Grand Canal Securities 1 DAC

Transcription

1 Presale: Grand Canal Securities 1 DAC This presale report is based on information as of April 4, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings Assigned Class Prelim. rating* Class size (%) Available credit enhancement (%) Interest X NR 3.00 N/A Three-month plus a margin A AAA (sf) Three-month plus a margin B-dfrd AA (sf) Three-month plus a margin C-dfrd A (sf) Three-month plus a margin D-dfrd BBB (sf) Three-month plus a margin E-dfrd BB (sf) Three-month plus a margin Step-up margin Three-month plus a margin Three-month plus a margin Three-month plus a margin Three-month plus a margin Three-month plus a margin Three-month plus a margin Step-up date May 2022 May 2022 May 2022 May 2022 May 2022 May 2022 Legal final maturity February 2055 February 2055 February 2055 February 2055 February 2055 February 2055 Primary Credit Analyst: Rory O'Faherty, London +44 (0) ; rory.ofaherty@spglobal.com Research Contributor: Saurabh Bansal, CRISIL Global Analytical Center, an S&P affiliate, Mumbai See complete contact list on last page(s) APRIL 4,

2 Preliminary Ratings Assigned (cont.) Class Prelim. rating* Class size (%) Available credit enhancement (%) Interest Step-up margin Step-up date Legal final maturity F1-dfrd B (sf) Three-month plus a margin Three-month plus a margin May 2022 February 2055 F2-dfrd NR Three-month plus a margin Three-month plus a margin May 2022 February 2055 Z1 NR Fixed interest rate Fixed interest rate May 2022 February 2055 Z2 NR Fixed interest rate Fixed interest rate May 2022 February 2055 Z3 NR Fixed interest rate Fixed interest rate May 2022 February 2055 *The rating on each class of securities is preliminary as of April 4, 2017, and subject to change at any time. We expect to assign final credit ratings on the closing date subject to a satisfactory review of the transaction documents and legal opinions. Our ratings address timely receipt of interest and ultimate repayment of principal for the class A notes and the ultimate payment of interest and principal on the other rated notes. This is the initial credit support (does not include the liquidity reserve fund). After the step-up date, on the class A to F2-dfrd notes will be capped at 6%. --Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable. Transaction Participants Originators Arranger Beneficial title seller Master servicer Initial servicer Replacement servicer Back-up master servicer facilitator Cash manager Corporate services provider Principal paying agent Registrar Trustee Share trustee Transaction account bank Collection account bank Irish Nationwide Building Society and Springboard Mortgages Ltd. Citigroup Global Markets Ltd. Mars Capital Ireland Holdings DAC Mars Capital Finance Ireland DAC Acenden Ltd. Acenden (Ireland) DAC Intertrust Finance Management (Ireland) Ltd. The Bank of New York Mellon, London branch TMF Administration Services Ltd. The Bank of New York Mellon, London branch The Bank of New York Mellon, (Luxembourg) S.A. BNY Mellon Corporate Trustee Services Ltd. TMF Management (Ireland) Ltd. Citibank N.A, London branch Barclays Bank Ireland PLC Supporting Ratings Institution/role Citibank N.A., London branch* as the transaction account provider Barclays Bank Ireland PLC as collection account bank provider Rating A+/Stable/A-1 A-/Negative/A-2 *Rating derived from the rating on the parent entity. APRIL 4,

