for the remaining collateral pool are 13.53% and 30.62%, respectively. At the AAA (sf) rating level, the corresponding PD is 38.51% and the LGD is 66.07%.

-- 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 Floating Rate Notes would be expected to be at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A2 Floating Rate Notes would be expected to be at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A2 Notes would be expected to be at AAA (sf).

Class A2 Floating Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class A3 Floating Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

For further information on DBRS historical default rates published by the European Securities and Markets Authority (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, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President

DBRS Ratings Limited
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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
-- 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
-- Unified Interest Rate Model for European Securitisations

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