London, 25 February 2011 -- Moody's Investors Service announced today that it has downgraded the ratings
of the Class A notes and withdrawn the ratings of the Class B notes issued
by Emerald Mortgages No.5 Limited.
....EUR2375M A Notes, Downgraded to
A1 (sf) and Remains On Review for Possible Downgrade; previously
on Oct 14, 2010 Aaa (sf) Placed Under Review for Possible Downgrade
....EUR125M B Notes, Withdrawn (sf);
previously on Oct 14, 2010 Baa3 (sf) Placed Under Review for Possible
Downgrade
RATING RATIONALE
On February 11 2011, Moody's announced that top-rated notes
of Irish RMBS transactions would suffer multi-notch downgrades
as a result of rating actions taken on most of the Irish bank ratings.
Today's rating action takes into consideration the worse-than-expected
performance of the collateral, the weakened macro-economic
environment in Ireland, the deterioration in the credit strength
of EBS as key counterparty and the recent restructuring of the transaction.
Portfolio expected loss: Moody's has reassessed its lifetime loss
expectation for the pool taking into account the collateral performance
to date as well as the current macroeconomic environment in Ireland.
The share of loans more than 90 days in arrears has increased to 8.5
per cent as at February 2011, compared to 5.0 per cent in
February 2010. The share of 360 days delinquent loans has more
than doubled from 1.3 per cent to 2.9 per cent over the
same period. Moody's believes the weakening of Irish economic conditions
and in particular the effects of further government austerity measures
will continue to negatively impact borrowers' ability to perform their
financial obligations. As a result we expect arrears levels in
the portfolio to continue to increase through 2011 and to remain at elevated
levels for several years. On this basis we have doubled our previous
portfolio expected loss assumption to 4.8 per cent of the original
pool balance, 6.0 per cent of the current pool balance.
Stress scenarios: Moody's has assessed the loan-by-loan
information to determine the MILAN Aaa Credit Enhancement (CE) and has
increased the assumption to 30 per cent. The A1 (sf) rating of
the Class A notes also incorporates additional stress scenarios,
which have been analysed by Moody's to take into account systemic country
risk and the impact of a sovereign and banking stress in Ireland.
In its analysis, Moody's considered the likely performance of the
transaction in the context of a severe stress scenario that assumes combinations
of a restructuring of the government's debt, a banking system crisis,
and a more severe version of the current austerity plan. The loss
to the portfolio in such an extreme scenario was assumed to be approximately
20 per cent and credit enhancement of the A1 (sf) rated senior notes was
assessed to ensure that these notes would not experience a loss in such
a scenario.
Operational risk: on February 11 2011, the senior unsecured
rating of EBS was downgraded to Ba2 and remains on review for further
possible downgrade. EBS performs several key roles in the transaction
including that of servicer and cash manager. EBS has taken a number
of steps (see below) to mitigate the operational risk to the transaction.
Deutsche Bank AG, London Branch, has been appointed as back-up
cash manager. The revised transaction documents also contain a
requirement for EBS, on a best efforts basis, to appoint a
back-up servicer within 60 days. Other key roles such as
issuer account bank, swap counterparty and liquidity facility provider
have either been terminated or transferred to third parties.
The Class A Notes remain under review for possible further downgrade pending
the appointment of a back-up servicer. Moody's will
assess the strength of the back-up arrangement, when appointed.
Should the arrangement be deemed weak, or if no back-up is
appointed within the required period, then the ratings of the Class
Notes will most likely be downgraded to A3.
Class B rating:
Moody's Investors Service has withdrawn the credit rating for its
own business reasons. Please refer to Moody's Investors Service's
Withdrawal Policy, which can be found on our website, www.moodys.com.
The rating addresses the expected loss posed to investors by the legal
final maturity of the notes. In Moody's opinion, the structure
allows for timely payment of interest and principal with respect of the
notes by the legal final maturity. Moody's ratings only address
the credit risk associated with the transaction. Other non-credit
risks have not been addressed, but may have a significant effect
on yield to investors.
