DBRS Confirms Ratings on Three Phoenix Funding Transactions

DBRS Ratings Limited (DBRS) confirmed the AAA (sf) ratings on the following notes issued by 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):

-- Phoenix 2 Class A confirmed at AAA (sf)
-- Phoenix 5 Class A3 confirmed at AAA (sf)
-- Phoenix 6 Class A1 and A2 confirmed at AAA (sf)

The ratings on the Class A notes in each transaction address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

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

-- Portfolio performance, in terms of delinquencies, defaults and losses.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective AAA (sf) rating levels.

Phoenix 2, Phoenix 5 and Phoenix 6 are securitisations of first-lien Irish residential mortgage loans originated by KBC Bank Ireland plc (KBCI). KBC Bank NV, Dublin Branch (KBC Dublin) acts as the named servicer for Phoenix 2, while delegating its servicing responsibilities to KBCI. KBCI acts as the servicer for Phoenix 5 and Phoenix 6, with the servicing arrangements guaranteed by KBC Dublin.

PHOENIX 2
As of the end of June 2019, the 90+ delinquency ratio was 17.5%, down from 18.2% in June 2018. As of June 2019, the cumulative realised loss ratio was 0.4%.

DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 27.1% and 31.2% respectively.

As of the July 2019 payment date, credit enhancement to the Class A notes was 67.4%, up from 47.1% at the transaction restructure in October 2014. Credit enhancement is provided by subordination and a reserve fund currently at its target balance of EUR 243.6 million.

PHOENIX 5
As of the end of May 2019, the 90+ delinquency ratio was 1.8%, stable since May 2018. As of May 2019, the cumulative realised loss ratio was 0.1%.

DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 7.3% and 14.4%, respectively.

As of the June 2019 payment date, credit enhancement to the Class A3 notes was 60.9%, up from 29.8% at the DBRS initial rating. Credit enhancement is provided by subordination and a reserve fund currently at its target balance of EUR 15.6 million.

PHOENIX 6
As of the end of May 2019, the 90+ delinquency ratio was 0.1%, stable since May 2018. As of May 2019, the cumulative realised loss ratio was zero.

DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 3.9% and 4.7%, respectively.

As of the June 2019 payment date, credit enhancement to the Class A1 and A2 notes was 25.7%, up from 16.0% at the DBRS initial rating. Credit enhancement is provided by subordination and a reserve fund currently at its target balance of EUR 12.6 million. The Class A notes in Phoenix 6 additionally benefit from a liquidity reserve fund, currently at its target balance of of EUR 7.7 million, available to cover interest payments on the Class A notes.

KBC Dublin acts as the account bank for each transaction. Based on the DBRS private rating of KBC Dublin, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Class A notes in each transaction, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

KBCI acts as the swap counterparty for Phoenix 2 with KBC Dublin acting as swap guarantor. DBRS's private rating of KBC Dublin is above the First Rating Threshold as described in DBRS's "Derivative Criteria for European Structured Finance Transactions" methodology.

The transaction structures were analysed in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology”. DBRS has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the amended transaction legal documents in Phoenix 6 has been conducted following an amendment executed on 11 December 2018, reversing one of the conditions allowing for pro rata amortisation between the Class A and Z notes, and increasing the limit on permitted fixed-rate conversions in the portfolio. A review of the transaction legal documents in Phoenix 2 and Phoenix 5 was not conducted as the legal 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/333487/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include investor reports provided by KBCI and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial rating of each transaction, 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 purpose 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 the three transactions took place on 21 August 2018, when DBRS confirmed the rating of the Class A notes in Phoenix 2 at AAA (sf), confirmed the ratings of the Class A2 and A3 notes in Phoenix 5 at AAA (sf), and upgraded the ratings of the Class A1 and A2 notes in Phoenix 6 to AAA (sf) from AA (high) (sf).

The lead analyst responsibilities for these transactions have been transferred to Andrew Lynch.

Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS expected a lifetime base case PD and LGD for each pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- For Phoenix 2, the base case PD and LGD of the current pool of loans for the Issuer are 27.1% and 31.2%, respectively.
-- For Phoenix 5, the base case PD and LGD of the current pool of loans for the Issuer are 7.3% and 14.4%, respectively.
-- For Phoenix 6, the base case PD and LGD of the current pool of loans for the Issuer are 3.9% and 4.7%, 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 Class A notes in Phoenix 2 would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A notes in Phoenix 2 would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes in Phoenix 2 would be expected to fall to AA (high) (sf).

Phoenix 2 Class A Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

Phoenix 5 Class A3 Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Phoenix 6 Class A1 Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Phoenix 6 Class A2 Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (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: Andrew Lynch, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
Phoenix 2: 16 July 2013
Phoenix 5: 6 June 2012
Phoenix 6: 15 December 2016

DBRS Ratings Limited
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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
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- 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.

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