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TEXT-S&P takes rtg action in Dutch RMBS Eurosail-NL 2007-1 & 2007-2
December 27, 2012 / 11:52 AM / 5 years ago

TEXT-S&P takes rtg action in Dutch RMBS Eurosail-NL 2007-1 & 2007-2

(The following statement was released by the rating agency)

Dec 27 -

OVERVIEW

-- On Dec. 5, 2012, we placed on CreditWatch negative our ratings on all classes of notes in Eurosail-NL 2007-1 and Eurosail-NL 2007-2 due to deteriorating credit performance.

-- We have observed deteriorating arrears performance and a large amount of 90+ days delinquent loans that have not been actively foreclosed.

-- The low rate of foreclosures means losses are not being realized and consequently, excess spread continues to leave the transaction structure.

-- Following our review and credit and cash flow analysis, we have lowered our ratings on Eurosail-NL 2007-1’s class D and E1 notes and Eurosail-NL 2007-2’s class B, C, and D1 notes.

-- We have also affirmed our ratings on Eurosail-NL 2007-1’s class A, B, and C notes and Eurosail-NL 2007-2’s class A and M notes.

-- Both transactions are backed by pools of nonconforming Dutch residential mortgages originated by ELQ Hypotheken.

Standard & Poor’s Ratings Services today took various credit rating actions in Eurosail-NL 2007-1 B.V. and Eurosail-NL 2007-2 B.V.

Specifically, we have:

-- Lowered and removed from CreditWatch negative our ratings on Eurosail-NL 2007-1’s class D and E1 notes;

-- Lowered and removed from CreditWatch negative our ratings on Eurosail-NL 2007-2’s class B, C, and D1 notes;

-- Affirmed and removed from CreditWatch negative our ratings on Eurosail-NL 2007-1’s class A, B, and C notes; and

-- Affirmed and removed from CreditWatch negative our ratings on Eurosail-NL 2007-2’s class A and M notes (see list below).

Today’s rating actions follow our review of the transactions’ October 2012 data, the application of our Dutch residential mortgage-backed securities (RMBS) criteria and 2012 counterparty criteria (see ”Dutch RMBS Market Overview And Criteria,“ published on Dec. 16, 2005, and ”Counterparty Risk Framework Methodology And Assumptions,“ published on Nov. 29, 2012”).

On Dec. 5, 2012, we placed on CreditWatch negative our ratings on all classes of notes in Eurosail-NL 2007-1 and Eurosail-NL 2007-2 due to deteriorating credit performance (see “Ratings In Four Dutch Nonconforming RMBS Transactions Placed On CreditWatch Negative Following Performance Deterioration”).

CREDIT AND CASH FLOW ANALYSIS

As highlighted in our Dec. 5, 2012 publication, the overall arrears performance for both transactions has deteriorated over the past 12 months, most notably in the 90+ days arrears bucket. We attribute this large increase to the lack of repossessions and foreclosures made on the underlying loans in these transactions. In Eurosail-NL 2007-1, 90+ days arrears have increased to 10.85% from 7.02% in October 2011. Eurosail-NL 2007-2 has experienced a more severe increase to 13.95% from 7.99%.

We have analyzed the payment rate of loans that are more than six months in arrears. We have concluded that approximately 85% of borrowers who are more than six months in arrears for Eurosail-NL 2007-2, and 90% for Eurosail-NL 2007-1, have not paid their full scheduled mortgage payments in their previous three payments. Therefore, in our analysis, we excluded approximately 6.88% and 9.25% of loans from the collateral pool of Eurosail-NL 2007-1 and Eurosail-NL 2007-2, respectively, and assumed a 50% recovery, to be realized after 18 months. As the majority of the borrowers for these loans have not been current or paying for an extended period of time, we believe they provide no immediate cash flow credit to these transactions until recovery.