The principal methodologies used this rating were: The Lognormal
Method Applied to ABS Analysis published in September 2000, Moody's
MILAN Methodology for rating Irish RMBS published in April 2009,
A Framework for Stressing House Prices in RMBS Transactions in EMEA published
in July 2008 and Cash Flow Analysis in EMEA RMBS: Testing Structural
Features with the MARCO Model published in January 2006.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
in this transaction.
RESTRUCTURING OVERVIEW
On the February 23 2011, the transaction documents were amended
to incorporate the following main changes:
1. The issuance of a new EUR358,033,007.94 Class
Z loan ranking junior in the waterfall. The proceeds of this issuance
will be used to fund a partial redemption of the Class A Notes.
The additional credit enhancement provided by this note together with
the Class B Notes and the partial redemption increases the current Class
A note subordination to approximately 24 per cent.
2. The Reserve Fund has been reduced to 1.5 per cent of
total note balance and Class Z loan as at the restructure date.
The revised transaction documents allow it to be reduced further,
to minimum of 1 per cent, when the clearing accounts are moved to
a P-1 rated bank. Apart from this one-off reduction
the reserve fund will be non-amortising. Once the expected
transfer has occurred, and the reserve fund reduced, the total
Class A credit enhancement will be approximately 25 per cent.
3. The Class A and Class B coupons have been changed to fixed rates
of 1.75 per cent and 0.25 per cent respectively.
The new Class Z loan will also have a fixed coupon of 0.25 per
cent
4. The priority of payments have been amended such that the reserve
fund is now more senior in the waterfall, replenished after the
Class A principal deficiency ledger. In addition Class B and Class
Z interest payments are subordinated, ranking after the Class B
and Class Z principal deficiency ledgers respectively as long as any Class
A note is outstanding and ranking before otherwise.
5. An artificial write-off mechanism has been incorporated
into the transaction. For any loan 12 months or more in arrears,
defined as arrears amount divided by scheduled instalment, the outstanding
loan balance will be debited in full to the principal deficiency ledger.
Any recoveries on such loans flow through the revenue waterfall and are
therefore available, along with any excess spread, to clear
the written-off amount. At the date of the restructure approximately
2.9 per cent of loans are 12 months or more in arrears therefore
generating an immediate principal deficiency ledger balance, it
is estimated this will take approximately 14 months to clear assuming
current levels of excess spread continue.
6. The Liquidity Reserve and Liquidity Facility have been cancelled
and repaid by the Issuer.
7. The interest rate swap agreement has been cancelled.
In order to help mitigate the potential mismatch between interest payments
received on the mortgage loans, which are generally floating rate,
versus interest payments due on the notes, which are all fixed rate,
EBS has covenanted to maintain a minimum standard variable rate of at
least 1.50 per cent
8. The issuer accounts have been transferred from EBS to Ulster
Bank Ireland Limited (A2 / P-1)
9. Deutsche Bank AG (Aa3 / P-1), London Branch,
had been appointed as a back-up cash manager
10. Estimation language has been included in the cash management
agreement. In the event that the servicer is unable to provide
certain information, the Cash Manager will base its calculations
on the information provided in the three previous collection periods in
order to make waterfall payments
11. Back-up Servicer to be appointed. No back-up
servicer is appointed as at the restructure date, however the transaction
documents have been amended to require EBS, on a best efforts basis,
to appoint a back-up servicer within 60 days.
12. TMF Administration Services Limited has been appointed as replacement
servicer facilitator. It is responsible, on a best efforts
basis, to appoint a replacement servicer in the event that the then
active servicing agreement is terminated
REGULATORY DISCLOSURES
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's Investors
Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Anthony Parry
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Neal Shah
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Moody's downgrades Irish RMBS notes issued by Emerald Mortgages No. 5