3 Transaction Key Features* Expected closing date April 2017 Collateral Irish owner-occupied and buy-to-let mortgage loans Outstanding principal of the provisional pool ( ) 331,861, Country of origination Concentration (%) Dublin: Property occupancy Owner-occupied 91.94% and buy-to-let 8.06% Weighted-average current indexed LTV ratio (%) Weighted-average original LTV ratio (%) Average loan size balance ( ) 148,683 Largest loan-size ( ) 910,228 Weighted-average seasoning (months) Arrears greater than or equal to one month, including capitalized arrears (%) 2.43 Projected arrears (%) Redemption profile (%) Repayment: 82.58; Interest-only: Liquidity reserve fund (%) 1.85 *Data is based on a provisional pool as of Dec. 31, Calculations are according to S&P Global Ratings' methodology (including valuation haircuts). The seller will fund the liquidity reserve fund at closing to 1.85% of the initial balance of the class A notes. LTV--Loan-to-value. Ireland Transaction Summary S&P Global Ratings has assigned its preliminary credit ratings to Grand Canal Securities 1 DAC's (Grand Canal 1) class A, B-dfrd, C-dfrd, D-dfrd, E-dfrd, and F1-dfrd notes. At closing, Grand Canal 1 will also issue unrated class F2, Z1, Z2, Z3, and X notes. Grand Canal 1 is a securitization of a pool of buy-to-let and owner-occupied residential mortgage loans to nonconforming borrowers, secured on properties in Ireland. At closing, the issuer will use the note issuance proceeds to purchase a portfolio of Irish residential mortgages from the beneficial title seller, Mars Capital Ireland Holdings DAC (Mars Capital Ireland). The transaction will have two reserve funds: A liquidity reserve fund, which will be funded to 1.85% of the class A note balance at closing. This can build up to 3.75% of the class A note balance at closing through the revenue priority of payments. A general reserve fund, which will not be funded at closing. This can build up to 3.5% of the outstanding principal balance of the class B to Z3 notes, and to 4% after the step-up date in 2022, through the revenue priority of payments. The rated notes' interest rate will be based on an index of three-month Euro Interbank Offered Rate (). Within the mortgage pool, the loans are linked to either the European Central Bank (ECB) base rate, or a standard variable rate (SVR). There will be no swap in the transaction to cover the interest rate mismatches between the assets and liabilities, although after the step-up date a cap of 6% (on the three-month index) applies to the rated notes. We considered this cap in our analysis, but in scenarios where the cap is reached, we also apply a cap to the three-month payable by the assets. APRIL 4,

4 Our preliminary ratings reflect our assessment of the transaction's payment structure, cash flow mechanics, and the results of our cash flow analysis to assess whether the notes would be repaid under stress test scenarios. Subordination and the general reserve fund provide credit enhancement to the rated notes. The notes will amortize sequentially, and do not include a trigger to switch to pro rata amortization. Subject to certain documented conditions, principal can be used to pay interest and further liquidity is provided through the liquidity reserve fund. Taking these factors into account, we consider the available credit enhancement for the rated notes to be commensurate with the preliminary ratings that we have assigned. Interest on the class B-dfrd to F1-dfrd notes can be deferred, so our analysis of these notes addresses the ultimate payment of principal and the ultimate payment of interest. Our preliminary ratings also reflect the application of our criteria for structured finance ratings above the sovereign (RAS criteria; see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016). Our RAS criteria designate the country risk sensitivity for residential mortgage-backed securities as moderate. Under our RAS criteria, this transaction's notes can therefore be rated four notches above the sovereign rating, if they have sufficient credit enhancement to pass at least a severe stress. However, as all six of the conditions in paragraph 42 of the RAS criteria are met, we can assign ratings in this transaction up to a maximum of six notches (two additional notches of uplift for the most senior class of notes) above the sovereign rating, subject to credit enhancement being sufficient to pass an extreme stress. As our long-term sovereign rating on the Republic of Ireland is 'A+', our RAS criteria do not currently constrain our ratings on any class of notes. This will be Mars Capital Ireland's first securitization. The million provisional pool (as of Dec. 31, 2016) comprises owner-occupied and buy-to-let (BTL), Irish residential mortgages, which were originated by Irish Nationwide Building Society (60.37%) and Springboard Mortgages Ltd. (39.63%). The portfolio of mortgages was acquired during 2014 by a number of entities (Mars Capital Ireland DAC, Mars Capital Ireland No. 2 DAC, Mars Capital Ireland No. 3 DAC, and Mars Capital Ireland No. 4 DAC). Mars Capital Finance Ireland DAC will act as master servicer and special servicer for all of the loans in the transaction. However, the primary servicing will be done by Acenden Ltd. Once a loan in the pool goes beyond 35 days in arrears, Mars Capital Finance Ireland will step back in as the special servicer for the loan in question. Strengths, Concerns, And Mitigating Factors Strengths At closing, the preliminary capital structure provides 26.75% of available credit enhancement for the class A notes through subordination. A liquidity reserve fund will be funded at closing to 1.85% of the initial balance of the class A notes and can build up through the revenue priority of payments to 3.75% of the class A notes' initial balance, based on a predefined schedule. Upon redemption of the class A notes or seven years after the closing date (whichever is earlier), the APRIL 4,

