Dilosk RMBS No. 1 Ltd.

Transcription

1 Presale: Dilosk RMBS No. 1 Ltd. Primary Credit Analyst: Rory O'Faherty, London +44 (0) ; rory.ofaherty@standardandpoors.com Secondary Contact: Anne-Marie Lam, London (44) ; anne-marie.lam@standardandpoors.com Table Of Contents Euro-Denominated Residential Mortgage-Backed Floating-Rate Notes And Unrated Notes Transaction Summary Strengths, Concerns, And Mitigating Factors Transaction Structure Servicing Notes Terms And Conditions Collateral Description Credit structure Cash Flow Analysis Scenario Analysis Sectoral Credit Highlights Surveillance Standard & Poor's 17g-7 Disclosure Report MAY 12,

2 Table Of Contents (cont.) Related Criteria And Research MAY 12,

3 Presale: Dilosk RMBS No. 1 Ltd. Euro-Denominated Residential Mortgage-Backed Floating-Rate Notes And Unrated Notes This presale report is based on information as of May 12, 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. Class Prelim. rating* Class size (%) Available credit enhancement (%) Interest Step-up margin A AAA (sf) Three-month EURIBOR plus a margin B AA (sf) Three-month EURIBOR plus a margin C A (sf) Three-month EURIBOR plus a margin D BBB (sf) Three-month EURIBOR plus a margin Z NR Three-month EURIBOR Three-month EURIBOR plus a margin Three-month EURIBOR plus a margin Three-month EURIBOR plus a margin Three-month EURIBOR plus a margin Three-month EURIBOR Optional call date Legal final maturity August 2020 February 2051 August 2020 February 2051 August 2020 February 2051 August 2020 February 2051 August 2020 February 2051 *The rating on each class of securities is preliminary as of May 12, 2015, 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 opinion. Standard & Poor's ratings address timely receipt of interest and ultimate repayment of principal for the class A and B notes. We have treated the class C and D notes as deferrable-interest notes in our analysis. Our preliminary ratings on the class C and D notes address the ultimate payment of principal and the ultimate payment of interest. This is the initial credit support. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. Transaction Participants Originator Arranger Seller Servicer Delegated servicer Back-up servicer Cash manager Subordinated loan provider Principal paying agent Trustee Share trustee Bank account and collection bank account provider Corporate services provider ICS Building Society Deutsche Bank AG, London Branch Dilosk Funding No. 1 Ltd. Dilosk Ltd. Capita Asset Services (Ireland) Ltd. Homeloan Management Ltd. Deutsche Bank AG, London Branch Dilosk Funding No. 1 Ltd. Deutsche Bank AG, London Branch Deutsche Trustee Company Ltd. Castlewood CS Holdings Ltd. BNP Paribas, Dublin Branch Deutsche International Corporate Services (Ireland) Ltd. MAY 12,

4 Supporting Ratings Institution/role BNP Paribas, as parent bank of the bank account and collection bank account provider Ireland (Republic of), as the host sovereign of the bank account provider (unsolicited rating) Rating A+/Negative/A-1 A/Stable/A-1 Transaction Key Features* Expected closing date May 2015 Collateral Irish owner-occupied and buy-to-let first-ranking mortgage loans Outstanding principal of the provisional pool ( ) 207,668, Country of origination Concentration Dublin: 53.42% Property occupancy Owner-occupied 87.64% and buy-to-let 12.36% Weighted-average current indexed LTV ratio (%) Weighted-average original LTV ratio (%) Average loan size balance ( ) 107,101 Largest loan-size ( ) 686,074 Weighted-average seasoning (months) Arrears greater than or equal to one-month (%) 0.63 Projected arrears (%) 5.00 Redemption profile (%) Repayment: 99.55; Interest-only: 0.45 General reserve fund (%) 0.5 Liquidity reserve fund (%) 0.5 Mortgage loan priority Ireland First-ranking *Data is based on a provisional pool as of March 31, Based on Standard & Poor's methodology. The seller will fund the general reserve fund at closing to 0.50% of the closing pool. The seller will fund the liquidity reserve fund at closing to 0.50% of the closing pool. LTV--Loan-to-value. Transaction Summary Standard & Poor's Ratings Services has assigned its preliminary credit ratings to Dilosk RMBS No.1 Ltd.'s (Dilosk No. 1) class A, B, C, and D notes. At closing, Dilosk No. 1 will also issue unrated class Z notes. At closing, the issuer will use the note issuance proceeds to purchase a portfolio of Irish residential mortgages from the seller, Dilosk Funding No. 1 Ltd. The seller will fund both a general reserve fund and a liquidity reserve fund, and both will be sized to 0.5% of the closing pool balance. 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, which rank senior to the unrated notes. The notes will amortize sequentially, with no trigger for 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. MAY 12,

