DBRS Finalises Provisional Ratings on Fastnet Securities 12

DBRS Ratings Limited (DBRS) has today finalised its provisional ratings on the securitisation notes issued by Fastnet Securities 12 Designated Activity Company (Fastnet 12, Issuer):

--Class A notes: AAA (sf)
--Class B notes: AA (sf)
--Class C notes: A (high) (sf)

The final ratings on the Class A and Class B notes represent timely payment of interest and ultimate payment of principal. The final ratings on the Class C notes stand for ultimate payment of interest and ultimate payment of principal.

Fastnet 12 is the securitisation of a portfolio of first-lien mortgage loans in Ireland, originated by permanent tsb p.l.c. (PTSB; rated BB (low) with a Positive trend and R-4 with a Stable trend by DBRS).

The ratings are based on the following analytical considerations:

-- The transaction’s capital structure provides 20.59% credit enhancement to the Class A notes, through subordination of the Class B notes (5.50% in size of the total issuance), the Class C notes (3.75% in size of the total issuance) and the Class Z notes (11.06% in size of the total issuance) and a 0.28% credit support available from the reserve fund. The Class B notes have 15.09% of credit enhancement and that for the Class C notes 11.34%. The Class Z notes are not rated.

-- The liquidity in the transaction is provided by the reserve fund, which can be used to pay senior costs and interest on the rated notes. The liquidity for the rated notes will be further supported by the use of principal receipts from the mortgage loans and a liquidity reserve fund (which is 2.50% of the rated notes in size). The liquidity support to such payments on the Class B and Class C notes is subject to principal deficiency ledger triggers. Terms and conditions on the notes allow interest payments on the subordinated notes of Class B and Class C to be deferred if the funds available are insufficient, where Class B and Class C are not the most senior outstanding class of notes. DBRS has tested for timely payment of interest (without deferral) on the three class of notes. Class A notes are rated for timely payment of interest and ultimate payment of principal. Unlike the cash flows analysis for the Class B notes for the provisional ratings which found three cash flows scenarios where the interest payment on the Class B notes were temporarily deferred, the lower interest margins on issued notes (at closing) meant no such deferral in any of the scenarios. Therefore the issued Class B notes have been rated for timely payment of interest and ultimate payment of principal.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay the lender according to the terms of the transaction documents. DBRS utilised front and back loaded default timing curves, rising and declining interest rates and low, mid and high prepayment scenarios. As the recently exhibited prepayment rates in Irish mortgage sector are low, DBRS also tested for a scenario with 0% prepayments.

-- The mortgage portfolio aggregates EUR 561.94 million (as of 4 October 2016). The mortgage portfolio is a positive selection of loans from PTSB’s mortgage book with none of the loans currently in arrears. The weighted-average indexed current loan-to-value ratio (WACLTV (indexed)) is 61.16% with 8.40% of the loans currently in negative equity. 26.11% of the loans have been originated in 2006, 2007 and 2008, which show the worst arrears history of the PTSB vintage originations; this concentration is the least as compared to recent Fastnet transactions. The provisional mortgage portfolio has a small proportion of loans which pay on an interest-only basis (2.56%) and none of the loans are for investment properties (Buy-to-Let or holiday homes). However, 19.68% of the loans are currently under some form of forbearance (7.34%) or have been under forbearance in the past (12.33%). The performance of such restructured has shown an improving trend.

-- The transaction’s servicing arrangements, which will consist of PTSB being the servicer of the mortgage portfolio with Homeloan Management Limited (HML) acting as back-up servicer. In DBRS’s view, this set-up can mitigate a potential servicer termination and therefore remedy potential interest shortfalls due to operational issues. Moreover, the rated Class A notes are expected to have sufficient liquidity support from the liquidity reserve fund on account of any temporary servicing disruption.

-- The Class A notes pay an interest linked to the three-month Euribor rate and, in comparison, the loans in the mortgage portfolio pay interest linked to the European Central Bank (ECB) rate (40.20% of the mortgage portfolio), the standard variable rate (SVR) set by PTSB (50.48% of the mortgage portfolio) and the rest pay a fixed rate of interest (9.32% of the mortgage portfolio) for a limited period. This gives rise to basis risk that is not hedged in the transaction. To partially mitigate this risk, the servicer, PTSB, is expected to maintain the SVR rate at a minimum of three-month Euribor plus 2.25%, which if breached, the difference would be compensated for by PTSB to the Issuer. Failure by PTSB to compensate the Issuer will trigger the replacement of PTSB as the servicer and also trigger a perfection event of the legal title of the loans. The replacement servicer, per the contract with the Issuer, cannot reduce the SVR below the SVR floor. DBRS has thus given credit to the SVR floor in the cash flow analysis of the transaction structure. DBRS has additionally stressed the historic spread between the ECB rate and three-month Euribor rate in the cash flow analysis.

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.

As a result of the analytical considerations, DBRS derived a Base Case probability of default (PD) of 6.99% and loss given default (LGD) of 22.21%, which resulted in an expected loss of 1.55% using the European RMBS Credit Model. DBRS cash flow model assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and ratings of the notes. The cash flows were analysed using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (August 2016).

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 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 PTSB and investor reports of publicly rated Irish RMBS transactions. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was supplied with third-party assessments, which 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.

This rating concerns newly issued financial instruments. This is the first rating action since the Initial Rating Date. The last rating action on this transaction took place on 15 September 2016, when provisional ratings were assigned to the notes to be issued.

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

To assess the impact of potential changes in the transactions’ parameters on the ratings, DBRS considered, in addition to its base case, further stress scenarios for its main rating parameters Probability of Default (PD) and Loss Given Default (LGD) in its cash flow analysis. The two additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determine the ratings (the Base Case):

-- In respect of the Class A notes and a rating category of AAA (sf), PD of 29.44% and the LGD of 59.90%.

-- In respect of the Class B notes and a rating category of AA (sf), PD of 23.79% and the LGD of 48.43%.

-- In respect of the Class C notes and a rating category of A(high) (sf), PD of 20.92% and the LGD of 44.59%.

DBRS concludes that for the Class A notes (amongst other possible changes PD/LGD and impact of such changes to the ratings):
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to A (sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to AA (high)(sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to AA (high)(sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to AA (low)(sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to A (high)(sf).

DBRS concludes that for the Class B notes (amongst other possible changes PD/LGD and impact of such changes to the ratings):
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to A (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to BB (high)(sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to AA (low)(sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to A (high)(sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to AA (low) (sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to A (high)(sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to BBB (high)(sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to BBB (sf).

DBRS concludes that for the Class C notes (amongst other possible changes PD/LGD and impact of such changes to the ratings):
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to BBB (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to BB (low)(sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to A (low)(sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to BBB (low)(sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to A (low)(sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to BBB (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to BBB (low)(sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to BB (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, Vice President
Initial Final Rating Date: 10 October 2016
Initial Final Rating Committee Chair: Erin Stafford, Managing Director
Lead Surveillance Analyst: Kevin Ma, Assistant Vice President

DBRS Ratings Limited
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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
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- 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