Approximately EUR 1.8 billion of rated debt securities affected
London, 11 March 2011 -- Moody's Investors Service announced today that it has downgraded the ratings
of all notes issued by Valencia Hipotecario 2, Valencia Hipotecario
3 and Valencia Hipotecario 4. A detailed list of the rating actions
is provided at the end of this press release.
The ratings of all rated notes in Valencia Hipotecario 2, 3 and
4 were placed on review for possible downgrade in November 2009 due to
the worse than expected performance of the collateral. In September,
we commented that we were investigating the credit performance in the
Valencia Hipotecario series, which had experienced irregular delinquency
trends in the period Q4-09 to Q2-10.
RATINGS RATIONALE
Today's rating action takes into consideration the worse-than-expected
performance of the collateral. It also reflects Moody's negative
sector outlook for Spanish RMBS and the weakening of the macro-economic
environment in Spain, including high unemployment rates.
In September 2010, Moody's noted that Valencia Hipotecario
1 to 5 RMBS had shown irregular credit performance since their reporting
period in Q4-09. The deals, managed by Europea de
Titulización, experienced spikes in arrears in early 2010
followed by a rapid improvement in credit trends over the subsequent reporting
periods. (For more details, please refer to press release
"Moody's updates on the Spanish Valencia Hipotecario RMBS"
published on 15th of September 2010). Banco de Valencia (Baa1/P-2/under
review) explained to us that the arrears in the Valencia Hipotecario series
had been overstated for the period Q4-09 to Q2-10.
The release of new IT systems on the 17th of October 2009 affected the
transmission of mortgage repayment to the management company. Edt
failed to receive the payment data relating to loans in arrears,
which resulted in an overestimation of arrears. Banco de Valencia
provided EdT with additional files to progressively adjust the arrears
reporting figure. The arrears data has not been corrected retrospectively
in the investor reports. Banco de Valencia confirmed that the default
figure remained correct following the IT conversion.
The ratings of the notes take into account the credit quality of the underlying
mortgage loan pools, from which Moody's determined the MILAN
Aaa Credit Enhancement (MILAN Aaa CE) and the lifetime losses (expected
loss), as well as the transaction structure and any legal considerations
as assessed in Moody's cash flow analysis. The expected loss
and the Milan Aaa CE are the two key parameters used by Moody's to calibrate
its loss distribution curve, used in the cash-flow model
to rate European RMBS transactions.
Portfolio Expected Loss:
Moody's has reassessed its lifetime loss expectation for Valencia Hipotecario
2, 3 & 4 taking into account the collateral performance to date
as well as the current macroeconomic environment in Spain.
All 3 deals are performing worse than Moody's expectations as of closing.
The share of loans in 90 days + arrears was standing at 1.2%
of current pool balance in Valencia Hipotecario 3 at the end of December
2010. Loans in 90 days to 18 months in arrears represented 1.0%
and 2.62% of current pool balance in Valencia Hipotecario
2 and 4 respectively in January 2011. Cumulative 18 months delinquency,
shown in the investor reports, reached 1.06%,
0.93% and 5.33% of original pool in Valencia
Hipotecario 2, 3 and 4 respectively at the end of January 2011.
We recalculated a cumulative write-offs figure for the Valencia
Hipotecario transactions by adding up 1) cumulative 18 months delinquency
and 2) property acquisitions relating to delinquent mortgages less than
18 months overdue. Edt provided us with the amount property acquisitions
relating to delinquent mortgages less than 18 months in arrears .
We understand that Banco de Valencia has acquired property after granting
"dacion en pago" to delinquent borrower. "Dacion en pago" is a
voluntary agreement whereby the borrower hands over the possession of
the property to the lender to clear the outstanding mortgage debt.
As at October 2010, property acquisitions relating to delinquent
mortgages less than 18 months overdue represented 0.02%,
0.13% and 0.83% of original pool balance in
Valencia Hipotecario 2, 3 and 4 respectively. Cumulative
write-offs for the Valencia Hipotecario 2,3 and 4 represented
1.08%, 1.06% and 6.16%
of original balance as Juanuary 2011.
The rapidly increasing levels of write-offs ultimately resulted
in draws to the reserve fund in all 3 transactions and build-up
in unpaid principal deficiencies ledgers (PDL) in Valencia Hipotecario
4 (EUR 22.9 million) as at the last payment date.
