DBRS Finalises Provisional Ratings to Fastnet Securities 13 DAC

DBRS Ratings Limited (DBRS) finalised its provisional ratings on the notes issued by Fastnet Securities 13 DAC (Fastnet 13; the Issuer) as follows:

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (high) (sf)
-- Class C Notes rated A (high) (sf)
-- Class D Notes rated BBB (high) (sf)

The Class Z Notes are not rated. DBRS's final rating on the Class D Notes differs from the provisional rating assigned on 9 October 2017, as a result of slightly better portfolio characteristics and lower than expected spreads on the Notes, the latter positively affecting the expected amount of excess spread in the structure.

The ratings assigned to the Class A, Class B and Class C notes address the timely payment of interest and ultimate payment of principal. The ratings assigned to the Class D Notes address the ultimate payment of interest and ultimate payment of principal.

Fastnet 13 is the latest securitisation in the Fastnet series of issuances. The collateral consists of first-ranking, residential loans that are for primary residences only and are originated by Permanent tsb Plc (PTSB; rated BB/Positive/R-4/Stable). The closing mortgage portfolio, which has an aggregate current balance of EUR 526 million, is a positive selection of loans where none of the loans have been in arrears over the last two years.

Of the mortgage portfolio, 17.0% was originated between 2006 and 2009. These have shown relatively worse performance in comparison with other PTSB vintage originations. In DBRS’s view, the loan performance of such vintages has been improving.

Approximately 64% of the mortgage portfolio was originated in recent years, dating back to 2013 with 54.8% originated in 2016 and 2017. These loans have been originated with relatively tighter origination criteria. Relative to the previous Fastnet transactions, the mortgage portfolio for Fastnet 13 has the highest proportion of new originations.

The weighted-average current loan-to-value (indexed) (WACLTV (ind)) of the mortgage portfolio is 64.4% as calculated by DBRS using data from Ireland’s Central Statistics Office from May 2017. The WACLTV (ind) is relatively lower compared with Fastnet 11 and transactions before this issuance, which is a reflection of the house price recovery in Ireland. The proportion of loans in negative equity is about 3.1% of the mortgage portfolio and such proportion is substantially lower than for other Fastnet issuances.

As a consequence of the regulatory clarity on the treatment of delinquent borrowers in Ireland, more active servicing and forbearance measures have been applied for approximately 20% of the mortgage portfolio by PTSB to solve high arrears cases, of which 14.1% are currently in forbearance. The performance history of the loans in the portfolio, provided from July 2012 onwards, indicates that 84.6% of the loans have never been in arrears in the last five years; this includes the loans considered to be in technical arrears – from zero up to and including one month in arrears. Approximately 14.4% of the loans were in arrears for three months or more but all are currently performing. The loans performing status may in some cases have been helped by some form of forbearance measure applied to delinquent loans. DBRS has considered these improvements in the assessment of the credit risk of the provisional mortgage portfolio.

The transaction’s capital structure provides 21.6% credit enhancement (CE) to the Class A Notes, through subordination of the Class B Notes (5.75% in size of the total issuance), the Class C Notes (5.75% in size of the total issuance), Class D Notes (5% in size of the total issuance) and the Class Z Notes (5% in size of the total issuance) and a 0.10% credit support available from the reserve fund at closing. The Class B Notes have 15.85% of CE, while the Class C Notes have 10.1% of CE and the Class D Notes have 5.1% of CE.

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 2.0% of the rated notes in size. The liquidity support to such payments on the Class B, Class C and Class D notes is subject to principal deficiency ledger (PDL) triggers. Terms and conditions on the notes allow interest payments on the subordinated notes of Class B, Class C and Class D to be deferred if the funds available are insufficient in cases where Class B, Class C and Class D are not the most senior outstanding class of notes.

A key structural feature in the transaction is the provisioning mechanism, which is linked to the arrears status of a loan besides the usual provisioning based on losses. The degree of provisioning increases with the increase in number of months in arrears status of a loan. This is positive for the transaction as provisioning based on arrears status will trap any excess spread much earlier for a loan that may ultimately end up in litigation for recovery.

The aggregate of the deposits of borrowers held with PTSB over and above the deposit protection scheme amounts to 0.28% of the provisional mortgage portfolio balance. DBRS has accounted for such potential loss to the Issuer on account of a set-off invoked by the borrowers who are also deposit holders with PTSB.

The account bank in the transaction is Bank of New York Mellon, London Branch (BNYM; rated AA/Stable/R- 1(high)/Stable). The account bank rating complies with the Minimum Institution Rating as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS based the ratings primarily on the following analytical considerations:

-- The transaction capital structure, form and sufficiency of available CE and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated portfolio default rates (PDRs), loss given default (LGD) and expected loss (EL) outputs on the mortgage loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents. The transaction cash flows were analysed using PDRs and LGD outputs provided by the European RMBS Insight Model. Transaction cash flows were analysed using INTEX DealMaker.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and its consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.

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.

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 data and information used for this rating include information from PTSB and Merrill Lynch International and investor reports for Irish RMBS transactions.

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

At the time of the initial rating DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on October 9, 2017, when the notes were assigned new provisional ratings.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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”). The additional stresses assume a 25% and 50% increase in both the PDRs and LGD assumptions for each series of notes:

The following scenarios constitute the parameters used to determing the Base Case:
-- In respect of the Class A notes, the PDR and LGD at the AAA (sf) stress scenario of 28.71% and 57.88%, respectively.
-- In respect of the Class B notes, the PD and LGD at the AA (high)(sf) stress scenario of 24.64% and 48.26%, respectively.
-- In respect of the Class C notes, the PD and LGD at the A(high) (sf) stress scenario of 18.33% and 42.43%, respectively.
-- In respect of the Class D notes, the PD and LGD at the BBB (high) (sf) stress scenario of 14.68% and 36.36%, respectively.

DBRS concludes the following impact on the Class A Notes:
-- 25% increase of the PD, ceteris paribus, would not lead to a downgrade from AAA (sf).
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (high)(sf).
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade from AAA (sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (sf).

DBRS concludes the following impact on the Class B Notes:
-- 25% increase of the PD, ceteris paribus, would not lead to a downgrade from AA (high) (sf).
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (sf).
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade from AA (high) (sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (high) (sf).

DBRS concludes the following impact on the Class C Notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BBB (sf).
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (sf).

DBRS concludes the following impact on the Class D Notes: The change in ratings consider timely payment of interest and ultimate payment of principal as compared to the finalised ratings which address ultimate payment of interest and ultimate payment of principal at BBB (high) (sf).
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BB (sf).
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (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 and U.S. regulations only.

Lead Analyst: Kali Sirugudi, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 9 October 2017

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

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

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