OREANDA-NEWS. Fitch Ratings upgraded two and affirmed 34 other tranches of 12 Irish RMBS.

A full list of rating actions is available at the link above.

KEY RATING DRIVERS

Decreasing Arrears
For the first time since 2005, the level of loans in arrears by more than three months showed signs of stabilisation. As of end-March 2015, the average three-months-plus arrears in Ireland stood at 17.7% of the current pool balance, down from their peak of 19.3% in September 2014.

The best performer in Fitch's pool of rated transactions has been Fastnet 9, which has reported negligible arrears; while the most extreme case remain the two non-conforming deals (Lansdowne 1 and 2) with approximately 68% of the pool in arrears by more than three months. This improved performance is the result of the combination of the restructuring activity carried out by Irish servicers and an improved macroeconomic environment.

Restructured Loans
To return loans to performing status, lenders are offering various types of restructuring options to borrowers facing financial difficulty. Restructuring options are also available to borrowers who are currently making their mortgage payments but might face difficulties in the future. Both short- and long-term solutions are offered depending on borrower's circumstances. Most of the short-term arrangements are temporary interest rate reduction or conversion to interest- only payments for a period of up to one year. Such arrangements represent 10% of all Irish mortgage restructurings. For borrowers with more structural issues, the most common solutions offered are: arrears capitalisation, term extension and split mortgages (together 57.4% of all restructuring across the jurisdiction).

To account for this feature of the Irish market, Fitch has collected information on the types of restructurings carried out across almost all the transactions. In its analysis, the agency applied its standard assumptions in determining the default probability of such loans.

In cases where such information was not made available, the agency made conservative assumptions about the level and/or types of loan restructurings in the pools. The assumptions used in such instances are based on data made available by the Central Bank of Ireland, covering all Irish mortgage lenders, and led to an increase in base case default probabilities of up to 5.5 percentage points for such portfolios.

Low Repossessions and Losses
Considering the arrear levels, cumulative possessions and losses remain limited. The outstanding balance of loans with properties taken into possession range from 0% (Fastnet 9) to 4.4% (Lansdowne 2), while cumulative losses on properties sold remain muted across most deals. The largest losses are reported in Lansdowne 2 (3.7% as of March 2015). Fitch expects possessions and losses to remain fairly small compared with arrears as Irish lenders pursue other means of dealing with long-term arrears.

Fully Funded Reserve Funds
With the exception of the two non-conforming deals, all transactions have fully funded reserve funds (RF).

In addition to its RF, Emerald 4 has a moratorium reserve that can be used to cover senior fees and interest payments, once the RF and liquidity facility have been fully utilised. This reserve was funded using excess spread and principal receipts. As it continues to amortise, the proceeds flow back to the principal waterfall and are used to pay down the notes. As a result, in its analysis, Fitch gave full credit to this feature.

The RFs of Lansdowne 1 and 2 are currently at 63.4% and 49.2% of their target amounts. The draws to date were caused by losses, which have accumulated to 2.2% and 3.7% of their respective initial loan balances.

Counterparty Exposure
The recent downgrade of Royal Bank of Scotland (BBB+/Stable/F2), which acts as a bank account and swap counterparty in Celtic 11 has had no effect on the ratings of the notes, as the highest rating assigned to the notes is still below the rating of the bank. Similarly, the downgrade of the collection account bank, Ulster Bank (BBB/Stable/F2) has had no immediate effect on the current ratings of the notes.

Bank of Ireland (BB+/Positive/B) acts as the swap counterparty in Kildare. In its analysis, Fitch gave no credit to the swap in its full cash flow analysis and found that the current credit enhancement available to the notes is sufficient to withstand such stresses.

The Lansdowne series is exposed to Allied Irish Bank (BB/Positive/B), which acts as the account bank in both deals. Given the highest rating of the notes in the two deals is only CCCsf, the recent downgrade of the bank has had no effect on the current ratings of the notes.

The transaction documentation for the four Phoenix transactions states that replacement of the account bank will occur once the rating of KBC NV (A-/Stable/F1) falls below 'BBB+/F2'. According to Fitch's counterparty criteria for structured finance transactions direct support counterparties, such as account banks, with rating triggers of 'BBB+/F2' can only support note ratings up to 'A+sf'. Therefore, the ratings on the Phoenix transactions remain capped at 'A+sf'.

RATING SENSITIVITIES

Standard default probability assumptions were applied to loans in arrears. However, the Irish market shows a large proportion of loans in arrears by more than 12 and 24 months, at 60.6% and 43.5% of total arrears respectively. Should the performance of these loans deteriorate beyond Fitch's expectations and/or result in losses that exceed the standard assumptions, the agency may take negative rating actions on the affected notes.

Fitch's analysis shows that payment interruption in Mespil 1 is presently mitigated. However, after fully using the credit buffer provided by the class Z PDL, draws on the reserve fund could lead to tightened liquidity in case of servicer default, which may lead to negative rating actions.

Future rating actions on counterparties in direct and indirect support roles in transactions subject to rating caps may result in the revision of the rating caps assigned to these notes.

DUE DILIGENCE USAGE

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

DATA ADEQUACY

Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

For Celtic 11, Emerald 4, Emerald 5, Kildare, Lansdowne 1, Lansdowne 2, Phoenix 2, Phoenix 3 and Phoenix 4.

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.

For Phoenix 5 and Fastnet 9

Prior to the transactions closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.

For Mespil 1

Prior to the transaction closing, Fitch did not review the results of a third party assessment conducted on the asset portfolio information.

For Fastnet 9

Prior to the transactions closing, Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.

Overall and together with the assumptions referred to above, 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.

SOURCES OF INFORMATION

The information below was used in the analysis.

Celtic 11
-Loan-by-loan data provided by Ulster Bank at end-March 2015.
-Transaction reporting provided by Ulster Bank at end-March 2015.
Restructuring information provided by Ulster Bank at end-March 2015.

Emerald 4, Emerald 5 and Mespil 1
-Loan-by-loan data provided by EBS at end-April 2015.
-Transaction reporting provided by EBS at end-May 2015.
-Restructuring information provided by EBS at end-April 2015.

Kildare
-Loan-by-loan data provided by Bank of Ireland at end-February 2015.
-Transaction reporting provided by Bank of Ireland at end-May 2015.
-Restructuring information provided by Bank of Ireland at end-February 2015.

Lansdowne 1 and Lansdowne 2
-Loan-by-loan data provided by Kensington at end-February 2015.
-Transaction reporting provided by Kensington at end-March 2015.

Phoenix 2, Phoenix 3, Phoenix4 and Phoenix5
-Loan-by-loan data provided by KBC at end-March 2015.
-Transaction reporting provided by KBC at end-May 2015.
-Restructuring information provided by KBC at end-March 2015.

Fastnet 9
-Loan-by-loan data provided by Permanent TSB at end-February 2015.
-Transaction reporting provided by Permanent TSB at end-April 2015.
-Restructuring information provided by Permanent TSB attend- February 2015.