5 Our preliminary ratings also reflect the application of our criteria for rating single-jurisdiction securitizations above the sovereign foreign currency rating (RAS criteria; see "Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance," published on Sept. 19, 2014). Our RAS criteria designate the country risk sensitivity for residential mortgage-backed securities (RMBS) 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 a minimum of a "severe" stress. However, as all six of the conditions in paragraph 48 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) above the sovereign rating, subject to credit enhancement being sufficient to pass an "extreme" stress (see "Understanding Standard & Poor's Rating Definitions," published on June 3, 2009 for our definitions of severe and extreme levels of economic stress). As our long-term sovereign rating on the Republic of Ireland is 'A', our RAS criteria do not constrain our ratings on the most senior class of notes. While the class A notes are outstanding, the maximum potential rating for all other classes of notes is 'AA+ (sf)'. This will be Dilosk Ltd.'s (Dilosk) first securitization since it was established in The million provisional pool (as of March 31, 2015) comprises first-lien, owner-occupied and buy-to-let (BTL), performing Irish residential mortgages, which ICS Building Society originated. Dilosk acquired the ICS brand, mortgage platform, broker network, and a portfolio of mortgages from Bank of Ireland in September Of the portfolio, 58.79% comprises loans that were originated since the beginning of 2010, which is when the house price decline in the Irish market began to slow down. Strengths, Concerns, And Mitigating Factors Strengths The preliminary capital structure provides 22.50% of available credit enhancement for the class A notes through subordination and an amortizing general reserve fund. The seller will fund a liquidity reserve fund at closing, which will be available, along with principal, to pay senior expenses and mitigate interest shortfalls on all classes of notes. The use of principal and liquidity for the class A notes has no restrictions. While the class A notes are outstanding, principal and liquidity can be used to pay interest on the class B notes subject to a principal deficiency ledger (PDL) trigger on the class B notes of 70%. Upon redemption of the class A notes, principal and liquidity can be used to pay interest on the most senior class of notes outstanding without condition. A 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, or to replenish the liquidity reserve fund. The capital structure is sequential, with no trigger for pro rata amortization. Credit enhancement can therefore build-up meaningfully over time for the class A notes, which will enable the structure to withstand performance shocks. We consider the pool to be well-seasoned, with a weighted-average seasoning of 65 months. In our view, more seasoned performing loans exhibit lower risk profiles than less seasoned loans. Of the preliminary pool, more than 32.00% of loans have an original loan-to-value (LTV) ratio of less than 50.00%. The original weighted-average LTV ratio is 61.29% and the current weighted-average indexed LTV ratio is 46.89%, MAY 12,

6 both of which are typically lower than we would expect to see in an Irish RMBS transaction. Loans with higher original LTV ratios historically exhibit poorer performance than otherwise similar loans. 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 (22.92%) and loans that have been granted to first-time buyers (31.77%). Of the preliminary pool, 0.63% of loans are in arrears of greater than or equal to one month. Additionally, the historical level of arrears among the borrowers has been low compared with the Irish market in general. Nevertheless, we have forecast an additional 5.00% for the next year to account for potentially increasing arrears in the pool. 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 rates of interest. 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. The seller may agree to a request from a borrower to extend the fixed rate period or to switch from a floating rate to a fixed rate for a maximum period of three years and at a minimum fixed rate of 2.25%. No such requests may be granted after April This can occur for up to 7.5% of the pool's balance. We have considered this risk in our cash flow analysis. Transaction Structure At closing, Dilosk No. 1 will use the class A, B, C, D, and Z notes' issuance proceeds to purchase the beneficial title of the mortgage loans from Dilosk Funding No. 1. The issuer will grant security over all of its assets to the security trustee (see chart 1). MAY 12,