Moody's expect the portfolio credit performance to continue to be
under stress, as Spanish unemployment remains elevated. Moody's
believe that the anticipated tightening of Spanish fiscal policies is
likely to weigh on the recovery in the Spanish labour market and constraint
further Spanish households finances. Moody's has also concerns
over the timing and degree of future recoveries in a weaker Spanish housing
market. On the basis of the rapid increase in write-offs
in the transactions and Moody's negative sector outlook for Spanish
RMBS, we have updated the portfolio expected loss assumption to
1.3% of original pool balance in Valencia Hipotecario 2,
1.6% in Valencia Hipotecario 3 and 5.9% in
Valencia Hipotecario 4.
MILAN Aaa CE:
Moody's has assessed the loan-by-loan information for Valencia
Hipotecario 2, 3 and 4 to determine the MILAN Aaa CE. Moody's
has revised its MILAN Aaa CE assumptions to 7% in Valencia Hipotecario
2, 8% in Valencia Hipotecario 3 and 18% in Valencia
Hipotecario 4, up from closing assumptions of 3.55%,
3.65% and 6.05% respectively. The increase
in the MILAN Aaa CE reflects the high geographical concentration on the
Mediterranean coast, and the exposure to loans originated to new
residents.
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.
Operational Risk:
The rating of Banco de Valencia (Baa1/P-2) is on review for possible
downgrade. Banco de Valencia is the servicer in all three transactions.
Moody's notes that operational risk in these transactions is only partially
mitigated as there is no trigger in place to appoint a back-up
servicer. The operational risk is not a driver of the rating action
on the notes in Valencia Hipotecario 3 and 4. But, it is
the driver of the rating action on the senior notes in Valencia Hipotecario
2. Moody's notes that the reserve fund in Valencia Hipotecario
2 is not at target level and that no other sources of liquidity are available
in the transaction. Moody's expect further draw-downs on
the reserve fund and the absence of liquidity in the transactions could
impair the ability of the Issuer to make timely payment of interest on
the notes, particularly in case of a servicing transfer.
Moody's considers that the risk of a missed payment of interest on the
Class A of Valencia Hipotecario 2 is not commensurate with a Aaa-rating
and therefore has downgraded the rating for this class of notes.
Banco de Valencia acts as servicer, collection account bank and
swap counterparty in the deals. A severe downgrade of the servicer
into the Baa3/Ba range will impact further the ratings of the senior notes
in Valencia Hipotecario 2 & 3.
TRANSACTION FEATURES
Valencia Hipotecario 2, 3 and 4 closed in December 2005, November
2006 and December 2007 respectively. The transactions are backed
by portfolios of first-ranking mortgage loans originated by Banco
de Valencia (Baa1/P-2/on review for possible downgrade) and secured
on residential properties located in Spain, for an overall balance
at closing of EUR 940 million, EUR 900 million and EUR 950 million,
respectively.
The securitized mortgage portfolios benefit from a relatively low weighted
average LTV, currently about 55% in Valencia Hipotecario
2 and 3 and 64% in Valencia Hipotecario 4. The three pools
are fairly exposed to the Mediterranean coast, with between 62%
and 68% exposure to the Valencia region. Non-Spanish
borrowers represent between 4 and 5% of current pool balance in
Valencia Hipotecario 2 and 3 and about 18% in Valencia Hipotecario
4. Non-Spanish borrowers have been affected by difficult
economic conditions such as increasing unemployment. Moody's performed
a loan-by-loan analysis of all delinquent and written-off
loans in the three Valencia Hipotecario RMBS. In Valencia Hipotecario
4, the write-off rate for loans granted to non-Spanish
national (calculated as the written-off loan amount divided by
original pool balance of loans originated to non-Spanish borrowers)
is between 6 to 7 times the write-off rates of loans granted to
Spaniards.
For details on the deal structure, please refer to the "Valencia
Hipotecario 2", "Valencia Hipotecario 3" and "Valencia
Hipotecario 4" new issue reports. All 3 reports are available
on www.moodys.com.
Some features in the deals have changed since closing:
Hedging agreement: All 3 transactions benefit from an interest rate
swaps provided by Banco de Valencia. Following its downgrade,
Banco de Valencia has chosen to take remedial action by way of posting
collateral in Valencia Hipotecario 3 and 4. Banco de Valencia is
transferring cash collateral to the Treasury Account and then such collateral
is resized on a weekly basis in an amount equal to First Trigger Collateral
Amount as stated in the swap documents. In Valencia Hipotecario
2, Bancaja (A3/P2/DWG) is the guarantor of the obligations of Banco
de Valencia under the interest rate swap agreement and is posting collateral.