5 required amount of the liquidity reserve can fall to zero. The liquidity reserve fund will be available, along with principal, to pay senior expenses and mitigate interest shortfalls on the class A notes. The issuer can also pay interest shortfalls on the most senior class of notes outstanding from principal receipts. A principal deficiency ledger (PDL) mechanism permits excess spread to be trapped in the priority of payments. The PDL will be debited for any losses on the portfolio, and for any use of principal to cover interest shortfalls. The capital structure is sequential, and does not include a trigger for pro rata amortization. Over time, meaningful credit enhancement can therefore build up for the senior notes--this will enable the structure to withstand performance shocks. We consider the pool to be well-seasoned--it has a weighted-average seasoning of months. In our view, more-seasoned performing loans exhibit lower risk profiles than less-seasoned loans. Of the preliminary pool, more than 45% of loans have an original loan-to-value (LTV) ratio of less than 70%. The original weighted-average LTV ratio is 70.88% and the current weighted-average indexed LTV ratio is %. These are both in line with what we would expect to see in an Irish residential mortgage-backed securities (RMBS) transaction. Loans that have higher original LTV ratios historically exhibit poorer performance than otherwise similar loans. The LTV calculations are based on S&P Global Ratings' methodology and incorporate valuation haircuts. Concerns and mitigating factors In our credit analysis, we considered the fact that the preliminary pool has a significant proportion of loans that are remortgage loans (47.17%); loans that have been granted to borrowers who have self-certified their income (25.38%); and loans that have been granted to first-time buyers (35.42%). Loans that have these characteristics have historically exhibited poorer performance than otherwise similar loans. We have addressed this factor in our credit analysis. Of the preliminary pool, 2.43% of loans are in arrears (including capitalized arrears) of greater than or equal to one month. Historically, the loans in the preliminary pool have exhibited high levels of arrears, particularly the loans in the Springboard portfolio, where arrears reached 40.23% in Arrears in the Irish Bank Resolution Corp. Ltd. portfolio have also been higher in the past than currently observed, reaching almost 8% in Additionally, a significant number of loans in the pool (6.14%) have been restructured to some extent. Given that these prior restructurings and the high level of historical arrears could indicate a higher risk of increasing arrears in the pool, we have assumed an additional 21.95% in arrears for the next year. Mars Capital Ireland has proposed to commit to a minimum interest margin of three-month plus 2.5% for all SVR loans that are currently paying a rate of 2.5% or higher. For any loans currently paying less than this amount, we have assumed a 0% margin. The structure contains a class X note. In the revenue priority of payments, this class ranks senior to all the rated notes except the class A notes, until the step-up date. On each interest payment date (IPD) until the step-up date, the class X note will receive the lesser of 1% of the outstanding class A note balance and interest payments that exceed the SVR floor of three-month plus 2.5%. The calculated amount is the split into class X interest and class X principal payments. After the step-up date in 2022, the class X notes will receive only subordinated payments. At all times until the redemption of the class X notes, class X noteholders will receive excess spread in the revenue priority of payments. In our cash flow analysis, we assume that the assets will pay only the SVR floor. Therefore, under our scenarios, no cash will be paid to the class X notes and this note therefore has minimal impact on the transaction. Of the preliminary pool, 8.91% comprises loans that have been split--a portion of the debt is deferred and paid as a bullet loan that accrues no interest. The principal on this portion is due when the rest of the loan matures. The borrower continues to service the remaining portion of the loan. We consider these loans in both our credit and cash flow analysis. APRIL 4,

6 There are no swap agreements in place to mitigate basis risk in this transaction. We have addressed this risk by applying stresses to the assets in our cash flow analysis. The loans in the pool yield different interest rates. In our cash flow analysis, we have considered the risk of the high-yielding loans defaulting or prepaying and applied spread compression to the assets. Of the preliminary pool, Mars Capital Finance Ireland has identified 125 loans (with a current balance of 15.8 million) which may have a restriction on their assignment to the issuer. It expects to resolve this issue after closing. To mitigate this issue, Mars Capital Finance Ireland will deposit an amount corresponding to the current balance on the loans in question ( 15.8 million) in a dedicated reserve in the transaction account. As and when Mars Capital Finance Ireland resolves the issue regarding assignment on each loan, it will release a corresponding amount from this reserve. We have considered this mechanism in our analysis. Transaction Structure At closing, Grand Canal Securities 1 will use the class A, B-dfrd, C-dfrd, D-dfrd, E-dfrd, F1-dfrd, F2, Z1, Z2, and Z3 notes' issuance proceeds to purchase the beneficial title of the mortgage loans from Mars Capital Ireland. The issuer will grant security over all of its assets to the trustee (see chart 1). APRIL 4,

7 The security for the mortgages will be transferred to the issuer by equitable assignment. Following our analysis, we consider that the security can be relied upon, as the true sale of the mortgages would remain valid if the seller were to become insolvent. Representations and warranties The beneficial title seller and the legal title holders provide representations and warranties in the mortgage sale agreement, which we consider to be weaker than those that are standard for an Irish RMBS transaction. The beneficial title seller and the legal title holders are only obliged to repurchase a loan if there is a breach in the representations and warranties within 24 months of closing. We have accounted for this representations and warranties package in our analysis. APRIL 4,

