DBRS Upgrades Class A Notes of Phoenix Funding 2 Designated Activity Company to AA (sf)

DBRS Ratings Limited (DBRS) has today upgraded the rating on the Class A notes issued by Phoenix Funding 2 Designated Activity Company (Phoenix 2) to AA (sf) from A (high) (sf).

The upgrade reflects an annual review of the transaction and is 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 and the ongoing improvement of the house prices in Ireland.
-- Current available credit enhancement (CE) to the notes to cover the expected portfolio losses at AA (sf) rating level.

Phoenix 2 closed in June 2008 and is a securitisation of Irish residential mortgages originated by KBC Bank Ireland plc between 2004 and 2008. KBC Bank Ireland plc also acts as servicer for the transaction. On 28 July 2016, Phoenix 2 was converted to a Designated Activity Company from a Limited Company under the Companies Act 2014.

The performance of the mortgage collateral pool continues to improve since DBRS’s last rating review. As of 31 July 2016, loans more than 90 days delinquent as a percentage of the outstanding mortgage portfolio balance were 20.25%, down from 22.29% 12 months prior. Loans more than 30 days delinquent were 21.54%, down from 23.38% 12 months prior. Cumulative repossessions as a percentage of the mortgage portfolio balance on the transaction closing date increased to 6.96% from 4.95% 12 months prior, while cumulative realised losses remained low at 0.20%.

As of 30 June 2016, approximately 58.08% of the outstanding loan balance in the transaction has been restructured to assist borrowers with payment difficulties. This is only a slight increase from the last year. 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 collateral analysis.

Ireland’s house prices have continued to recover over the past 12 months. As of June 2016, house prices have increased by 4.46% in Dublin and 8.62% outside Dublin year over year, although the prices for both regions were still down by approximately 35.50% from their most recent peaks. The improvement in house prices has reduced the loan-to-value ratios and expected loss severities of the mortgages.

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 its analysis of Irish securitisation transactions. Consequently, DBRS has reduced the transaction’s 2-Year PD assumption to 2.82% from 2.87%.

Following the analysis of the loan-by-loan data as of 31 July 2016, DBRS has updated its base-case PD and LGD assumptions on the remaining collateral pool to 36.67% and 44.05% from 39.15% and 44.85%, respectively.

The credit enhancement (CE) available to the Class A notes increased to 47.26% as of the August 2016 payment date, as the transaction continues to deleverage. The sources of CE are the subordination of the Class B 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 for the transaction. Currently, DBRS’s private rating on KBC Dublin meets the Minimum Institution Rating criteria given the AA (sf) rating assigned to the Class A notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

KBC Bank Ireland Plc is the swap counterparty to the transaction with KBC Dublin acting as the swap guarantor. The guarantor’s DBRS private rating complies with the rating requirement as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the rating assigned to the Class A notes.

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 2 October 2015, when DBRS upgraded the Class A notes to A (high) (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 36.67% and 44.05%, respectively. At the AA (sf) rating level, the corresponding PD is 59.49% and the LGD is 64.12%.

-- 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 at BBB (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 A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A notes would be expected to be at BB (low) (sf).

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

Lead Surveillance Analyst: Kevin Ma, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY 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

-- 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
-- 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