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 seller provides representations and warranties in the mortgage sale agreement, which we consider to be standard for an Irish RMBS transaction. If there is a breach in the representations and warranties, then the seller must remedy it within 30 days of notification. If the seller cannot remedy the breach, then Dilosk Funding No.1 Ltd. will repurchase the loan from the pool, which may take up to a further 30 days. Further advances and product switches Dilosk No.1 can, at its discretion, fund future further advances to borrowers in the pool, which will be secured on the original mortgage loan's underlying property and which the issuer may purchase. Dilosk No.1 will fund these further MAY 12,

8 advances through principal receipts. However, certain documented conditions, including that the level of further advances granted cannot exceed more than 5% of the closing pool balance, restrict Dilosk No.1's granting of further advances. We have accounted for this in our credit analysis. Under the mortgage sale agreement, product switches are permitted for up to 7.5% of the pool balance within the transaction's first year. The seller may agree to a request from a borrower to extend their fixed interest period or alternatively to switch from a floating rate to a fixed rate. The maximum length of any switch is three years and the minimum fixed rate payable is 2.25%. All borrowers will revert to a floating rate of interest linked to Dilosk's standard variable rate (SVR). Our cash flow analysis accounts for the consequences of this on the pool's yield and interest rate risk. Servicing In February 2015, we reviewed Capita Asset Services (Ireland) Ltd.'s collections and default management processes. This review is an integral part of the corporate overview we carry out during the rating process of any transaction. We also met with the servicer (Dilosk) to discuss its background and experience. Dilosk was formed in August 2013 with a view to becoming a specialist buy-to-let lender in the Irish market. In 2014, Dilosk acquired Bank of Ireland's ICS mortgage brand as well as their mortgage distribution platform. Dilosk has not yet started originations since it purchased ICS, but we expect it to begin in mid-2015 under the name ICS Mortgages. Dilosk will act as servicer in the transaction and will also hold the legal title to the mortgage loans until a perfection of title event occurs. Dilosk will sub-delegate the portfolio's day-to-day servicing to Capita. Although in the past we have mainly dealt with Capita as a specialist commercial servicer, following our review in February 2015 we believe their systems and processes are sufficiently robust to service a residential mortgage book. At closing, Homeloan Management Ltd. (HML), a wholly owned subsidiary of Computershare, will also be in place as a back-up servicer. ICS Building Society originated all of the loans in the pool primarily between 2009 and 2013, and Dilosk purchased them in September The lending criteria that ICS used at origination are, in our view, relatively conservative, as the portfolio's low LTV levels indicate. Dilosk Funding No. 1 will be the seller. Notes Terms And Conditions Dilosk No. 1 will pay interest quarterly on the interest payment date (IPD) in May, August, November, and February of each year, beginning in August The class A, B, C, and D notes pay interest equal to three-month EURIBOR, plus a class-specific margin. Following the step-up date (August 2020), the rated notes will pay a step-up margin of three-month EURIBOR plus class-specific margins. 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 (excluding the most senior class of notes at any point in time) can be deferred. Consequently, any deferral of interest would not constitute an event of default. Our preliminary ratings on the class A and B notes address the timely payment of interest and the ultimate payment of MAY 12,

9 principal on the notes. However, the issuer has requested that the class C and D notes be rated on a deferrable interest basis, i.e. our ratings address the ultimate payment of interest and the ultimate payment of principal on the notes by the legal final maturity date. 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: If the notes become subject to a withholding tax; On any IPD, if the principal amount outstanding is less than or equal to 10% of the principal balance at closing; or On any IPD on or after the step-up date (August 2020). 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 In our analysis, we have applied our new Irish RMBS criteria (see "Ireland RMBS Methodology And Assumptions," published on March 30, 2015). As of the pool cut-off date on March 31, 2015, the preliminary pool of 207,668,234 comprises 1,939 loans that ICS Building Society originated and that are secured against properties in Ireland. Almost 50% of the loans were originated since the beginning of Of the initial pool, 87.64% consists of loans secured against owner-occupied properties, with 12.36% as buy-to-let mortgage loans (see chart 4). Other features of the provisional pool include: Based on the information provided, we have assumed that the purpose for remortgage loans (22.92%) was for equity release. Of the provisional pool, 0.63% are loans in arrears. Based on historical data, arrears in the transaction have generally remained low when compared with the Irish market. Nevertheless, we have incorporated into our analysis a projection of our expected arrears in the pool within the next year. The provisional pool comprises approximately 31.77% of loans to first-time buyers and 11.18% of loans to self-employed borrowers, which in our view, are more likely to exhibit a higher historical default probability than otherwise similar loans. However, the provisional pool's seasoning partially mitigates the adjustment for first-time buyers. As shown in chart 2, the weighted-average seasoning is months, and we consider risk associated with loans to first-time buyers to diminish as seasoning increases. MAY 12,

