OREANDA-NEWS. Fitch Ratings has downgraded one, upgraded two and affirmed five tranches of HipoTotta 4, and Magellan Mortgages No. 1 and 2 Plc. Fitch has also placed two tranches of Magellan Mortgages No. 1 on Rating Watch Negative (RWN). The agency has also revised the Outlook on two tranches to Stable from Positive.

Both Magellan deals comprise Portuguese mortgage loans originated and serviced by Banco Comercial Portugues (BCP; BB-/Stable/B) while HipoTotta 4 was originated and is serviced by Santander Totta S.A. (BBB+/Positive/F2). A full list of rating actions follows at the end of this rating action commentary.

KEY RATING DRIVERS

Counterparty Exposure
The RWN on the class A and B notes of Magellan Mortgages No. 1 reflect the transactions' exposure to RBS (BBB+/Negative/F2), as remedial actions have not been implemented following its downgrade (see Fitch Downgrades Royal Bank of Scotland Group to 'BBB+' Upgrades VR to 'bbb+', dated 19 May 2015 at www.fitchratings.com).

The agency's understanding of the transaction documents is that remedial actions should have been implemented to adequately mitigate the increased counterparty risk. For exposures that cannot be addressed by collateralisation (e.g. issuer's account banks), Fitch's criteria envisage remedial action being completed within 30 calendar days of the downgrade trigger event.

Fitch has been informed that the transaction parties are seeking to implement remedial actions. Fitch will monitor the progress of the remedial action and expects to resolve the RWN within six months. Resolution of the RWN will depend on the implementation of appropriate remedial action, which could lead to the affirmation of the notes or upon failure to take such action, a downgrade.

The reserve fund is the only source of credit enhancement for Magellan Mortgages No. 1 class C notes. As a result, the agency has capped the notes' ratings at the Long-term Issuer Default Rating of the account bank (RBS (BBB+/Stable/F2), as reflected in their downgrade.

Worst Case Scenario
Neither BCP nor Santander Totta has been able to provide loan-by-loan default and recovery information for the transactions. As a result, in its analysis Fitch applied the worst case scenario assumptions based on the experience of other Portuguese lenders. This involved increasing the quick sale adjustment to 50% from 40% and extending the expected recovery timing to six years from four years. These recoveries were applied to both expected defaults and outstanding defaults that have been provisioned for.

Provisioning
HipoTotta 4 and Magellan 2 feature a provisioning mechanism whereby excess spread is diverted to principal distributions 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 provisions, in both cases Fitch has estimated the amounts of loans that have defaulted, but for which full provisions have not yet been made at below 1.1% of the outstanding collateral balance. This has been deducted from the current credit enhancement available in Fitch's analysis, since they are expected to be payable in the coming quarters.

Magellan Mortgages 1 has no provisioning system in place, unlike the majority of Fitch-rated Portuguese transactions. This explains the higher late stage arrears in this deal (7.2%) in comparison with the Portuguese RMBS index of 1.03%. To date the transaction has had sufficient excess spread, despite cost of carry caused by the volume of loans in arrears.

Credit Enhancement
Credit enhancement levels for HipoTotta 4's and Magellan 2's class A and B notes are sufficient to maintain current ratings, given the application of the worst-case scenario assumptions. This is reflected in today's affirmation of the notes. For HipoTotta 4 the class C notes' credit enhancement is insufficient to sustain ratings higher than 'CCCsf', and given Fitch's expectations on recoveries the notes are affirmed with a recovery estimate of 95%. For the class C and D notes of Magellan 2 credit enhancement has risen to levels that are sufficient to sustain higher ratings, leading to today's upgrades.

Payment Interruption Risk
HipoTotta 4 structure is exposed to payment interruption risk in the event of servicer default. As there are no alternative mitigants in place, in its analysis Fitch assessed the liquidity available in the transaction to fully cover senior fees, net swap payments and note interest in case of servicer disruption.

The liquidity available to the structure, which is provided by 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 ratings for Portuguese structured finance transactions (A+sf). In line with its counterparty criteria, Fitch continues to cap the ratings of the class A and B notes at 'Asf'.

Liquidity Facility
Magellan Mortgages No. 2 benefits from a liquidity facility line provided by RBS. Given its downgrade to BBB+/Stable/F2 in May 2015, rating upside on the class A and B notes may be constrained, leading to the Outlook revision to Stable.

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 in both Magellan deals is RBS. In light of RBS's downgrade the transactions are currently not posting collateral in line with Fitch's latest Counterparty Criteria for Structure Finance and Covered Bonds: Derivative Addendum. Although this does not have an immediate impact on the rating it may constrain rating upside.

For Magellan 1 failure to implement remedial actions may trigger negative rating actions.

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 Comercial Portugues and sourced from European Data Warehouse with the following cut-off dates:
-31 August 2015 for Magellan 1
-30 June 2015 for Magellan 2

Banco Santander Totta, S.A and sourced from the European Data Warehouse with the following cut-off dates:
-15 June 2015 for Hipototta 4

Transaction reporting provided by:
Banco Comercial Portugues, S.A for:
-Magellan 1 since close and until June 2015
-Magellan 2 since close and until July 2015
-Deutsche Bank AG since close and until June 2015 for Hipototta 4

MODELS
The EMEA RMBS Surveillance model below was used in the analysis.

The rating actions are as follows:

HipoTotta No. 4 Plc
Class A (ISIN XS0237370605): affirmed at 'Asf'; Outlook Stable
Class B (ISIN XS0237370787): affirmed at 'Asf'; Outlook Stable
Class C (ISIN XS0237370860: affirmed at 'CCCsf'; Recovery Estimate 95%

Magellan Mortgages No. 1 Plc:
Class A (ISIN XS0140415836): 'A+sf'; placed on RWN
Class B (ISIN XS0140416057): 'A+sf'; placed on RWN
Class C (ISIN XS0140416214): downgraded to 'BBB+sf' from 'Asf'; Outlook Stable

Magellan Mortgages No. 2 Plc:
Class A (ISIN XS0177944690): affirmed at 'A+sf'; Outlook revised to Stable from Positive
Class B (ISIN XS0177945077): affirmed at 'A+sf'; Outlook revised to Stable from Positive
Class C (ISIN XS0177945234): upgraded to 'Asf' from 'A-sf'; Outlook Stable
Class D (ISIN XS0177945408): upgraded to 'BBBsf' from at 'BBsf'; Outlook Stable.