London, 30 April 2013 -- Moody's Investors Service has today downgraded the ratings of 4 notes
and confirmed the ratings of 3 notes in two Spanish residential mortgage-backed
securities (RMBS) transactions: Madrid RMBS I, Madrid RMBS
II. At the same time, Moody's confirmed the ratings of the
senior notes in Madrid Residencial II. Insufficiency of credit
enhancement to address sovereign risk and revision of key collateral assumptions
have prompted today's downgrade action.
Today's rating action concludes the review of 8 notes placed on
review on 2 July 2012, following Moody's downgrade of Spanish government
bond ratings to Baa3 from A3 on 13 June 2012.
For a detailed list of affected ratings, see towards the end of
the ratings rationale section.
RATINGS RATIONALE
Today's rating action primarily reflects the insufficiency of credit enhancement
to address sovereign risk and revision of key collateral assumptions.
Moody's confirmed the ratings of securities whose credit enhancement and
structural features provided enough protection against sovereign and counterparty
risk.
The determination of the applicable credit enhancement driving today's
rating actions reflects the introduction of additional factors in Moody's
analysis to better measure the impact of sovereign risk on structured
finance transactions (see "Structured Finance Transactions:
Assessing the Impact of Sovereign Risk", 11 March 2013).
This report is available on www.moodys.com and can be accessed
via the following link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF319988
.
-- Additional Factors Better Reflect Increased Sovereign
Risk
Moody's has supplemented its analysis to determine the loss distribution
of securitised portfolios with two additional factors, the maximum
achievable rating in a given country (the local currency country risk
ceiling) and the applicable portfolio credit enhancement for this rating.
With the introduction of these additional factors, Moody's
intends to better reflect increased sovereign risk in its quantitative
analysis, in particular for mezzanine and junior tranches.
The Spanish country ceiling, and therefore the maximum rating that
Moody's will assign to a domestic Spanish issuer including structured
finance transactions backed by Spanish receivables, is A3.
Moody's Individual Loan Analysis Credit Enhancement (MILAN CE) represents
the required credit enhancement under the senior tranche for it to achieve
the country ceiling. By lowering the maximum achievable rating
for a given MILAN, the revised methodology alters the loss distribution
curve and implies an increased probability of high loss scenarios.
--Revision of Key Collateral Assumptions
During its review Moody's increased its Milan assumption in Madrid RMBS
I, Madrid RMBS II and Madrid Residencial II to 35% ,
33% and 32% respectively. The revised Milan CE reflect
the high concentration of high LTV loans as well as the high exposure
to loans offered to Non-Spanish borrowers and to loans originated
via broker .
In all three affected transactions, Moody's maintained the
current expected loss assumptions. Expected loss assumptions remain
at 12.35% for Madrid RMBS I, 13.13%
for Madrid RMBS II, and 9.5% for Madrid Residencial
II.
In Madrid RMBS II, Class A2 and A3 amortise sequentially.
However, sequential amortization reverts to pro-rata if the
outstanding amount of loans more than six months in arrears and net of
recoveries exceeds 25% of the original notes balance. The
cumulative written-off loan balance net of recoveries represents
currently 6.7% of original pool balance, well below
the trigger level. Under the current expected loss assumption,
Moody's does not expect this trigger to be breached. As a result,
Class A2 is expected to be repaid in priority to Class A3 in most of the
default scenarios, and therefore Moody's confirms the A3 (sf)
rating for the Class A2.
-- Exposure to Counterparty Risk
The conclusion of Moody's rating review takes into consideration
the exposure to Bankia (Ba2, Non Prime), which acts as servicer
and collection account bank for all three transactions. This exposure
to Bankia does not negatively impact revised ratings of the notes.
Moody's rating action takes into consideration the exposure to Banco
Bilbao Vizcaya Argentaria (Baa3/P-3), which acts as swap
counterparty for the Madrid Residencial II transaction. The rating
agency has assessed the probability and effect of a default of the swap
counterparty on the ability of the issuer to meet its obligations under
the transaction. Additionally, Moody's has examined
the effect of the loss of any benefit from the swap and any obligation
the issuer may have to make a termination payment. In conclusion,
these factors will not negatively affect the rating on the notes.
