OREANDA-NEWS. Fitch Ratings has affirmed six tranches of AyT Kutxa Hipotecario I and AyT Kutxa Hipotecario II, which are Spanish RMBS transactions of residential mortgages originated and serviced by Kutxabank, S.A. (BBB/Positive/F3). A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS
Sufficient Credit Enhancement
The present and projected credit enhancement (CE) levels of the rated notes are considered compatible with the current ratings, at 17.4% and 16.7% for the senior most tranches of Kutxa 1 and Kutxa 2 respectively. CE levels have risen over the past years as a result of sequential amortisation. We expect CE to remain broadly stable for Kutxa 1 transaction following the switch to pro-rata from sequential amortisation since end-2014. For Kutxa 2, sequential amortisation should continue to allow CE to build, mainly for senior most tranches. In light of the better performance of Kutxa 2, the outlook for class B is revised to stable from negative.

Performance Trends
Fitch expects cumulative gross defaults will stabilise, as the current arrears pipeline shows a downward trend. Cumulative gross defaults remain low for Kutxa 1 at 0.6% of initial portfolio balance whereas Kutxa 2 showed a much higher 5.8% as of end-2015. The existing balance of arrears over 90 days represented 0.3% and 1% of the current portfolio balance for Kutxa 1 and Kutxa 2 respectively as of end-2015, comparable to the 1.2% average seen for other prime Spanish RMBS transactions rated by Fitch.

Cumulative net defaults relative to the original portfolio balance in Kutxa 2 decreased to 2.6% in October 2015 from 3.2% in July 2015, due to a large one-off recovery. However, Fitch understands from information received from the originator that such recoveries are mainly linked to the repurchase of defaulted assets by Kutxabank, a practice that Fitch considers not sustainable in times of stress and consequently is not factored in by the agency when estimating recovery expectations on defaults.

Payment Interruption Risk
Cash reserves are sufficient to mitigate payment interruption risk on the rated notes during servicer disruption. For Kutxa 1, the cash reserve stands at 100% of target, which we expect to remain broadly stable given the prime collateral composition and the long weighted average seasoning of loans of almost 10 years. The cash reserve of Kutxa 2 transaction has been below target (49% at end-December 2015), but the risk is partly mitigated by an available dedicated liquidity reserve during servicer disruption to an amount equivalent to two quarterly interest payment obligations of the class A notes plus senior expenses.

RATING SENSITIVITIES
A worsening of the Spanish macroeconomic environment, especially employment conditions, or an abrupt shift of interest rates could jeopardise the underlying borrowers' affordability.
A deterioration of the asset performance beyond Fitch expectations would 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 pool and the transaction. 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.

SOURCES OF INFORMATION
The information below was used in the analysis.
-Investor report provided by Haya Titulizacion at end-December 2015
-Loan-by-loan data sourced from European Datawarehouse on 31 December 2015 for Kutxa Hipotecario I and 15 January 2016 for Kutxa Hipotecario II.

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

Fitch has affirmed the following ratings:

AyT Kutxa Hipotecario I
Class A notes (ISIN ES0370153001) affirmed at 'AA+sf'; Outlook Stable
Class B notes (ISIN ES0370153019) affirmed at 'Asf'; Outlook Stable
Class C notes (ISIN ES0370153027) affirmed at 'BBBsf'; Outlook Stable

AyT Kutxa Hipotecario II
Class A notes (ISIN ES0370154009) affirmed at 'Asf'; Outlook Stable
Class B notes (ISIN ES0370154017) affirmed at 'BBsf'; Outlook revised to Stable from Negative
Class C notes (ISIN ES0370154025) affirmed at 'CCCsf'; Recovery Estimate 90%