DBRS Assigns Rating to Fastnet Securities 14 DAC

DBRS Ratings Limited (DBRS) assigned the following rating to the notes issued by Fastnet Securities 14 DAC (Fastnet 14 or the Issuer):

-- Class A notes rated AAA (sf)

The rating assigned to the Class A notes addresses the timely payment of interest and ultimate payment of principal. DBRS does not rate the Class Z notes issued by the Issuer.

Fastnet 14 is the latest securitisation in the Fastnet series of issuances. The Fastnet 14 mortgage portfolio was part of Fastnet Securities 3 DAC (Fastnet 3), the notes of which have been called. The non-performing and/or loans in arrears of Fastnet 3 were removed and the remaining portfolio split into two. The first half of the remaining mortgage portfolio has now been securitised under Fastnet 14.

The collateral consists of first-ranking, residential mortgage loans originated by Permanent tsb Plc (PTSB; rated BB/Positive/R-4/Positive), largely for the purpose of purchasing primary residences (about 76%). The closing mortgage portfolio has an aggregate current balance of EUR 1.44 billion.

The portfolio is well seasoned with 11.9 years of seasoning. 75% of the mortgage portfolio was originated in 2006 and 2007. These vintages 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, albeit with a dose of forbearance to the majority of the loans which went into three months plus arrears status in the last five years of performance history. Temporary repayment moratoriums have been the more popular form of forbearance.

The weighted-average current loan-to-value (indexed) (WACLTV (ind)) of the mortgage portfolio is 83.2% as calculated by DBRS using data from Ireland’s Central Statistics Office. The WACLTV (ind) is relatively higher compared with Fastnet 13 and Fastnet 12, which is a reflection of the concentration of the loans originated just around the peak in house prices (2007) in Ireland. The recovery in house prices since the house-price-index trough in 2012-2013 has resulted in a significant proportion of loans in the Fastnet 3 portfolio moving out of the negative equity category. Only 20.5% of the loans in Fastnet 14, per DBRS calculations, are in negative equity.

About 22% of the loans are paying on an interest-only (IO) basis, and the majority of these IO loans (17% of the total pool balance) are buy-to-let (BTL) loans. The total proportion of BTL loans in portfolio is just under 24%. Approximately 80% of the loans pay an interest linked to the European Central Bank (ECB) rate. On the borrower profile, over 11% of the borrowers were categorised as self-employed.

The transaction’s capital structure provides 24.4% credit enhancement (CE) to the Class A notes through subordination of the Class Z Notes (24% in size of the total issuance) and a 0.48% credit support available from the reserve fund at closing.

The liquidity support in the transaction is provided by the general reserve fund and the liquidity 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. The general reserve fund and the liquidity reserve fund are funded at closing using a subordinated loan provided by PTSB.

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.

80% of the loans in the pool pay interest indexed to ECB rate, whereas the remaining 20% are indexed to the standard variable rate (SVR) set by PTSB and, in comparison, the Class A notes are paid interest linked to the 1-month Euribor index. This gives rise to basis risk that is not hedged. However, the transaction includes a SVR floor of 1-month Euribor plus 2.25% which partially mitigates the basis risk. DBRS applied stresses on the historical spread between the ECB rate and 1-month Euribor in the cash flow analysis.

The account bank in the transaction is Bank of New York Mellon, Dublin Branch. The DBRS private rating of the account bank is consistent with the Minimum Institution Rating, given the rating assigned to the Class A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

The servicer in the transaction is PTSB. Unlike the previous series of Fastnet transactions, Fastnet 14 does not envisage a back-up servicer. Instead, the transaction includes Wilmington Trust SP Services (Dublin) Limited as the replacement servicer facilitator. In DBRS’s view, there are several mortgage servicers in Ireland that have capabilities to onboard Irish mortgage portfolios and resume active servicing within a short period of time. The transaction structure also includes a general reserve fund and a liquidity reserve fund which will support payment of interest on the rated notes in the event of temporary servicing disruption.

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 (PD), loss given default (LGD) and expected loss (EL) outputs for 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 PD and LGD outputs provided by DBRS’s “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” methodology. 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 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include PTSB, Citigroup Global Markets Limited 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. DBRS applied additional cash flow stresses in its 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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 PD and LGD assumptions for each series of notes:

The following scenarios constitute the parameters used to determining the Base Case:

-- In respect of the Class A notes, the PD and LGD at the AAA (sf) stress scenario of 36.6% and 69.2%, respectively. DBRS concludes the following impact on the Class A Notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to AA(sf).
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to A (high)(sf).
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA(sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA(low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low)(sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB(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 US regulations only.

Lead Analyst: Kali Sirugudi, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 June 2018

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
-- 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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.