10 Chart 2 MAY 12,

11 Chart 3 The pool is mainly concentrated in Dublin (53.42%; see chart 4). This concentration is just above the concentration limit of 50% under our Irish RMBS criteria. We have accounted for this concentration in our analysis. MAY 12,

12 Chart 4 The weighted-average original indexed LTV ratio of the provisional collateral pool is 61.29%, calculated using our Irish RMBS criteria (see chart 6). We consider that borrowers with minimal equity in their property are less likely to be able to refinance, and are more likely to default on their obligations than borrowers with lower current indexed LTV ratio loans. At the same time, loans with high current indexed high LTV ratios are likely to incur greater loss severities if the borrower defaults. Of the pool, 0.07% exhibits a current indexed LTV ratio between 90% and 100%, and 0.31% has a current indexed LTV ratio greater than 100%. The weighted-average current LTV ratio is 46.89%. This is typically lower than we would see in Irish RMBS transactions and is a feature of the point in time at which the loans were originated. MAY 12,

13 Chart 5 MAY 12,

14 Chart 6 The loans in the provisional pool are either fixed-rate loans with a future switch to a floating rate or are currently paying a floating rate of interest. Of the provisional pool, 85.27% pay a floating rate linked to Dilosk's SVR and 14.73% pay a fixed rate of interest reverting to the SVR. Of the provisional portfolio, 99.55% are repayment mortgage loans and 0.45% comprises interest-only loans. 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 AA (sf) C A (sf) D BBB (sf) MAY 12,

15 Dilosk No. 1 will open a bank account with BNP Paribas, acting through its Dublin branch, which will be subject to the terms of the transaction documents. We understand that the transaction documents will specify that the issuer must take remedial actions, including the replacement of BNP Paribas, Dublin branch, as the bank account provider with a suitably rated financial institution within 30 days, if at any time, our long-term issuer credit rating (ICR) on BNP Paribas as bank account provider falls below 'A', where the short-term rating is at least 'A-1'. Borrowers pay into a collection bank account, also held with BNP Paribas, Dublin branch, in the seller's name. All of these amounts are transferred to the bank account on the following business day. The transaction documents will establish a declaration of trust in the issuer's favor over any amounts in the collection account. We expect that the transaction documents will specify that the issuer must take remedial actions, including the replacement of BNP Paribas as collection account provider with a suitably rated financial institution within 30 days, if our long-term ICR on BNP Paribas, Dublin branch as the collection bank account provider falls below 'BBB', where the short-term rating is at least 'A-2'. Subject to the transaction documentation reflecting our current counterparty criteria, we do not foresee any counterparty constraints on our preliminary ratings on the notes in this transaction (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). General reserve fund At closing, the seller will fund the general reserve fund to 0.5% of the closing portfolio balance. The reserve fund does not have a floor and can amortize to the lower of 1.0% of the outstanding collateral balance and 0.5% of the closing portfolio balance. Liquidity support In high-delinquency scenarios, there may be liquidity stresses on the transaction, by which the issuer would not have sufficient revenue receipts to pay interest due on the notes. To mitigate this risk, liquidity support for the transaction will be provided first through the general reserve fund, followed by the use of principal to pay interest, and then the liquidity reserve fund. The seller will fund the liquidity reserve at closing to 0.5% of the closing portfolio balance. The liquidity reserve fund is non-amortizing. If the general reserve fund, principal receipts, or revenue receipts are insufficient, the liquidity reserve fund can be used to cure shortfalls in senior fees and the class A notes' interest. It can also be used to pay interest on the class B notes subject to the class B PDL remaining below 70%. Once the class A notes have fully paid down, the liquidity reserve fund can be used to pay interest on the most senior class of notes outstanding with no PDL trigger in place. The use of principal to either pay interest or to replenish the liquidity reserve to its required amount 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 five subledgers, one for each of the class A to Z notes. Amounts will be recorded on the PDL if the portfolio suffers any losses, if the transaction uses principal as available MAY 12,

