Today's rating action follows our credit and cash flow analysis of the most recent information that we have received for the transaction and the application of our Portuguese residential mortgage-backed securities (RMBS) criteria, our 2012 counterparty criteria, and our nonsovereign ratings criteria (see "Criteria For Rating Portuguese Residential Mortgage-Backed Securities," published on Aug. 6, 2002, "Counterparty Risk Framework Methodology And Assumptions," published on May 31, 2012, and "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, 2011).
We have reviewed counterparty risk in this transaction by applying our 2012 counterparty criteria and we consider that the structural mechanisms in place continue to mitigate counterparty risk in this transaction to support the currently assigned 'A- (sf)' rating on the class A notes.
In our analysis, we have observed deteriorating credit quality of the asset pool due to an increase in 90+ days arrears since November 2011 to 5.36% from 2.64%. The transaction documents state that the revolving period will end if certain conditions are not met, one of which is that the level of 90+ arrears should not exceed 4%. This trigger was breached in May 2012, although the issuer continued to purchase additional mortgage loans on the August 2012 interest payment date, which breached its obligations under the transaction documents. The servicer has advised that no more loans will be added to the transaction until maturity.
Despite the increase in the 90+ days arrears since November 2011, the reserve fund is at the target level under the transaction documents and there is enough excess spread in the transaction to clear the principal deficiency ledger for the class B notes and pay the interest due on the class C notes.
After applying our Portuguese RMBS criteria, our credit analysis results show an increase in the weighted-average foreclosure frequency (WAFF) for all rating levels since our previous review of the transaction due to an increase in the level of arrears. The weighted-average loss severity (WALS) for all rating levels has increased due to the ongoing fall in Portuguese house prices. The combined result is an increase in the required level of credit coverage for this transaction at all rating levels. However, despite the increase in the level of required credit coverage, the actual current level of credit enhancement in this transaction is still sufficient to support the currently assigned rating on these notes after the application of our credit and cash flow stresses.
In our credit and cash flow analysis, we used the standard WAFF and WALS, including a 30% adjustment to the WAFF, following our revised assessment of Portuguese country risk in March 2012 (see "Various Rating Actions Taken On Portuguese RMBS And ABS Tranches Following Revised Assessment Of Portuguese Country Risk," published on March 7, 2012). When we applied stresses to the class A notes, the results of the WAFF and WALS were 31.03% and 19.97% at a 'A' rating level, 24.82% and 15.93% at a 'BBB' rating level, and 18.12% and 12.33% at a 'BB' rating level, respectively. The level of credit enhancement available to the class A notes at a 'A' rating level is 18.69%, which is three times the credit coverage needed for this rating level. Although the class A notes pass at a 'AA' rating level, we have not raised our rating on these notes due to our opinion of the transaction's country risk exposure.
We also consider the transaction's country risk exposure in our analysis, in accordance with our nonsovereign ratings criteria. Because the transaction's securitized assets are located in Portugal (BB/Negative/B), our nonsovereign ratings criteria only permit a maximum potential five-notch uplift on the rating on the sovereign. Our nonsovereign ratings criteria therefore cap our rating on the class A notes at 'A- (sf)'.
We have affirmed our 'A- (sf)' rating on the class A notes because our nonsovereign ratings criteria cap our rating on the class A notes at 'A- (sf)' and we consider the level of credit enhancement available to the class A notes combined with the structural mechanisms in place to mitigate counterparty risk in this transaction under our 2012 counterparty criteria to be commensurate with the currently assigned rating.
Atlantes Mortgage No. 5 securitizes Portuguese first-ranking residential mortgage loans originated by BANIF Banco Internacional do Funchal S.A.
RELATED CRITERIA AND RESEARCH
-- Portuguese RMBS Index Report Q2 2012: Defaults and Delinquencies Rise, But Remain Within Our Expectations, Aug. 15, 2012
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- Portuguese RMBS Index Report Q1 2012: Increased Country Risk Reflected In Declining Performance of Portuguese RMBS Transactions, May 9, 2012
-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012
-- Various Rating Actions Taken On Portuguese RMBS And ABS Tranches Following Revised Assessment Of Portuguese Country Risk, March 7, 2012
-- European Structured Finance Rating Actions Following Eurozone Sovereign Rating Actions, Jan. 23, 2012
-- Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments, Jan. 13, 2012
-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Methodology: Credit Stability Criteria, May 3, 2010
-- Methodology And Assumptions: Update To The Criteria For Rating Portuguese Residential Mortgage-Backed Securities, Jan. 6, 2009
-- Criteria For Rating Portuguese Residential Mortgage-Backed Securities, Aug. 6, 2002