DBRS Morningstar Confirms Ratings on Three Phoenix Funding Transactions

DBRS Ratings Limited (DBRS Morningstar) confirmed its 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 Notes
-- Phoenix 5 Class A3 Notes
-- Phoenix 6 Class A2 Notes

The ratings on the Class A notes in each transaction address the timely payment of interest and the 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.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

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 2020, the 90+ delinquency ratio was 18.1%, up from 17.5% in June 2019. As of June 2020, the cumulative realised loss ratio was 0.4%.

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 27.5% and 28.0%, respectively.

As of the July 2020 payment date, credit enhancement to the Class A Notes was 74.5%, up from 67.4% 12 months prior and 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 2020, the 90+ delinquency ratio was 2.5%, up from 1.8% in May 2019. As of May 2020, the cumulative realised loss ratio was 0.1%.

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 8.5% and 13.3%, respectively.

As of the June 2020 payment date, credit enhancement to the Class A3 Notes was 69.9%, up from 60.9% 12 months prior and 29.8% at the DBRS Morningstar 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 2020, the 90+ delinquency ratio was 0.1%, almost stable since May 2019. As of May 2020, the cumulative realised loss ratio was zero.

DBRS Morningstar 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 4.2%, respectively.

As of the June 2020 payment date, credit enhancement to the Class A2 Notes was 26.1%, up from 25.7% 12 months prior and 16.0% at the DBRS Morningstar initial rating. Credit enhancement is provided by subordination and a reserve fund currently at its target balance of EUR 12.6 million. The Class A2 Notes in Phoenix 6 additionally benefit from a liquidity reserve fund, currently at its target balance of EUR 6.2 million, available to cover interest payments on the Class A2 Notes.

KBC Dublin acts as the account bank for each transaction. Based on the DBRS Morningstar private rating of KBC Dublin, the downgrade provisions outlined in the transactions’ documents, and other mitigating factors inherent in the transactions’ structure, DBRS Morningstar 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 Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For these transactions, DBRS Morningstar increased the expected default rate for self-employed borrowers, assessed a potential reduction in portfolio prepayment rates, incorporated a moderate reduction in residential property values, and considered reported payment holidays in its cash flow analysis.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 22 July 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings.
The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated RMBS transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the amended transactions’ legal documents in Phoenix 2, Phoenix 5, and Phoenix 6 has been conducted following amendments executed on 27 November 2019. In all three transactions, collection account agreements with BNP Paribas were terminated and replacement agreements put into place with KBC Bank NV; contingency language was added to reflect the future discontinuation of Euribor; and clarifications were made to ensure that funding of further advances is provided by KBCI rather than the special purpose vehicles. Additionally, note coupons were floored at zero for Phoenix 2 and Phoenix 5, and the swap rate payable by Phoenix 2 was reduced. A review of the remaining transaction legal documents in Phoenix 2, Phoenix 5, and Phoenix 6 was not conducted as these legal documents have remained unchanged since the most recent rating actions.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

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 Morningstar 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 Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purpose of providing these ratings to be of satisfactory quality.

DBRS Morningstar 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 20 August 2019, when DBRS Morningstar confirmed the rating of the Class A Notes in Phoenix 2 at AAA (sf), confirmed the rating of the Class A3 Notes in Phoenix 5 at AAA (sf), and confirmed the ratings of the Class A1 and A2 notes in Phoenix 6 at AAA (sf). On 16 October 2019, the rating of the Class A1 Notes in Phoenix 6 was discontinued following the full repayment of the notes.

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

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

-- DBRS Morningstar 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 27.5% and 28.0%, respectively.
-- For Phoenix 5, the base case PD and LGD of the current pool of loans for the Issuer are 8.5% and 13.3%, respectively.
-- For Phoenix 6, the base case PD and LGD of the current pool of loans for the Issuer are 3.9% and 4.2%, 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 fall to AA (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 (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 AA (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 AA (sf) -- 50% increase in PD and 50% increase in LGD, expected rating of AA (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 A2 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 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 (high) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
https://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: Andrew Lynch, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates: 16 July 2013 for Phoenix 2, 6 June 2012 for Phoenix 5, 15 December 2016 for Phoenix 6

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Registered and incorporated under the laws of England and Wales: Company No. 7139960.

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 July 2020) and European RMBS Credit Model v1.0.0.0
https://www.dbrsmorningstar.com/research/363998/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019), https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].