DBRS Takes Rating Actions on Three Phoenix Funding Transactions

DBRS Ratings Limited (DBRS) took rating actions on three Irish residential mortgage-backed securities transactions, Phoenix Funding 2 Designated Activity Company (Phoenix 2), Phoenix Funding 5 Designated Activity Company (Phoenix 5), and Phoenix Funding 6 Designated Activity Company (Phoenix 6) as follows:

-- Phoenix 2 Class A confirmed at AAA (sf)
-- Phoenix 5 Class A2 and A3 confirmed at AAA (sf)
-- Phoenix 6 Class A1 and A2 upgraded to AAA (sf) from AA (high) (sf)

The rating actions follow the annual reviews of the transactions and are based on the following analytical considerations:

-- Portfolio performance in terms of delinquencies and defaults.
-- Portfolio default (PD) rate, loss given default (LGD) rate and expected loss assumptions for the remaining collateral pool.
-- Current credit enhancement (CE) available to the notes to cover the expected losses at their respective rating levels.

KBC Bank Ireland plc (KBCI) is the originator and the servicer on all the loans and KBC Bank NV, Dublin Branch (KBC Dublin) is the Account Bank in all three transactions.

-- PHOENIX 2
The portfolio’s performance has continued to improve. Loans more than 90 days in arrears as a percentage of the outstanding portfolio balance decreased further to 18.2% from 18.9% as of 30 June 2018. Cumulative repossessions as a percentage of the mortgage portfolio balance on the transaction closing date increased to 8.5% from 8.0%, while cumulative realised losses remained low at 0.4%.

The recovery in Ireland’s house prices has continued since the last rating review. As of May 2018, house prices have increased by 10.7% in Dublin and 14.1% outside Dublin year over year. Following the increase in house prices, the mortgage portfolio’s loan-to-value ratio and the expected loss severities have declined. DBRS has updated the base case PD and LGD assumptions on the remaining portfolio to 29.7% and 34.6% from 33.6% and 40.7%, respectively.

As the transaction continues to deleverage, the CE to the Class A notes has increased to 56.0% from 51.7% as of the July 2018 payment date and is commensurate with the AAA (sf) rating.

-- PHOENIX 5
Loans more than 90 days in arrears decreased significantly to 1.7% as of 30 June 2018 from 6.24% at the last rating review. However, DBRS notes that the decrease was mainly a result of the repurchase of loans more than 12 months in arrears in November 2017. There were limited increases in the cumulative repossessions and losses to 1.2% and 0.1%, respectively. DBRS has maintained the base case PD and LGD assumptions on the remaining portfolio at 13.53% and 30.62%, respectively.

The CE available to the Class A2 and A3 notes increased to 49.2% as of the July 2018 payment date, as the transaction deleveraging continues, and is commensurate with the AAA (sf) ratings.

-- PHOENIX 6
The portfolio is performing within DBRS’s expectations. As of 31 May 2018, the percentage of loans more than 90 days in arrears were 0.1% and there were no repossessions. DBRS has updated the base case PD and LGD to 4.76% and 5.92% from 7.46% and 16.34%, respectively. The lower PD and LGD assumptions in Phoenix 6 in comparison with Phoenix 2 and 5 reflect the post-crisis vintages of the loans in the portfolio underwritten through tightened lending criteria.

The transaction is deleveraging faster than other Phoenix transactions with the conditional prepayment rate above 5.0%. Consequently, the CE available to the Class A1 and A2 notes has increased quickly to 23.2%. The reduced portfolio PD and LGD assumptions and the increase in the CE prompted the upgrades of the Class A1 and A2 notes.

KBC Dublin’s DBRS private rating is consistent with the Account Bank Minimum Institution Rating criteria, given the ratings assigned to the notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

KBCI is the swap counterparty in Phoenix 2 with KBC Dublin acting as the swap guarantor. The guarantor’s DBRS private rating is consistent with the first rating threshold, given the rating assigned to the Phoenix 2 Class A notes, as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “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 respective transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions 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 these ratings include the investor reports provided by KBCI and the loan-by-loan data from European Data Warehouse GmbH.

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

At the time of each transaction’s 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 these ratings 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 all three transactions took place on 25 August 2017, when DBRS upgraded Class A to AAA (sf) from AA (sf) in Phoenix 2, confirmed Class A2 and A3 in Phoenix 5 at AAA (sf), and confirmed Class A1 and A2 in Phoenix 6 at AA (high) (sf).

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):

-- For Phoenix 2, the base case PD and LGD assumptions for the remaining collateral pool are 29.7% and 34.6%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 55.2% and 66.7%, respectively.

-- For Phoenix 5, the base case PD and LGD assumptions for the remaining collateral pool are 13.5% and 30.6%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 38.5% and 66.1%, respectively.

-- For Phoenix 6, the base case PD and LGD assumptions for the remaining collateral pool are 4.8% and 5.9%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 27.5% and 50.1%, respectively.

-- 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 of the Phoenix 2 Class A notes would be expected to be at AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Phoenix 2 Class A notes would be expected to be at AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Phoenix 2 Class A notes would be expected to be at A (low) (sf).

The following eight stress scenarios are applied:
Scenario 1: a 25% increase on the PD base case.
Scenario 2: a 50% increase on the PD base case.
Scenario 3: a 25% increase on the LGD base case.
Scenario 4: a 50% increase on the LGD base case.
Scenario 5: a 25% increase on the PD and a 25% increase on the LGD base case.
Scenario 6: a 25% increase on the PD and a 50% increase on the LGD base case.
Scenario 7: a 50% increase on the PD and a 25% increase on the LGD base case.
Scenario 8: a 50% increase on the PD and a 50% increase on the LGD base case.

The expected ratings for the notes under each stress scenario are:

Phoenix 2
-- Class A: AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), AAA (high) (sf), AA (sf), AA (low) (sf), A (low) (sf)

Phoenix 5
-- Class A2: AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf)
-- Class A3: AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AA (high) (sf)

Phoenix 6
-- Class A1: AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf)
-- Class A2: AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (sf), AAA (high) (sf), AAA (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 and US regulations only.

Lead Analyst: Kevin Ma, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Phoenix 2 Initial Rating Date: 16 July 2013
Phoenix 5 Initial Rating Date: 6 June 2012
Phoenix 6 Initial Rating Date: 15 December 2016

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 these transactions can be found at: http://www.dbrs.com/about/methodologies.

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

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.