For the remaining performing collateral, we applied an additional 5% decrease in house prices, while giving full credit to the recent house price index (HPI) movement. Furthermore, we expect arrears to increase; therefore, we have adjusted our weighted-average foreclosure frequency (WAFF) by projecting arrears based on the historical performance for each transaction. For Eurosail-NL 2007-1 and Eurosail-NL 2007-2 we have projected an additional 90+ days arrears that are equal to 4.50% and 5.14%, respectively.

Since November 2011, we have observed an accelerated decline in Dutch house prices, most significantly in the past six months. Our calculations show that the weighted-average indexed loan-to-value ratio for both of these pools has increased, and subsequently our weighted-average loss severity (WALS) calculations for these pools have increased. Declining house prices have had less of a negative effect on our WAFF, the increase in the WAFF being due to the deteriorating performance of the assets. Based on our analysis, both the WAFF and WALS have increased at each rating level since our last review in July 2011.

EUROSAIL-NL 2007-1

Rating WAFF WALS CC

level (%) (%) (%)

AAA 44.27 37.62 16.65

AA 37.51 33.66 12.63

A 29.33 28.17 8.26

BBB 20.00 24.76 4.95

BB 16.20 19.28 3.12

EUROSAIL-NL 2007-2

Rating WAFF WALS CC

level (%) (%) (%)

AAA 45.38 43.86 19.90

AA 37.98 40.15 15.25

A 28.99 34.73 10.07

BBB 19.63 31.25 6.13

BB 15.34 25.51 3.91

WAFF--Weighted-average foreclosure frequency.

WALS--Weighted-average loss severity.

CC--Credit coverage.

As the loans backing these transactions are nonconforming, borrowers pay a floating interest rate (100% for Eurosail-NL 2007-1 and approximately 97% for Eurosail 2007-2) and the rate is typically higher than for standard prime loans.

We have seen relatively volatile historical excess spread in both transactions due to the high losses and the January 2011 increased servicer fees. Eurosail-NL 2007-1’s current weighted-average cost of funds is lower than Eurosail-NL 2007-2’s and the transaction has experienced fewer losses. Therefore, Eurosail-NL 2007-1 has generally reported higher excess spread. If the heavily delinquent loans in both transactions were actively being foreclosed and losses crystalized, available revenue would be used to cover these losses, but currently these amounts are being paid out of the transaction structure as excess spread. As of October 2012, there was no balance on the principal deficiency ledger recording losses on the underlying asset portfolio. Based on discussions with the servicer, our conclusion is that the servicer is waiting for more favorable market conditions before foreclosing on long-term arrears.

On the October 2012 interest payment date, the issuer drew on Eurosail-NL 2007-1’s reserve account to cover losses, leaving the reserve account at 95.66% of its target. Eurosail-NL 2007-2’s reserve fund is at its target amount, although it had been previously drawn--most recently in January 2012 to cover losses.

Our assumed servicing fees have increased for both these transactions since our last review, and we assume that each transaction will experience asset spread compression due to higher interest rate assets defaulting first. These factors coupled with our undercollateralized pool assumption, means the available revenue in the deal is limited to ensure timely payment of interest.

For both transactions, credit coverage levels have increased significantly since our last review. Consequently, we have lowered and removed from CreditWatch negative our ratings on Eurosail-NL 2007-1’s class D and E1 notes and on Eurosail-NL 2007-2’s class B, C, and D1 notes due to the increased liquidity and credit stresses that are present in the transactions.

Based on our stressed cash flow analysis, it is likely that Eurosail-NL 2007-1’s class E1 notes will experience an interest shortfall within the next 18 months. Although we expect Eurosail-NL 2007-2’s class D1 notes to also experience an interest shortfall, we do not expect this to happen within 18 months in the current interest rate environment. Furthermore, these notes benefit from more credit enhancement and external liquidity support than Eurosail-NL 2007-1’s class E1 notes.

