OREANDA-NEWS. Fitch Ratings has upgraded two tranches of Pelican Mortgages No.5 plc and affirmed 17 tranches in the Pelican RMBS Series. The mortgages in the six transactions were originated by Caixa Economica Montepio Geral (Montepio, B+/Stable/B).

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KEY RATING DRIVERS
Robust Performance
The robust performance of the assets has resulted in the upgrade of two tranches of Pelican 5 as well as the affirmations of the other transactions. The volume of loans in three-months plus arrears excluding defaults currently range from 0.2% (Pelican 3) to 1.5% (Pelican 6) of the outstanding pool balances. Defaults as a proportion of the original collateral balance range from 0.8% (Pelican 3) to 3.6% (Pelican 6).

Increasing Instalment Loans
The more recent Pelican deals - Pelican 4, 5 and 6 - contain increasing instalment loans with negative amortisation features. At close the portions of these loans were approximately 71%, 39% and 34.3% of Pelican 4, 5 and 6, respectively. Since transaction close, the volume of loans that are still expected to have increased future instalments has reduced to 3.9%, 7.0% and 4.0% of the current pool balances, respectively. This form of affordability loan product has been associated with generally weaker borrowers and Fitch continues to view the presence of these loans in the transactions credit negative .

Provisioning
The transactions benefit from a partial provisioning mechanism, whereby excess spread is diverted to principal distributions for the loans in arrears beyond certain thresholds. Deemed principal losses are recorded according to the number of monthly instalments in arrears. Fitch has estimated the amounts of loans that have defaulted, but for which full provisions have not yet been made, which range from 0.1% (Pelican 2) to 0.8% (Pelican 1). Those amounts have been deducted from the available credit enhancement in Fitch's analysis, since they are expected to be payable in the coming quarters.

Unhedged Basis Risk
The structure in Pelican 6 does not feature a basis swap agreement to hedge the interest rate mismatch between the assets and the liabilities. To account for the exposure, Fitch stressed the excess spread applied in Fitch's EMEA RMBS Surveillance model. The subsequent reduction in excess spread has no effect on the ratings, as reflected in the affirmation.

Counterparty Exposure
The swap counterparty in Pelican 1 and 4 is Royal Bank of Scotland (BBB+/Stable/F2). The agency's understanding of the transaction documents is that remedial actions should have been implemented 14 days after the downgrade of RBS to adequately mitigate the increased counterparty risk.
Fitch has been informed that no collateral is posted with regards to RBS's exposure to Pelican 1, while the process of posting collateral has not yet been finalised in Pelican 4. As a result, Fitch stressed the excess spread applied in Fitch's EMEA RMBS Surveillance model for both Pelican 1 and Pelican 4.

Royal Bank of Scotland (BBB+/Stable/F2) also performs the role of liquidity facility provider in Pelican 1. The agency has been informed that a liquidity facility drawing will be finalised in the future at the request of the trustee. Given that this drawing has not yet been made, Fitch has only taken into account the reserve fund as a source of liquidity with regards to testing the payment interruption risk. The analysis shows that the risk remains sufficiently mitigated.

RATING SENSITIVITIES
Deterioration in asset performance may result from economic factors. A corresponding increase in new defaults and associated pressure on excess spread levels and reserve funds could result in negative rating action.

The ratings are also sensitive to changes to 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. The income data was missing in the loan-by-loan data of Pelican 1. This finding was reflected in this analysis by assuming class 5 DTI for the portfolio.

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 Pelican 1-5's 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.

Prior to Pelican 6's 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.

Prior to Pelican 6's closing, Fitch conducted a review of a small targeted sample of Montepio'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.
- Loan-by-loan data provided by European Data Warehouse and Montepio as at 30 August (Pelican 2-6) and 30 September 2015 (Pelican 1)
Transaction reporting provided by US Bank (Pelican 1-2) and Citi (Pelican 3-6) as at 15 September (Pelican 1-2-3-5-4) and 25 September 2015 (Pelican 6)
- Loan enforcement details provided by Montepio as at 31 August 2015