OREANDA-NEWS. Fitch Ratings has affirmed 15 tranches of the Atlantes and Azor series. Fitch has also revised the Outlook to Positive from Stable on one tranche.

The mortgages in the eight transactions comprise loans originated and serviced by Banco Internacional do Funchal, S.A.'s (Banif) (B-/Stable/B). A full list of rating actions follows at the end of this ratings action commentary.

KEY RATING DRIVERS
Worst Case Scenario
Banif has informed Fitch that historically the bank has repurchased the full value of written-off loans at the point of foreclosure in each transaction. Banif is under no obligation to continue this practice, therefore in its analysis Fitch gave no credit to future repurchasing activities.

Fitch requested loan-by-loan level default and recovery information for Banif's mortgage book which the lender was unable to provide. As a result, in its analysis Fitch applied the worst case scenario assumptions based on the experience of other Portuguese lenders. The agency increased its quick sale adjustment assumption for these series to 50% from 40%.

Fitch analysed the delay between defaults and recoveries for each Banif transaction and found that in Atlantes 2 to 5, Atlantes 7 and Azor 2 the delay was approximately six years, rather than Fitch's base assumption of four years. As a result the agency increased its base foreclosure timing to six from four years.

Strong Performance and Credit Enhancement
The robust performance of the assets is sufficient to maintain current ratings, given the application of the worst-case scenario assumptions. Three-months plus arrears (excluding defaults) currently range between 0.7% (Atlantes 3) and 3.8% (Atlantes 7). Atlantes 1 and 2 feature reserve fund balances at 99% of their targets while the rest of the transactions' reserve funds remain fully funded.

The strong credit enhancement levels in Atlantes 1, 3, 4 and 7 are reflected in the Positive Outlook on the senior notes and a reason for the revision of the Outlook of the class B notes on Atlantes 1 to Positive from Stable.

Provisioning
The Atlantes and Azor transactions feature provisioning mechanisms, whereby excess spread is diverted to cover deemed principal losses. The amount provisioned is dependent on the number of monthly instalments in arrears.

To account for the staggered nature of the provisions, Fitch has estimated the amounts of loans that have defaulted, but for which full provisions have not yet been made, which range from 0.4% (Azor 1) to 1.8% (Atlantes 5) of the outstanding performing collateral balance. Those amounts have been deducted from the available current credit enhancement in Fitch's analysis, since they are expected to be payable in the coming quarters. Given the strong credit enhancement across the notes of the Atlantes and Azor series, the reduction has had no effect on the ratings of the notes.

Concentration Exposure
Both Azor 1 and 2 may be subject to performance volatility that is inconsistent with a rating above the 'Asf' category, given high geographical concentration in the Azores. In Fitch's view, a small population residing in a small area, with an isolated economy given the remote location of the islands, pose a risk that cannot be addressed through the structural features of the deals.

Counterparty Exposure
The structure of Azor 2 is exposed to payment interruption risk in the event of servicer default. In its analysis, as there are no alternative structural mitigants in place, Fitch has assessed the liquidity available in the transaction to fully cover senior fees, net swap payments and note interest in case of servicing disruption.

The liquidity available to the structure, which comes in the form of a reserve fund (reduced by the expected loss), is insufficient to provide payments to the notes for two interest payment periods in the event of servicer default. As a result Fitch believes that the transaction cannot support the highest achievable rating for Portuguese structured finance transactions (A+sf). In line with its counterparty criteria for structured finance transactions, Fitch continues to cap the rating of the class A notes at 'Asf'.

Performance Adjustment Factor (PAF)
Fitch has revised the PAF employed to model Atlantes Mortgage No. 2 Plc to 0.6 from the 0.7 floor specified in its criteria given the stable performance of the deal and the expectation of lower defaults. This combined with the strong performance of the deal, has led to today's affirmation.

RATING SENSITIVITIES
Deterioration in asset performance may result from economic factors. A corresponding increase in new defaults and associated pressure on excess spread and reserve funds, beyond Fitch's assumptions, could result in negative rating action. Furthermore, an abrupt shift of the underlying interest rates might jeopardise the underlying loan affordability of the underlying borrowers.

The swap provider for Atlantes 2-7 and Azor 2 is Royal Bank of Scotland (BBB+/Stable/F2) while the transactions are currently posting collateral amounts that are not in line with Fitch latest Counterparty Criteria For Structure Finance and Covered Bonds: Derivative Addendum. While currently this does not have an impact on any of the ratings it may constrain upside of the ratings in future.

The ratings are also sensitive to changes in Portugal's Country Ceiling and consequently changes to the highest achievable rating of Portuguese structured finance 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.

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.

SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by Banco Internacional do Funchal, S.A.'s and sourced from European Data Warehouse with the following cut-off dates:
-30 June 2015 for Atlantes 1 and Azor 2
-31 July 2015 for Atlantes 3, 5 and 7
31 August 2015 for Atlantes 2, 4 and Azor 1

-Transaction reporting provided by:
Deutsche Bank AG for:
-Atlantes 1 and Azor 1 since close and until June 2015
-Atlantes 7 since close and until August 2015

HSBC Bank Plc for:
-Azor 2 since close and until July 2015
-Atlantes 2, 3 since close and until May 2015
-Atlantes 4 since close and until June 2015
-Atlantes 5 since close and until August 2015

MODELS
The EMEA RMBS Surveillance model below was used in the analysis. Click on the link for a description of the model.

The rating actions are as follows:

Atlantes Mortgage No. 1 Plc
Class A (ISIN XS0161394324): affirmed at 'A+sf'; Outlook Positive
Class B (ISIN XS0161394910): affirmed at 'A+sf'; Outlook revised to Positive from Stable
Class C (ISIN XS0161395305): affirmed at 'A+sf'; Outlook Stable
Class D (ISIN XS0161395560): affirmed at 'Asf'; Outlook Stable

Atlantes Mortgage No. 2 Plc
Class A (ISIN XS0348690651): affirmed at 'Asf'; Outlook Stable
Class B (ISIN XS0348690735): affirmed at 'BBBsf'; Outlook Stable
Class C (ISIN XS0348691972): affirmed at 'BBsf'; Outlook Stable

Gamma, STC S.A. / Atlantes Mortgage No. 3
Class A (ISIN XS0395875999): affirmed at 'A+sf'; Outlook Positive

Gamma, STC S.A. / Atlantes Mortgages No. 4
Class A (ISIN XS0412478199): affirmed at 'A+sf'; Outlook Positive

Gamma, STC S.A. / Atlantes Mortgage No. 5
Class A (ISIN XS0472854370): affirmed at 'A+sf'; Outlook Stable

Atlantes Mortgage No. 7 Plc
Class A (ISIN PTGAMAOM0014): affirmed at 'A+sf'; Outlook Positive

Azor Mortgages Plc
Class A (ISIN XS0206334095): affirmed at 'Asf'; Outlook Stable
Class B (ISIN XS0206334335): upgraded to 'Asf'; Outlook Stable
Class C (ISIN XS0206334764): upgraded to 'Asf'; Outlook Stable

Gamma, STC S.A. / Azor Mortgages No. 2
Class A (ISIN XS0378557234): affirmed at 'Asf'; Outlook Stable.