COUNTERPARTY ANALYSIS

On May 30, 2012, we lowered our long- and short-term ratings on Danske Bank A/S (A-/Positive/A-2)--the transaction account and liquidity facility provider for both transactions (see “Danske Bank Downgraded To ‘A-/A-2’ On Continued Weak Irish Operations; Outlook Stable”).

Following the breach of its ‘A-1’ rating trigger, a standby liquidity drawing was made on June 29, 2012. Danske Bank remains as the transaction account provider even though the remedy period has expired in which to find a replacement provider. Due to the replacement framework specified in the transaction documents and under our 2012 counterparty criteria, the ratings on the notes in both transactions are capped at Danske Bank’s ‘A-’ long-term issuer credit rating (see “Counterparty Risk Framework Methodology And Assumptions,” published on Nov. 29, 2012). We have therefore affirmed and removed from CreditWatch negative our ‘A- (sf)’ ratings on Eurosail-NL 2007-1’s class A, B, and C notes and Eurosail-NL 2007-2’s class A and M notes.

Eurosail-NL 2007-1 and Eurosail-NL 2007-2 are backed by a pool of Dutch nonconforming residential mortgages originated by ELQ Hypotheken N.V.

RELATED CRITERIA AND RESEARCH

Related Criteria

-- Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012

-- Principles Of Credit Ratings, Feb. 16, 2011

-- Methodology: Credit Stability Criteria, May 3, 2010

-- Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009

-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008

-- Changes To The Treatment Of Potential Set-Off Risk In The Dutch RMBS Market, Sept. 8, 2006

-- Dutch RMBS Market Overview And Criteria, Dec. 16, 2005

-- Cash Flow Criteria for European RMBS Transactions, Nov. 20, 2003

Related Research

-- Ratings In Four Dutch Nonconforming RMBS Transactions Placed On CreditWatch Negative Following Performance Deterioration, Dec. 5, 2012

-- Dutch RMBS Index Report Q3 2012: Transaction Performance Stabilizes Despite The Struggling Economy, Nov. 20, 2012

-- The Eurozone’s New Recession--Confirmed, Sept. 25, 2012

-- Danske Bank Downgraded To ‘A-/A-2’ On Continued Weak Irish Operations; Outlook Stable, May 30, 2012

-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012

-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011

RATINGS LIST

Class Rating

To From

RATINGS LOWERED AND REMOVED FROM CREDITWATCH NEGATIVE

Eurosail-NL 2007-1 B.V.

EUR361.2 Million Mortgage-Backed Floating-Rate Notes And An Overissuance Of Excess Spread-Backed Floating-Rate Notes

D BB (sf) BBB (sf)/Watch Neg

E1 CCC (sf) BB (sf)/Watch Neg

Eurosail-NL 2007-2 B.V.

EUR353.675 Million Mortgage-Backed Floating-Rate Notes Including An Overissuance Of EUR3.675 Million Excess Spread-Backed Floating-Rate Notes

B BB (sf) A- (sf)/Watch Neg

C BB- (sf) A- (sf)/Watch Neg

D1 B- (sf) BBB (sf)/Watch Neg

RATINGS AFFIRMED AND REMOVED FROM CREDITWATCH NEGATIVE

Eurosail-NL 2007-1 B.V.

EUR361.2 Million Mortgage-Backed Floating-Rate Notes And An Overissuance Of Excess Spread-Backed Floating-Rate Notes

A A- (sf) A- (sf)/Watch Neg

B A- (sf) A- (sf)/Watch Neg

C A- (sf) A- (sf)/Watch Neg

Eurosail-NL 2007-2 B.V.

EUR353.675 Million Mortgage-Backed Floating-Rate Notes Including An Overissuance Of EUR3.675 Million Excess Spread-Backed Floating-Rate Notes

A A- (sf) A- (sf)/Watch Neg

M A- (sf) A- (sf)/Watch Neg

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