-- Other Developments May Negatively Affect the Notes
In consideration of Moody's new adjustments, any further sovereign
downgrade would negatively affect structured finance ratings through the
application of the country ceiling or maximum achievable rating,
as well as potentially increased portfolio credit enhancement requirements
for a given rating.
As the euro area crisis continues, the ratings of structured finance
notes remain exposed to the uncertainties of credit conditions in the
general economy. The deteriorating creditworthiness of euro area
sovereigns as well as the weakening credit profile of the global banking
sector could further negatively affect the ratings of the notes.
Moody's describes additional factors that may affect the ratings
in "Approach to Assessing Linkage to Swap Counterparties in Structured
Finance Cashflow Transactions: Request for Comment" (http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF289772),
both published on 2 July 2012.
METHODOLOGIES
The methodologies used in these ratings were "Moody's Approach to Rating
RMBS Using the MILAN Framework" published in March 2013 and "The
Temporary Use of Cash in Structured Finance Transactions: Eligible
Investment and Bank Guidelines" published in March 2013.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
In reviewing these transactions, Moody's used its cash flow model,
ABSROM, to determine the loss for each tranche. The cash
flow model evaluates all default scenarios that are then weighted considering
the probabilities of the lognormal distribution assumed for the portfolio
default rate. In each default scenario, Moody's calculates
the corresponding loss for each class of notes given the incoming cash
flows from the assets and the outgoing payments to third parties and noteholders.
Therefore, the expected loss for each tranche is the sum product
of (1) the probability of occurrence of each default scenario and (2)
the loss derived from the cash flow model in each default scenario for
each tranche.
As such, Moody's analysis encompasses the assessment of stressed
scenarios.
In the context of the rating review, the transactions have been
remodeled and some inputs have been adjusted to reflect the new approach
described above. In addition, for Madrid RMBS I and II,
the final spreads on the notes have been corrected in the models.
LIST OF AFFECTED RATINGS
Issuer: Madrid Residencial II, FTA
....EUR456M A Notes, Confirmed at A3
(sf); previously on Jul 2, 2012 Downgraded to A3 (sf) and Remained
On Review for Possible Downgrade
Issuer: MADRID RMBS I, FONDO DE TITULIZACION DE ACTIVOS
....EUR1340M A2 Notes, Downgraded to
Baa2 (sf); previously on Jul 2, 2012 Downgraded to A3 (sf)
and Placed Under Review for Possible Downgrade
....EUR70M B Notes, Downgraded to Ba3
(sf); previously on Jul 2, 2012 Ba1 (sf) Placed Under Review
for Possible Downgrade
....EUR75M C Notes, Confirmed at Caa2
(sf); previously on Jul 2, 2012 Caa2 (sf) Placed Under Review
for Possible Downgrade
Issuer: Madrid RMBS II Fondo de Titulizacion de Activos
....EUR936M A2 Notes, Confirmed at A3
(sf); previously on Jul 2, 2012 Downgraded to A3 (sf) and Placed
Under Review for Possible Downgrade
....EUR270M A3 Notes, Downgraded to
Baa2 (sf); previously on Jul 2, 2012 Downgraded to A3 (sf)
and Placed Under Review for Possible Downgrade
....EUR63M B Notes, Downgraded to Ba3
(sf); previously on Jul 2, 2012 Ba1 (sf) Placed Under Review
for Possible Downgrade
....EUR67.5M C Notes, Confirmed
at Caa2 (sf); previously on Jul 2, 2012 Caa2 (sf) Placed Under
Review for Possible Downgrade
REGULATORY DISCLOSURES
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of these transactions
in the past six months.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Carole Bernard
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Barbara Rismondo
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades 4 notes and confirms 4 notes in three Spanish RMBS transactions