8 Servicing In January 2017, we reviewed the collections and default management processes of both Acenden Ltd., the initial servicer, and Mars Capital Finance Ireland, the master servicer and special servicer. This review is an integral part of the corporate overview we carry out during the rating process of any transaction. Acenden will initially service the portfolio. However, if a loan falls more than 35 days in arrears, Mars Capital Finance Ireland will take over as servicer for the loan in question. Mars Capital Finance Ireland remains the master servicer and will interact daily with Acenden to ensure continuity of servicing. We rank Acenden as ABOVE AVERAGE for primary servicing. We are satisfied that both Acenden and Mars Capital Finance Ireland are capable of performing their servicing functions in the transaction. The loans in the preliminary pool were acquired by Mars Capital Ireland DAC, Mars Capital Ireland No. 2, Mars Capital Ireland No. 3, and Mars Capital Ireland No. 4 throughout Three distinct pools in the portfolio are being assessed. Irish Nationwide Building Society originated the Sand (6.97% of the preliminary pool) and Pearl (53.40%) portfolios and Springboard Mortgages Ltd. originated the Springboard (39.63%) portfolio. Irish Nationwide ceased to exist in 2011 when its assets and liabilities, including mortgage loans, were transferred to the entity that became the Irish Bank Resolution Corp. Ltd. Springboard Mortgages was established in Permanent TSB then took full control of Springboard in Notes Terms And Conditions Grand Canal 1 will pay interest quarterly in August, November, February, and May of each year, beginning in August The class A, B-dfrd, C-dfrd, D-dfrd, E-dfrd, F1-dfrd, and F2 notes pay three-month, plus a class-specific margin. Following the step-up date in May 2022, the class-specific margins for the rated notes will step up but the portion will be capped at 6%. We have accounted for this in our analysis. The unrated class X notes will pay interest equal to three-month plus a class-specific margin. The class Z1, Z2, Z3, and X notes will pay a fixed interest rate. All of the notes will reach legal final maturity in February The issuer will pay interest according to the interest priority of payments. Under the transaction documents, interest payments on all classes of notes (except the class A notes) can be deferred. Consequently, any deferral of interest on the class B-dfrd, C-dfrd, D-dfrd, E-dfrd, F1-dfrd, and F2 notes would not constitute an event of default. Our preliminary ratings address the timely payment of interest and the ultimate payment of principal on the class A notes and the ultimate payment of interest and principal on the other rated notes. Optional redemption of the notes Under the transaction documents, the issuer may redeem the rated notes at their outstanding principal amount, with any accrued interest: On any IPD after the optional redemption date (May 2020); On any IPD between the step-up date (May 2022) and February 2023; or On any IPD, if the principal amount outstanding is less than or equal to 20% of the principal balance at closing. APRIL 4,

9 Mandatory redemption of the notes The issuer will apply available principal receipts to redeem the notes on each IPD, subject to the principal priority of payments. Collateral Description As of the pool cut-off date on Dec. 31, 2016, the preliminary pool of 331,861,800 comprised 2,232 loans originated by either Irish Nationwide (60.37% of the total amount of the pool) or Springboard Mortgages (39.63%). All loans are secured against properties in Ireland. Of the initial pool, 91.94% consists of loans secured against owner-occupied properties and 8.06% of buy-to-let residential mortgage loans. Other features of the provisional pool include: Only 2.43% of loans are currently in arrears (including capitalized arrears), but given the high levels of historical delinquencies in the portfolio and the number of loans that have restructuring arrangements, we have incorporated the borrower's historical arrears performance in our projected arrears for the next year (see chart 2). Approximately 35.42% of loans are to first-time buyers and 25.38% of loans are to self-employed borrowers. In our view, such loans have historically exhibited a higher default probability than otherwise similar loans. However, we consider that the risk associated with loans to first-time buyers diminishes as seasoning increases, so the pool's high weighted-average seasoning of months partially mitigates the adjustment for first-time buyers (see chart 3). Of the provisional portfolio, 82.58% are repayment mortgage loans, and 17.42% are interest-only loans. APRIL 4,

10 Chart 2 APRIL 4,

11 Chart 3 The pool is mainly concentrated in Dublin (23.76%; see chart 4). However, this concentration is below the level that we consider to be excessive, and we have therefore made no further adjustment for this in our analysis. APRIL 4,