16 revenue receipts, or if principal receipts are applied to replenish the liquidity reserve fund. PDL amounts will first be recorded in the class Z notes' PDL up to the class Z notes' collateralized outstanding amount. They will then be debited sequentially upward. Revenue priority of payments Senior fees; The class A notes' interest; The class A notes' PDL; The class B notes' interest; The class B notes' PDL; The class C notes' interest; The class C notes' PDL; The class D notes' interest; The class D notes' PDL; Top up the liquidity reserve fund (so long as any class of rated notes remain outstanding); Top up the general reserve fund (so long as any class of rated notes remain outstanding); The class Z notes' PDL; Subordinated servicing fee; The class Z notes' interest; The subordinated loan's interest; Principal on the subordinated loan; and Deferred consideration. Principal priority of payments If revenue receipts are insufficient, to use principal to pay interest; Top up the liquidity reserve fund to the documented required amount; The class A notes' principal; The class B notes' principal; The class C notes' principal; The class D notes' principal; The class Z notes' principal; and Deferred consideration. Hedging risk Of the provisional pool, 85.27% pays interest based on a floating rate SVR, while 14.73% comprises fixed-rate loans, which will all revert to the SVR. The SVR set by Dilosk will reference three-month EURIBOR. The class A, B, C, D, and Z notes will pay interest based on three-month EURIBOR. The transaction does not have a basis risk swap in place. Therefore, the portion of the provisional pool that references the SVR, including the loans that are currently fixed but revert to the SVR, will be exposed to basis risk. The risk arises as the EURIBOR on the notes resets three months before the IPD, while the SVR on the assets can be reset for each loan at any point in time at Dilosk's discretion. This can result in a full 90 day mismatch between the rate setting dates on the assets and the liabilities. We applied this basis risk stress in our cash flow analysis throughout our recession timeframe, with a 'B' basis stress applied at all rating levels outside of the recession. MAY 12,

17 In our cash flow analysis, we also modeled the transaction's unhedged exposure to interest rate risk, which is derived from the assets paying interest on a fixed rate and liabilities paying interest on a floating rate. SVR loans Of the pool, 100% of the floating- and fixed-rate loans are linked to the SVR (all of the fixed-rate loans will also revert to the SVR). We generally do not give credit to SVR margin because it is not part of a contractual agreement that can be relied upon. However, Dilosk has proposed to commit to a minimum interest margin of EURIBOR plus 2.25%. The SVR falling below this threshold for any loan would result in a perfection event under the transaction documents. In the event of Dilosk's insolvency, the right to set the SVR rate will transfer to the back-up servicer. Spread compression The loans in the pool pay different rates of interest. If the high-yielding loans were to default or prepay, the average yield available to the issuer would fall. We have modeled spread compression in our analysis to address the risk of the high-yielding loans defaulting or prepaying. The margin that we used in our cash flow analysis is therefore the margin on the pool after we assumed that the highest-yielding assets defaulted or prepaid. We based the assumed defaulted amount on our weighted-average foreclosure frequency (WAFF) assumptions at each rating level. Product switches The seller can allow product switches for up to 7.5% of the principal balance for up to one year after the closing date. This entails a borrower currently on a fixed rate of interest, which has a mandatory switch to a floating rate, extending the length of the fixed-rate term for up to three years. Borrowers currently on a floating rate of interest could also potentially switch to a fixed-rate product for a maximum term of three years. Any loan that is subject to this change will be at Dilosk's discretion and will be subject to a minimum interest rate of 2.25%. We have considered this risk in our analysis. Payment holidays and moratorium Borrowers in the provisional pool are also eligible to take a payment holiday or to avail of a short term moratorium in certain circumstances. In terms of payment holidays, borrowers may overpay their mortgage and then take a break to the extent of the overpayment. For example, instead of making twelve monthly payments over the course of a year, a borrower could make ten slightly higher monthly payments and then take a two-month payment holiday. In terms of a moratorium, borrowers may request a three month break from mortgage payments. In order to be eligible, the loan must have no arrears and the moratorium cannot be as a form of forbearance but rather be due to a "life event", such as parental leave from work or for a wedding. Missed payments will be capitalized onto the outstanding balance of the loan. The granting of a payment holiday or a moratorium is at Dilosk's discretion. Currently, the provisional pool has very few loans under these payment schemes. We have considered the potential liquidity risk 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 general and liquidity reserve funds provide. MAY 12,

