OREANDA-NEWS. June 16, 2015. Fitch Ratings has affirmed 11 tranches and upgraded one other tranche of four AyT ICO-FTVPO RMBS deals. The underlying pools are mostly composed of loans backed by VPO properties (Viviendas de Proteccion Oficial), allocated to low income borrowers fulfilling stated eligibility criteria.

The deals were originated and serviced by Banco Mare Nostrum (BB/Stable/B) for AyT ICO-FTVPO Caja Murcia; by Kutxabank, S.A (BBB/Positive/F3) for AyT ICO-FTVPO Caja Vital Kutxa; by ABANCA Corporacion Bancaria, S.A (BB+/Stable/B) for AyT ICO-FTVPO I and by Bankia, S.A (BB+/Positive/B) for AyT ICO-FTVPO III, Series Rioja.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Stable Credit Enhancement
The notes are currently paying down sequentially. AyT ICO-FTVPO I may switch to pro-rata in the next 18 months as the relevant triggers are close to being met. For the remaining transactions a switch to pro-rata is not expected in the near future as the conditions are not expected to be met. Fitch believes that available credit enhancement is sufficient to withstand the stress scenarios associated with the ratings and has consequently upgraded and affirmed the relevant notes.

Stable Asset Performance
The deals have shown sound asset performance compared with the Spanish average. As of the latest reporting periods, three-months plus arrears (excluding defaults) as a percentage of the current pool balance ranges from 0.3% (AyT ICO-FTVPO III, Series Rioja) to 0.98% (AyT ICO-FTVPO I). These numbers remain below Fitch's index of three-months plus arrears (excluding defaults) of 1.6%.

Cumulative defaults, defined as mortgages in arrears by more than 18 months in all transactions, represent less than 1% of the original balance, below the sector average of 5%. Fitch, however, believes that these levels may rise further as late-stage arrears roll into the default category.

Subsidy Interruption
The prices of the VPO properties are regulated by the Spanish government and VPO borrowers are eligible to obtain government sponsorship in the form of partial (up to 20%) subsidy to the monthly instalment. At the transactions' closing date, the portion of subsidised loans in the pools ranged between 0% (AyT ICO-FTVPO Caja Vital Kutxa) and 100% (AyT ICO-FTVPO Caja Murcia).

In its analysis, Fitch has tested potential interruption of the government subsidy by assigning a higher probability of default to subsidised loans. The analysis showed that the credit enhancement was sufficient to withstand these stresses.

Account Bank Exposure
In accordance with Fitch's counterparty criteria, the ratings of AyT ICO-FTVPO III Series Rioja are capped at 'A+sf', as the account bank, Banco Santander (A-/Stable/F2), has committed to implementing remedial actions upon a downgrade of its IDR below 'BBB+'/'F2'. Our criteria specify that direct support counterparties such as account banks with rating triggers of 'BBB+'/'F2' can only support note ratings up to 'A+sf'. As the reserve fund is the only source of credit enhancement for the class C notes the rating of this notes is linked to the rating of Santander, currently implying a cap of 'A-sf'/Stable.

Reserve Fund Draws
The reserve fund for AyT Caja Vital Kutxa remains close to its target (98.6%). Given the small margin guaranteed by the swap (10 bps), Fitch believes further draws may take place on future payment dates, but are expected to be limited in size and are to have a limited effect on the junior tranches. In contrast the other deals feature a fully funded reserve fund. The resilience of the reserve funds are reflected in Fitch's affirmation of the ratings and the Stable Outlooks across the structure.

Payment Interruption Risk
The current reserve fund level provides sufficient liquidity to cover at least six months of senior fees and interest on the senior notes in case of default of the servicer or the collection account bank.

RATING SENSITIVITIES

A worsening of the Spanish macroeconomic environment, especially employment conditions, or an abrupt shift in interest rates could jeopardise the ability of the underlying borrowers to meet their payment obligations.

Should the effect of the macroeconomic factors result in more volatile arrears patterns or a material increase in default rates, this could trigger negative rating action. Fitch may also revise the ratings if significant draws from the reserve fund occur in the next payment dates as this may compromise the protection of the junior classes.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action

DATA ADEQUACY

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.