12 Chart 4 The weighted-average original indexed LTV ratio of the provisional collateral pool is 70.87%, calculated using our European residential loans criteria (see "Methodology And Assumptions: Assessing Pools Of European Residential Loans," published on Dec. 23, 2016) (see chart 5). We consider that a borrower that has minimal equity in their property is less likely to be able to refinance, and more likely to default on their obligations than borrowers that have lower current indexed LTV ratio loans. At the same time, loans that have high current indexed high LTV ratios are likely to incur more severe losses if the borrower defaults. Of the pool, 11.11% exhibits a current indexed LTV ratio between 90% and 100%, and 47.82% has a current indexed LTV ratio greater than 100% (see chart 6). The weighted-average current LTV ratio is %. The LTV calculations are based on S&P Global Ratings' methodology and incorporate valuation haircuts. APRIL 4,

13 Chart 5 APRIL 4,

14 Chart 6 Of the provisional pool, 69.37% pay a floating rate linked to Mars Capital Finance Ireland's SVR and 27.29% pay a floating rate linked to the ECB base rate. The remaining 3.33% are not linked to any index as they are the warehoused portion of the split mortgages. Credit Structure A combination of subordination, the general reserve fund, and excess spread on the mortgage loans provides credit support for the notes (see table 1). Table 1 Credit Support For The Rated Notes Class Preliminary rating Size of class (%) Initial credit support (%) A AAA (sf) B-dfrd AA (sf) C-dfrd A (sf) D-dfrd BBB (sf) E-dfrd BB (sf) APRIL 4,

15 Table 1 Credit Support For The Rated Notes (cont.) Class Preliminary rating Size of class (%) Initial credit support (%) F1-dfrd B (sf) Grand Canal 1 will open a transaction account with Citibank N.A., London branch (the rating on which is derived from our rating on the parent entity; A+/Stable/A-1). Accounts are subject to the transaction documents' terms. The transaction documents specify that the issuer must take remedial actions, including replacing Citibank, London branch as bank account provider with a suitably rated financial institution, if: We lower our long-term issuer credit rating (ICR) on the account bank (in this case, Citibank, London branch) below 'A', where the short-term rating is at least 'A-1'; or We lower our long-term ICR on the account bank below 'A+', if it does not have a short-term rating. Borrowers pay into collection accounts held with Barclays Bank Ireland PLC. All amounts in the collection account are transferred weekly to the transaction account. A weekly sweep is less frequent than we typically see and as such we have a longer commingling stress. Additionally, before being swept to the transaction account, collections will be used to top up the master servicer expense account up to the required balance of 50,000. This account is used to pay for items such as protective advances and we have considered it in our cash flow analysis. The transaction documents will establish a declaration of trust over any amounts in the collection account. The transaction documents will specify that the issuer must take remedial actions, including replacing Barclays Bank Ireland as collection account provider with a suitably rated financial institution, if: Our long-term ICR on the collection bank account provider (Barclays Bank Ireland) falls below 'BBB', where the short-term rating is at least 'A-2'; or Our long-term ICR on the collection bank account provider falls below 'BBB+', if it does not have a short-term rating. General reserve fund The general reserve fund will build up to 3.5% of the outstanding principal balance of the class B-dfrd, C-dfrd, D-dfrd, E-dfrd, F1-dfrd, F2, Z1, Z2, and Z3 notes. After the step-up date, the required amount of the general reserve fund increases to 4% of the outstanding principal balance of the class B-dfrd, C-dfrd, D-dfrd, E-dfrd, F1-dfrd, F2, Z1, Z2, and Z3 notes. When the class F2 notes are redeemed, the required amount of the general reserve fund will fall to zero. Until this time, the general reserve fund can only amortize while the 90+ days arrears are less than 15% of the outstanding collateral balance. Liquidity support High-delinquency scenarios increase the liquidity stresses on the transaction--the issuer may not have sufficient revenue receipts under these scenarios to pay interest due on the notes. To mitigate this risk, liquidity support to the transaction will be provided, first through the general reserve fund, then through the liquidity reserve fund, and then through the use of principal to pay interest. The seller will fund the liquidity reserve at closing to 1.85% of the initial balance of the class A notes. The liquidity APRIL 4,

