OREANDA-NEWS. November 18, 2015. Fitch Ratings has downgraded seven and affirmed 14 tranches of five Dutch non-conforming RMBS. It has also revised the Outlook on four tranches to Stable from Negative.

The transactions are Eurosail-NL 2007-1 B.V. (Eurosail 2007-1), Eurosail-NL 2007-2 B.V. (Eurosail 2007-2), EMF-NL 2008-1 B.V. (EMF 2008-1) and EMF-NL Prime 2008-A B.V. (EMF 2008-A) series jointly originated by ELQ Portefeuille I BV (ELQ), Quion 50, and Spaarck Hypotheken's Principal Investment Mortgages 1 SA (PRIM). A full list of rating actions follows at the end of this rating action commentary.

KEY RATING DRIVERS
Lower Arrears but Higher Defaults
Fitch observes an improvement in the portion of loans in arrears by more than three months across the Eurosail and EMF transactions. It currently ranges from 8.8% (Eurosail 2007-2) to 10% (EMF 2008-A), which represents a material decrease from 2013 peaks.

This reduction in late-stage arrears is mostly driven by more loans going through foreclosures rather than loans returning to performing status. Cumulative foreclosures have been increasing steadily over the past year, almost following a one-for-one relationship with the decrease in arrears. Combined with high loan to values (LTVs), this has resulted in a build-up of realised losses that currently range from 5% (Eurosail 2007-1) to 6.4% (EMF 2008-A) of the original portfolio balance.

Similarly, for PRIM foreclosures and losses have been building-up. Arrears have remained between 2.6% and 5%, repossessions and losses are lagging behind the Eurosail and EMF transactions due to PRIM's shorter seasoning, and currently stand at 11.5% and 3.8% respectively.

Different Liquidity Levels
Eurosail 2007-1 and PRIM have reserve funds (RFs) that are currently at their target levels and represent 2.3% and 1.6% of their respective outstanding note balances. Comparatively, the RFs for Eurosail 2007-2 and EMF 2008-1 only represent 48.8% and 54% of their target. Meanwhile EMF 2008-A has completely depleted its RF and shows an outstanding principal deficiency ledger (PDL) of EUR4.3m (47.8% of the class D note).

Moreover, following the default of Lehman Brothers, the two EMF transactions were left without liquidity facilities, resulting in increased exposure to payment interruption risk in case of servicer default. According to Fitch's criteria, the structures do not have sufficient liquidity to withstand a temporary loss of principal and interest receipts, which would be required to cover for senior fees and senior note interest in a higher interest rate environment. For this reason, the ratings in EMF transactions are capped at 'Asf'.

Sufficient CE in EMF and PRIM
For the EMF and PRIM transactions, despite weak asset performance, considering the deleveraging of the portfolios and last year's rating actions on the notes (for EMF), the CE levels are considered sufficient to maintain the current ratings and this has led Fitch to revise the Outlook to Stable from Negative for several senior EMF tranches. However, credit protection for the Eurosail deals is not deemed sufficient to affirm all the tranches at their current levels, as reflected in the downgrade of the class A notes of Eurosail 2007-2.

RATING SENSITIVITIES
Further deterioration in asset performance that leads to an increase in losses beyond Fitch's assumptions, could lead to negative rating actions.

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 the Eurosail and EMF transactions
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 the PRIM transaction
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of the originators' 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, 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.

For the Eurosail and EMF transactions
-Loan-by-loan data provided by Adaxio as at 4 October 2015
-Transaction reporting provided by Wells Fargo as at 17 July 2015
-Counterparty information provided by Adaxio as at 12 November 2015

For the PRIM transaction
-Loan-by-loan data provided by the European Data Warehouse as at 31 August 2015
-Transaction reporting provided by Vesting Finance Servicing as at 30 August 2015
-Counterparty information provided by Intertrust as at 11 November 2015

MODELS
The models below were used in the analysis. Click on the link for a description of the model.
ResiEMEA.

EMEA RMBS Surveillance Model.

REPRESENTATIONS AND WARRANTIES
For the PRIM transaction: A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for the asset class is available by accessing the appendix that accompanies the initial new issue report (see Principal Residential Investment Mortgages 1 S.A. - Appendix, dated 7 March 2012 at www.fitchratings.com). In addition refer to the special report "Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions" dated 12 June 2015 available on the Fitch website."

Fitch's rating actions are as follows:

Eurosail 2007-1 B.V.
Class A (XS0307254259) affirmed at 'AAsf'; Outlook Negative
Class B (XS0307256114) downgraded to 'BBB+sf' from 'Asf'; Outlook Stable
Class C (XS0307257435) downgraded to 'BB+sf' from 'BBBsf'; Outlook Stable
Class D (XS0307260496) affirmed at 'Bsf'; Outlook Negative
Class E1 (XS0307265370) affirmed at 'CCCsf', Recovery estimate of 0%
Class ET (XS0307265883) affirmed at 'CCCsf', Recovery estimate of 0%

Eurosail 2007-2 B.V.
Class A (XS0327216569) downgraded to 'AAsf' from 'AAAsf'; Outlook Negative
Class M (XS0330526772) downgraded to 'Asf' from 'AAsf'; Outlook Negative
Class B (XS0327217880) downgraded to 'BBsf' from 'BBBsf'; Outlook Negative
Class C (XS0327218425) downgraded to 'Bsf' from 'BBsf'; Outlook Negative
Class D1 (XS0327219159) downgraded to 'CCCsf' from 'Bsf'; Recovery Estimate of 0%

EMF-NL 2008-1
Class A2 (XS0352315526) affirmed at 'Asf;' Outlook revised to Stable from Negative
Class A3 (XS0359127387) affirmed at 'Asf'; Outlook revised to Stable from Negative

EMF-NL Prime 2008-A B.V.
Class A2 (XS0362465535) affirmed at 'BBB+sf'; Outlook revised to Stable from Negative
Class A3 (XS0362465881) affirmed at 'BBB+sf'; Outlook revised to Stable from Negative
Class B (XS0362466186) affirmed at 'B+sf'; Outlook Negative
Class C (XS0362466269) affirmed at 'CCCsf'; Recovery Estimate revised to 15% from 80%
Class D (XS0362466772) affirmed at 'CCsf'; Recovery Estimate of 0%

Principal Residential Investment Mortgages 1 SA
Class A (XS0736639112) affirmed at 'AAAsf'; Outlook Stable
Class B (XS0736642686) affirmed at 'AAAsf'; Outlook Stable
Class C (XS0736644203) affirmed at 'Asf'; Outlook Stable