OREANDA-NEWS. Fitch Ratings believes the allocation of available funds to amortise the notes in Spanish RMBS transaction Rural Hipotecario VII in March 2015 does not compromise the credit profile of and protection available to the senior tranches A1 and A2 (Both rated at 'AA+sf' Outlook Stable).

The transaction trustee, Europea de Titulizacion, published an explanation note dated 25 March detailing the reasons that prevented the A2 notes from being fully redeemed on the prior payment date 15 March 2015 as per the indicative amortisation schedule in the transaction documents. Fitch acknowledges that such delay in the full amortisation of the class A2 notes does not constitute an event of default on the notes, as the final legal maturity date of the notes is 15 March 2038.

The event described above only occurs when all the pro-rata conditions are satisfactorily met following a period of non-compliance (eg. if arrears exceed a threshold of 1% or the reserve fund is not funded to its target level). When conditions are being met again, allocation of available funds to principal pay-down is arranged so the relative size of the mezzanine and junior class B and C notes is kept at 3.491% and 4.309% respectively of the outstanding balance of all bonds, double the initial size at closing date. As a consequence, the class B and C notes were amortised by EUR11.3m ahead of the class A2 notes which were amortised by only EUR0.67m.

Given that this amortisation allowed the B and C class notes to reach their target size, if pro-rata conditions continue to be met, no further bulk payments would be needed to maintain the proportion of the class B and C notes. Also if the pro-rata conditions are met for the class B and C notes, the allocation of funds to amortise the class A2 notes will take precedence over that of the class A1 notes as per transaction documents. Finally, pro-rata allocation is not allowed if the pool factor is lower than 10%.

This transaction comprises prime residential mortgages originated by multiple rural saving banks in Spain. The deal closed in June 2005, and as of March 2015 it had a pool factor of 28% and its 90 day plus arrears stood at 0.95%, below Fitch's three-month plus arrears Spanish RMBS index of 1.7%.