18 We apply these stresses to the cash flows at all relevant rating levels. For example, this transaction incorporates tranches that we rate 'AAA (sf)' and 'NR' (not rated). In our stresses on the class A and B notes, both must pay full and timely principal and interest. However, this is not necessarily the case for the tranches of lower rated notes (the class C and D notes) because their ratings address the ultimate payment of interest and the ultimate payment of principal. Credit enhancement Although the economic outlook in Ireland is relatively positive and has improved in the last months, our outlook for the Irish housing mortgage market calls for starting conditions that are not benign. We have therefore increased our expected 'B' foreclosure frequency assumption to 3.33% from 2.00%, when applying our Irish RMBS criteria, to reflect this view (see "Outlook Assumptions For The Irish Residential Mortgage Market," published on March 30, 2015). We did not modify our assumptions for the 'AAA' rating level as we believe 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). Table 3 Assumptions Rating level Minimum credit enhancement level (%) Initial credit enhancement modeled for this pool (%) AAA AA A BBB The WAFF and the WALS assumptions increase in tandem with the rating level because notes with a higher rating MAY 12,

19 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 WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loan severity. For modeling purposes, the repossession market value declines we apply in accordance with our Irish RMBS 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 (%) 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, year one, year two, 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). 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. MAY 12,

20 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 (a notable exception is when a transaction relies on overcollateralization). 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; i.e., 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. Interest rates were 0.01% at the time of modeling and we modeled them to rise or fall by 2.0% a month to a high of 12.0% or a low of 0.0%. For stable interest rates, the interest rate was held at the current rate throughout the transaction's life. In the 'AAA' scenario, we modeled the interest rate increase to begin in month 13. We modeled three prepayment scenarios at all rating levels high, low, and forecast. For this transaction, we modeled the forecast constant payment rate as 3%. 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 240 different scenarios at a 'AAA' rating level (see table 7). Our preliminary ratings on the class A and B notes address the timely payment of interest and the ultimate payment of principal under each of the scenarios at the assigned preliminary ratings. Our preliminary ratings on the class C and D 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' 96 High, expected, and low Closing, years 1, 2, and 3. Up, down, up-down, and down-up, Front-loaded and back-loaded MAY 12,

21 Table 7 RMBS Stress Scenarios (cont.) 'AA-' and below 64 High and expected Closing, years 1, 2, and 3. Up, down, up-down, and down-up Front-loaded and back-loaded Scenario Analysis Various factors could cause downgrades of rated RMBS notes, such as 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 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 MAY 12,

22 Table 9 Assuming An Additional 16% Of Arrears, All Of Which Have Missed Three Monthly Payments (cont.) BBB 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. Sectoral Credit Highlights Irish house prices ultimately fell by about 50% since their peak in early However, the Irish housing market started to stabilize in mid-2012, and house prices have since then rebounded, particularly in Dublin, which saw an increase of 19% in Projections for stronger economic expansion in 2015 and 2016, combined with improving labor market data, indicate a supportive backdrop for the housing market going forward. We forecast that house prices will continue to increase in 2015 and 2016, albeit at a slightly lower rate than seen in The recent introduction of tighter lending controls by the Central Bank--stricter limits on LTV and loan-to-income (LTI) levels than those imposed in the U.K.--will in our view cool demand, but we still anticipate growth of 9% in This is the largest anticipated increase in the Eurozone. Nevertheless, demand remains strong amid a shortage of supply of homes, mainly in urban areas such as Dublin, which will likely maintain upward pressure on prices. 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; Total and 90-day delinquencies; Cumulative realized losses; LTV ratios; Constant prepayment rates; and Increases in the seasoning of the collateral pool. MAY 12,

23 Standard & Poor's 17g-7 Disclosure Report SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at Related Criteria And Research Related criteria Ireland RMBS Methodology And Assumptions, March 30, 2015 Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, Sept. 19, 2014 Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013 Assessing Bank Branch Creditworthiness, Oct. 14, 2013 Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Methodology: Credit Stability Criteria, May 3, 2010 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Related research Outlook Assumptions For The Irish Residential Mortgage Market, March 30, 2015 Low Interest Rates Are Only Slowly Reviving Europe's Housing Markets, Feb. 5, 2015 European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic Factors, July 8, 2014 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 U.K. RMBS Methodology And Assumptions, Dec. 9, 2011 Additional Contact: Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com MAY 12,

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