16 reserve fund can then build up to 3.75% of the initial balance of the class A notes, based on a predefined schedule. Its required amount falls to zero when the class A notes are redeemed, or seven years after closing. Like the general reserve fund, the liquidity reserve fund can only amortize while 90+ days arrears are less than 15% of the outstanding collateral balance, until the class A notes are redeemed. The liquidity reserve fund can be used to cure shortfalls in senior fees and interest on the class A notes. If the general reserve fund, the liquidity reserve fund, and revenue receipts are insufficient, principal receipts can be used to cure shortfalls in senior fees and interest on the most senior class of notes outstanding. The use of principal to pay interest would result in the registering of a PDL and may reduce the credit enhancement available to the notes. Principal deficiency ledger The PDL will comprise 10 subledgers, one for each of the class A to Z3 notes. Amounts will be recorded on the PDL if the portfolio suffers any losses or if the transaction uses principal as available revenue receipts. PDL amounts will first be recorded in the class Z3 notes' PDL, up to the class Z notes' collateralized outstanding amount. They will then be debited sequentially upward. Revenue priority of payments Senior fees; Senior servicing fees; The class A notes' interest; Top up the liquidity reserve fund; The class X notes' interest; The class X notes' PDL; The class A notes' PDL; The class B-dfrd notes' interest; The class B-dfrd notes' PDL; The class C-dfrd notes' interest; The class C-dfrd notes' PDL; The class D-dfrd notes' interest; The class D-dfrd notes' PDL; The class E-dfrd notes' interest; The class E-dfrd notes' PDL; The class F1-dfrd notes' interest; The class F1-dfrd notes' PDL; The class F2 notes' interest; The class F2 notes' PDL; Mezzanine servicing fees; Top up the general reserve fund; The class Z1 notes' PDL; The class Z2 notes' PDL; The class Z3 notes' PDL; APRIL 4,

17 The class X notes' interest; The class X notes' principal; and Deferred consideration to Z3. Principal priority of payments If revenue receipts are insufficient, principal may be used to pay interest on the most senior class of notes outstanding and to pay senior fees; Top up the liquidity reserve fund to the documented required amount; The class A notes' principal; The class B-dfrd notes' principal; The class C-dfrd notes' principal; The class D-dfrd notes' principal; The class E-dfrd notes' principal; The class F1-dfrd notes' principal; The class F2 notes' principal; The class Z1 notes' principal; The class Z2 notes' principal; The class Z3 notes' principal; and Deferred consideration to the revenue priority of payments. Hedging risk Of the provisional pool, 69.37% pays interest based on Mars Capital Ireland's floating-rate SVR, while 27.29% pays based on a rate linked to the ECB. The remaining 3.33% are not linked to any index as they are the warehoused portion of the split mortgages. The SVR set by Mars Capital Ireland will reference three-month. The classes of rated notes will pay interest based on three-month. After the step-up date, the on the rated notes (and the class F2 notes) will be capped at 6%. The transaction does not have a basis risk swap in place. However, the portion of the provisional pool that references the SVR are linked to three-month, which is reset on the same day as the three-month on the notes. This mitigates the basis risk. Some basis risk is associated with the ECB-linked loans and we have considered this risk in our analysis. SVR loans Mars Capital Finance Ireland has proposed to commit to a minimum interest margin of three-month plus 2.5% for all SVR loans that are currently paying a rate of 2.5% or higher. For any loans currently paying less than this amount, we have assumed a 0% margin. In the event of Mars Capital Finance Ireland's insolvency, the right to set the SVR rate will transfer to the replacement master servicer. We have received legal confirmation that the underlying mortgage documentation does not prevent Mars Capital Ireland from setting a minimum SVR floor and that this will not breach any consumer protection law. Discounted pay-offs (DPOs) The master servicer may, in certain cases, enter into a discounted pay-off or a negotiated settlement with a borrower, which may result in a loan being settled at a discount. Our cash flow analysis includes consideration of the risk that the discount could exceed our estimated loss severities. APRIL 4,

18 Spread compression The asset yield on the provisional pool can decrease if higher-paying assets default or prepay. We have taken this into account in our cash flow analysis. Cash Flow Analysis We stressed the transaction's cash flows to test the credit and liquidity support that the assets, subordinated tranches, and the liquidity and general reserve funds provide. We apply these stresses to the cash flows at all relevant rating levels. In our stresses on the class A notes, all notes must pay full and timely principal and interest. Our ratings on the class B-dfrd to F1-dfrd notes address the ultimate payment of principal and interest. Credit enhancement Although the economic outlook in Ireland is relatively positive, our outlook for the Irish housing mortgage market calls for starting conditions that are not benign, given the elevated levels of unemployment and the fact that the stock of nonperforming loans remains high. We have therefore increased our expected 'B' foreclosure frequency assumption to 3.33% from 2.00%, when applying our European residential loans criteria, to reflect this view. We did not modify our assumptions for the 'AAA' rating level as we consider the current outlook to be within the boundaries of a moderate stress. We did, however, interpolate the 'B' assumption at the 'B+' to 'AA+' rating. Table 2 highlights the foreclosure frequency assumptions used as part of our credit analysis of the underlying assets in this transaction. Table 2 Assumptions Rating level Base foreclosure frequency component for an archetypical Irish mortgage loan pool (%) AAA AA A 9.00 BBB 6.50 BB 4.00 B 3.33 Amount of defaults and recoveries For each loan in the portfolio, we estimated the likelihood that the borrower will default on its mortgage payments (the foreclosure frequency), and the amount of loss upon the subsequent sale of the property (the loss severity, expressed as a percentage of the outstanding loan). We assume the total mortgage balance to default. We determine the total amount of this defaulted balance that is not recovered for the entire portfolio by calculating the WAFF and the weighted-average loss severity (WALS). When comparing the minimum credit enhancement levels that we consider commensurate with each rating level with that of this pool, we also included interest foregone between the point of default and the receipt of recoveries (see table 3). APRIL 4,

