DBRS Takes Rating Actions on Three Phoenix Funding Transactions

DBRS Ratings Limited (DBRS) reviewed and 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 upgraded to AAA (sf) from AA (sf)
-- Phoenix 5 Class A2 and A3 confirmed at AAA (sf)
-- Phoenix 6 Class A1 and A2 confirmed at AA (high) (sf)

Today’s 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 transaction closed in June 2008 and the vintages of the outstanding loans range from 2004 to 2008. The portfolio performance has continued to improve with loans more than 90 days delinquent as a percentage of the outstanding portfolio balance having decreased to 18.92% as of 30 June 2017. Cumulative repossessions as a percentage of the mortgage portfolio balance on the transaction closing date increased to 8.03%, while cumulative realised losses remained low at 0.30%.

Ireland’s house prices continue to recover both inside and outside Dublin. As of June 2017, house prices have increased by 11.15% inside Dublin and 11.83% outside Dublin year over year. The improvement in house prices has reduced the loan-to-value ratios and expected loss severities of the mortgages. DBRS has updated the base case PD and LGD assumptions on the remaining portfolio to 33.62% and 40.68% from 36.67% and 44.05%, respectively.

As the transaction continues to deleverage, the CE to the Class A notes has increased to 51.62% as of the July 2017 payment date. The increased CE and the updated portfolio assumptions prompted today’s rating upgrade.

-- PHOENIX 5
The transaction closed in June 2012 and the vintages of the outstanding loans range from 1997 to 2012 with a concentration in 2008. DBRS notes an increase in the loan arrears in this transaction. Loans more than 90 days delinquent increased to 6.24%, and loans more than 360 days delinquent increased to 3.75% as of 30 June 2017. Cumulative repossessions and losses remained low at 1.10% and 0.06%, 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 has increased to 43.62% as the transaction deleveraging continues and is commensurate with the AAA (sf) ratings.

-- PHOENIX 6
The transaction closed in December 2016 and the vintages of the outstanding loans range from 2011 to 2016. The portfolio is performing well and within DBRS’s expectations. As of 31 May 2017, there were no loans more than 90 days in arrears and no repossessions. DBRS has maintained the base case PD and LGD at 7.46% and 16.34%, respectively.

The CE available to the Class A1 and A2 notes has increased slightly to 17.79% as the transaction deleverages and is commensurate with the AA (high) (sf) ratings.

KBC Dublin’s DBRS private rating complies 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 complies 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 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 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 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 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.

For Phoenix 6, this is the first rating action since the Initial Rating Date.

The last rating action on Phoenix 2 took place on 3 October 2016, when DBRS upgraded Class A to AA (sf). The last rating action on Phoenix 5 took place on 26 August 2016, when DBRS upgraded Class A2 and A3 to AAA (sf). The last rating action on Phoenix 6 took place on 15 December 2016, when DBRS assigned AA (high) (sf) ratings to Class A1 and A2.

For Phoenix 6, the lead analyst responsibilities for this transaction have been transferred to Kevin Ma.

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 33.62% and 40.68%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 61.31% and 70.69%, respectively.

-- For Phoenix 5, the base case PD and LGD assumptions for the remaining collateral pool are 13.53% and 30.62%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 38.51% and 66.07%, respectively.

-- For Phoenix 6, the base case PD and LGD assumptions for the remaining collateral pool are 7.46% and 16.34%, respectively. At the AA (high) (sf) rating level, the corresponding PD and LGD are 27.58% and 48.68%, 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 on Phoenix 2 Class A would be expected to be at AA (low) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on Phoenix 2 Class A would be expected to be at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on Phoenix 2 Class A would be expected to be at BB (high) (sf).

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

Phoenix 5 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 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 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 AA (high) (sf)

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

Phoenix 6 Class A2 Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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, Assistant 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
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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
-- Unified Interest Rate Model for European Securitisations
-- 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.