TEXT-Fitch affirms EBS Mortgage Finance covered bonds
Sept. 26 - Fitch Ratings has affirmed EBS Mortgage Finance's (EBSMF, 'BBB-'/Negative/'F3') mortgage covered securities (MCS) at 'A-' with a Negative Outlook following a review of the programme. The total outstanding MCS equate to EUR3.3bn and all benefit from a 12-month extendable maturity from their expected maturity dates. The rating is based on EBSMF's Long-term Issuer Default Rating (IDR) of 'BBB-', a Discontinuity Cap (D-Cap) of 1 (very high risk) assigned to the programme and the overcollateralisation (OC) the issuer commits to maintain, which is above the 71.3% OC that supports the rating. The 'A-' rating would be vulnerable to a downgrade if the IDR was downgraded by one or more notches or the OC maintained by the issuer went below the level of OC supporting a 'A-' rating. The Negative Outlook on EBSMF's IDR drives the Negative Outlook for the covered bonds. As EBSMF is rated below 'F2', Fitch only gives credit to the public OC committed by the issuer. EBSMF commits to maintaining an OC of 30.5% on a prudent market value basis as detailed in the Series 5 & 6 final terms. In accordance with the Irish MCS legislation, issuers must use a prudent market value of the loans when calculating OC. This implies that mortgage loans in negative equity are valued less than the nominal amount of the loan, at the prudent market value of the property securing them. As such, the 30.5% OC on a prudent market value basis is equivalent to a nominal OC of 81.8% for the EBSMF pool. This level is sufficient to pass 'BBB' stress scenarios, and provides for high recoveries given default of the covered bonds in a 'A-' scenario. The D-Cap of 1 is driven by the very high risk assessment of the liquidity gap & systemic risk component, which is the weakest of the D-Cap components. The asset segregation as well as the systemic alternative management components are assessed as very low risk from a discontinuity point of view. The cover pool-specific alternative management and privileged derivative are assessed as low (see "Fitch Puts 2 Dutch Covered Bonds on RWN; Assigns Dutch & Irish Programmes D-Caps & Outlooks" dated 12 September 2012 at www.fitchratings.com). The very high risk assessment of liquidity gap and systemic risk is due to the Irish sovereign rating of 'BBB+' and the concerns about the ability to liquidate the pool in a timely manner if needed post issuer default. It also incorporates a three-month interest reserve that protects against liquidity gaps following issuer insolvency and a 12-month extendible maturity on the MCS. The asset segregation of the cover pool for Irish programmes benefits from the strong provisions of the Irish ACS Act. The D-Cap also assesses the role of the National Treasury Management Association, having the obligation to step in and manage cover pools where an alternative manager cannot be found post issuer default and the adequate IT systems and processes in place to provide timely delivery of data. The OC supporting the current 'BBB' rating on a PD basis and 'A-' incorporating recoveries given default of the MCS, has increased to 71.3% from 57.2%. This compares to a committed OC on a prudent market value basis of 30.5%, equivalent to a nominal OC of 81.8%. The current nominal OC is at 98.5% or 36.7% based on the prudent market value of the cover assets. The main drivers for the increase of the OC supporting the rating are, in the agency's view, the continued property value declines in Ireland, and the weak performance of EBSMF's total mortgage book, which provides an indication of the cover pool performance in a wind down situation after issuer default and the update of Fitch's modelling assumptions for Ireland earlier this year (see 'EMEA Criteria Addendum - Ireland' dated 01 August 2012 at www.fitchratings.com). In addition, Fitch has updated it refinancing spread assumptions for Ireland and these have been applied in the cashflow model. Finally the results were also driven by the asset and liability mismatch and the weighted average swap margin of the bonds, which changed due to bond redemptions. At end-August 2012, the cover pool consisted of EUR6.284bn of residential mortgage loans and EUR134.4m of cash/substitution assets held in an account with BNP Paribas Dublin (NR) and Danske Bank ('A'/Negative/'F1'). The pool consisted of 55,241 loans secured on residential properties in Ireland with 0.8% on interest only repayments. The mortgage portfolio had a weighted average (WA) original loan-to-value ratio (LTV) of 75.89% and a WA current indexed LTV of 107.54%. The cover pool is geographically diversified across Ireland, with the highest concentrations in Dublin 36.49%. In a 'AA' scenario, Fitch has calculated the pool's cumulative WA frequency of foreclosure at 37.98% and a WA recovery rate of 36.93%. Fitch will monitor the key characteristics of the cover assets and outstanding covered bonds on an on-going basis, and check whether the OC taken into account in its analysis provides protection commensurate with the rating. The level of OC supporting the rating is affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore, it cannot be assumed that the rating will remain stable over time.Contacts: Primary Analyst Stephen Kemmy Analyst +44 20 3530 1474 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Claire Heaton Director +44 20 3530 1299 Committee Chairperson Cosme de Montpellier Senior Director +44 20 3530 1407 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: firstname.lastname@example.org.
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