19 Table 3 Assumptions Rating level Minimum credit enhancement level (%) Initial credit enhancement modeled for this pool (%) AAA AA A BBB BB B The WAFF and the WALS assumptions increase in tandem with the rating level because notes that are assigned a higher rating should be able to withstand a higher level of mortgage default and loss severity. We base our credit analysis on the loans and the associated borrowers' characteristics, as well as our subsequent assessment of the portfolio's WAFF and WALS, which were the inputs we used in our cash flow analysis (see table 4). Table 4 Portfolio WAFF, WALS, And Credit Enhancement Rating level WAFF (%) WALS (%) AAA AA A BBB BB B WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loan severity. For modeling purposes, the repossession market value declines we apply in accordance with our European residential loans criteria to calculate the loss severity incorporate our calculation of the degree of over- or under-valuation for Ireland as a whole. Table 5 shows the resulting market value declines that we used in our analysis of this pool. Table 5 Repossession Market Value Declines At 'AAA', 'AA', 'A', And 'BBB' Rating Levels AAA (%) AA (%) A (%) BBB (%) BB (%) B (%) All counties Timing of defaults The WAFF at each rating level specifies the mortgage loans' total balance, assumed to default over the transaction's life. We model these defaults to occur over a three-year recession. Furthermore, we assess the effect of the recession's timing on the ability to repay the liabilities by starting the recessionary period at closing and year three. We applied the WAFF to the principal balance outstanding at closing. We model defaults to occur periodically, in amounts calculated as a percentage of the WAFF. The timing of defaults follows two paths, referred to as "front-loaded" and "back-loaded" (see table 6). APRIL 4,

20 Table 6 Default Timings For Front-Loaded And Back-Loaded Default Curves Recession month Front-loaded defaults (percentage of WAFF per month) (%) Back-loaded defaults (percentage of WAFF per month) (%) WAFF--Weighted-average foreclosure frequency. Timing of recoveries Due to current forbearance measures and the legal uncertainty regarding the foreclosure process, repossessions have generally been limited in the Irish residential mortgage market. To address this risk, we assume that the issuer regains any recoveries 42 months after a payment default. The value of recoveries at each rating level is 100%, minus the WALS for that rating level given above. We base the WALS that we use in a cash flow model on principal losses, including foreclosure costs. We assumed no recovery of any interest accrued on the mortgage loans during the foreclosure period. After we apply the WAFF to the balance of the mortgages, the asset balance is likely to be lower than that on the liabilities. The interest reduction arising from the defaulted mortgages during the foreclosure period will need to be mitigated by other structural mechanisms in the transaction. Delinquencies We model the liquidity stress arising from short-term delinquencies; that is, those mortgages that cease to pay for a period of time but then recover and become current on both interest and principal payments. To simulate the effect of delinquencies, we assume a proportion of interest receipts equal to one-third of the WAFF to be delayed. We apply this in each of the first 18 months of the recession, and model full recovery of these delinquencies to occur 36 months after they arise. Therefore, if in month five of the recession, the total collateral interest expected to be received is 1 million and the WAFF is 30%, 100,000 of interest (one-third of the WAFF) will be delayed until month 41. Interest and prepayment rates We modeled four different interest rate scenarios--up, down, up-down, and down-up. We have also considered the cap on three-month at 6% (after the step-up date) in our analysis. We modeled three prepayment scenarios at all rating levels--high, low, and forecast. We modeled the prepayment rate at 1% for the recession period, before gradually reverting to a high prepayment rate under both scenarios. At the 'AA' level and above, we modeled an additional low prepayment scenario, which also reverts to a low prepayment rate after the recession period. In combination, the default timings, recession timings, interest rates, and prepayment rates described above give rise to 48 different scenarios at a 'AA' rating level and above (see table 7). Our preliminary ratings on the class A notes address the timely payment of interest and the ultimate payment of principal under each of the scenarios at the APRIL 4,

