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July 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Lowland Mortgage Backed Securities 2 B.V.’s mortgage-backed notes final ratings, as follows:
EUR379,000,000 class A1 floating-rate notes: ‘AAAsf’; Outlook Stable
EUR1,326,900,000 class A2 fixed-rate notes: ‘AAAsf’; Outlook Stable
EUR65,200,000 class B fixed-rate notes: ‘AAsf’; Outlook Stable
EUR63,500,000 class C fixed-rate notes: ‘Asf’; Outlook Stable
EUR54,900,000 class D fixed-rate notes: ‘BBsf’; Outlook Stable
EUR27,300,000 class E fixed-rate notes: ‘NRsf’
Credit enhancement (CE) for the class A notes is 11.0% and is provided by subordination of Class B, C, D & E notes. There is no reserve fund in this transaction.
There is no swap in place to hedge the interest rate differential between the notes and the mortgage loans. Instead, the proportions of fixed- and floating-rate notes issued are similar to the proportions of fixed- and floating-rate loans in the pool, thereby providing a natural hedging for basis risk. SNS has also provided guarantees on the portfolio’s minimum weighted average (WA) margin and interest rate to protect against a decline in the portfolio yield when loans reset.
This is a seasoned (99 months) non-revolving portfolio consisting of prime residential mortgage loans with a weighted-average (WA) original loan-to-market-value (OLTMV) of 75.5% and a debt-to-income ratio (DTI) of 30.7%. The WA OLTMV is below the level typically seen in Fitch-rated Dutch RMBS transactions, and assumes that flexible borrowers will draw the full loan amount available. The majority of the pool was sourced from the prior Hermes XVII transaction.
The CE of 11.0% for the class A notes is achieved through subordination provided by the class B notes (3.4%), class C notes (3.3%), class D notes (2.9%) and class E notes (1.4%).
Exposure to SNS:
SNS Bank is the seller, servicer and foundation account provider in this transaction. The nationalisation of SNS Bank is not expected to hinder the transaction’s operational performance. However since SNS is rated below Fitch’s eligible counterparty rating of ‘A’/‘F1’, and acts as collection account provider the commingling risk was mitigated by the posting of cash collateral, equivalent to 1.5 months of mortgage payments in the transaction account.
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch’s base case expectations, which in turn may result in potential rating actions on the notes. Fitch’s analysis revealed that a 30% increase in the weighted average foreclosure frequency along with a 30% decrease in the weighted average recovery rate would result in a downgrade of the class A1 and A2 notes’ rating to ‘AA-sf’.
More detail on key rating drivers and rating sensitivities are further described in the accompanying new issue report which is available at www.fitchratings.com. For its ratings analysis, Fitch received a data template with all fields fully completed. Fitch used the results of the agreed-upon procedures reports (AUP) associated with three recent SNS Bank transactions. The AUPs contained a limited amount of material errors, although the agency did apply a moderate haircut to the property market value for 10% of the pool.
To analyse the CE levels, Fitch evaluated the collateral using its default model, details of which can be found in the reports entitled ‘EMEA Residential Mortgage Loss Criteria’, dated June 2013, ‘EMEA RMBS Criteria Addendum - Netherlands’ and ‘EMEA RMBS Criteria Addendum - Netherlands - NHG-Backed’, both dated June 2013, at www.fitchratings.com. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. The cash flow tests showed that each class of notes could withstand loan losses at a level corresponding to the related stress scenario without incurring any principal loss or interest shortfall and can retire principal by the legal final maturity.
Link to Fitch Ratings’ Report: Lowland Mortgage Backed Securities 2 B.V.