21 assigned preliminary ratings. Our preliminary ratings on the class B-dfrd to F1-dfrd notes, however, address the ultimate payment of interest and the ultimate payment of principal under each of the scenarios at the assigned preliminary ratings. Table 7 RMBS Stress Scenarios Rating level Total number of scenarios Prepayment rate Recession start Interest rate Default timing 'AAA' 48 High, expected, and low 'AA-' and below Closing and year three 32 High and expected Closing and year three Up, down, up-down, and down-up Up, down, up-down, and down-up Front-loaded and back-loaded Front-loaded and back-loaded Scenario Analysis Various factors could cause rated RMBS notes to be downgraded. These include increasing foreclosure rates in the securitized portfolios, house price declines, and changes in the portfolio composition. We have analyzed the effect of increased delinquencies by testing the sensitivity of the ratings to two different levels of movements. Increasing levels of delinquencies will likely cause more stress to a transaction, and would likely contribute to downgrades of rated notes. In our analysis, our assumptions for increased delinquencies are specific to a transaction, although these levels may be similar (or the same) across different transactions. The levels do not reflect any views as to whether these deteriorations will materialize in the future. However, our analysis already incorporates additional adjustments to the pool's default probability by projecting buckets of expected arrears. Even under these scenarios, structural features in securitizations may mitigate these deteriorations in performance. Further delinquencies of 16% In the first scenario, in addition to the rating-dependent stress assumptions, we apply a further 16% increase in nonperforming loans. These are split equally between the one-month and three-month buckets. In the second scenario, we apply an increase of 16%, but all the loans are deemed to have missed three monthly payments. The default probability we assign to a loan increases in tandem with the monthly payments missed. As a consequence, assuming that all loans have missed three monthly payments, the increase in the WAFF would be greater in the second scenario. Tables 8 and 9 summarize the results of assuming increasing levels of delinquencies. Table 8 Assuming An Additional 16% Of Arrears, Split Equally Between One Monthly Payment And Three Monthly Payments Rating on the notes WAFF (%) WALS (%) AAA AA A BBB APRIL 4,

22 Table 8 Assuming An Additional 16% Of Arrears, Split Equally Between One Monthly Payment And Three Monthly Payments (cont.) Rating on the notes WAFF (%) WALS (%) BB B Table 9 Assuming An Additional 16% Of Arrears, All Of Which Have Missed Three Monthly Payments Rating on the notes WAFF (%) WALS (%) AAA AA A BBB BB B Under our scenario analysis, the ratings on the notes in the transaction would not suffer a ratings transition of more than one category. For example, the 'AAA (sf)' rated notes would achieve a rating of at least 'AA (sf)'. We based our analysis above on a simplified assumption, i.e., that the increase in arrears materialized immediately on the day after closing. In reality, these are likely to occur over a period of time. Therefore, other factors, such as seasoning or repayments of some loans, could partially mitigate the effect of deteriorating performance of other loans. Surveillance We will maintain surveillance on the transaction until the notes mature or are otherwise retired. To do this, we will analyze regular servicer reports detailing the performance of the underlying collateral, monitor supporting ratings, and make regular contact with the servicer to ensure that it maintains minimum servicing standards and that any material changes in the servicer's operations are communicated and assessed. The key performance indicators in the surveillance of this transaction are: Increases in credit enhancement for the notes; The level of and the extent of any losses on discounted pay-offs (DPOs) which take place; Total and 90-day delinquencies; Cumulative realized losses; LTV ratios; Constant prepayment rates; and Increases in the seasoning of the collateral pool. APRIL 4,

23 Related Criteria And Research Related criteria Criteria - Structured Finance - General: Methodology And Assumptions: Assessing Pools Of European Residential Loans, Dec. 23, 2016 Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 08, 2016 Criteria - Structured Finance - General: Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 02, 2015 General Criteria: Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 Criteria - Structured Finance - General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 09, 2014 General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013 Legal Criteria: Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Criteria - Structured Finance - General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 General Criteria: Methodology: Credit Stability Criteria, May 03, 2010 Criteria - Structured Finance - General: Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009 Related research European Economic Snapshots: Resilience Despite Political Risk, Feb. 28, 2017 Europe's Housing Markets Continue To Recover Amid Extended QE, Feb. 15, 2017 European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016 Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, EMEA RMBS Scenario And Sensitivity Analysis, Aug. 6, 2015 Analytical Team Primary Credit Analyst: Rory O'Faherty, London +44 (0) ; rory.ofaherty@spglobal.com Research Contributor: Saurabh Bansal, CRISIL Global Analytical Center, an S&P affiliate, Mumbai APRIL 4,

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