The swap arrangements in the Valencia Hipotecario series are in line with
the requirements described in Moody's report titled "the Framework for
De-linking Hedge Counterparty Risks from Global Structured Finance.
Treasury Bank Accounts: For all 3 transactions, collections
are paid to Banco de Valencia (Baa1/P2/on review) and then transferred
every 24 to 48 hours to the treasury account held at Banco Popular Espanol
(Aa3 On review/P1).
Paying Agents: Banco Popular Espanol (Aa3 On review/P1) acts as
paying agent in all 3 transactions
Reserve fund: The rapidly increasing levels of defaulted loans ultimately
resulted in draws to the reserve fund in Valencia Hipotecario 2 and Valencia
Hipotecario 3 to 97% of target level . The reserve fund
is fully depleted in Valencia Hipotecario 4 and the unpaid principal deficiency
ledger (PDL) currently represent 3.2% of current pool balance.
INTEREST DEFFERRAL TRIGGER IN VALENCIA HIPOTECARIO 4
Class C interest in Valencia Hipotecario 4 were deferred on the interest
payment date falling on 20th January 2011. Under the revised expected
loss assumption for Valencia Hipotecario 4, the downgrade of class
B considers the likelihood that interest will be deferred also for this
class of notes if recoveries on defaulted loans fail to materialize quickly.
Interest on the class B notes are to be deferred if unpaid PDL (currently
EUR22.9m) exceed the sum of the Class C (EUR23.8m) and 50%
of Class B (EUR42.8m).
The principal methodologies used in this rating were Moody's MILAN Methodology
for Rating Spanish RMBS published in July 2008 and Revising Default/Loss
Assumptions Over the Life of an ABS/RMBS Transaction published in December
2008.
Moody's Investors Service did not receive or take into account a
third-party due diligence report on the underlying assets or financial
instruments related to the monitoring of this transaction in the past
six months.
REGULATORY DISCLOSURES
The ratings have 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 ratings 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 purpose of maintaining
a credit rating.
LIST OF RATINGS ACTIONS
Issuer: Valencia Hipotecario 2 Fondo de Titulización Hipotecario
....EUR909.5M A Certificate,
Downgraded to Aa1 (sf); previously on Nov 30, 2009 Aaa (sf)
Placed Under Review for Possible Downgrade
....EUR21.2M B Certificate, Downgraded
to A2 (sf); previously on Nov 30, 2009 A1 (sf) Placed Under
Review for Possible Downgrade
....EUR9.4M C Certificate, Downgraded
to Ba1 (sf); previously on Nov 30, 2009 Baa3 (sf) Placed Under
Review for Possible Downgrade
....EUR9.9M D Certificate, Downgraded
to C (sf); previously on Nov 30, 2009 Ca (sf) Placed Under
Review for Possible Downgrade
Issuer: VALENCIA HIPOTECARIO 3 Fondo de Titulización de Activos
....EUR780.7M A2 Certificate,
Downgraded to Aa1 (sf); previously on Nov 30, 2009 Aaa (sf)
Placed Under Review for Possible Downgrade
....EUR20.8M B Certificate, Downgraded
to Baa1 (sf); previously on Nov 30, 2009 A2 (sf) Placed Under
Review for Possible Downgrade
....EUR9.1M C Certificate, Downgraded
to Ba3 (sf); previously on Nov 30, 2009 Baa3 (sf) Placed Under
Review for Possible Downgrade
....EUR10.4M D Certificate, Downgraded
to C (sf); previously on Nov 30, 2009 Ca (sf) Placed Under
Review for Possible Downgrade
Issuer: VALENCIA HIPOTECARIO 4 FONDO DE TITULIZACIÓN DE ACTIVOS
....EUR883.4M A Certificate,
Downgraded to A3 (sf); previously on Nov 30, 2009 Aaa (sf)
Placed Under Review for Possible Downgrade
....EUR42.8M B Certificate, Downgraded
to B3 (sf); previously on Nov 30, 2009 Aa3 (sf) Placed Under
Review for Possible Downgrade
....EUR23.8M C Certificate, Downgraded
to C (sf); previously on Nov 30, 2009 Baa3 (sf) Placed Under
Review for Possible Downgrade
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
Carole Bernard
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Barbara Rismondo
VP - Senior Credit Officer
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
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Spanish RMBS notes issued by Valencia Hipotecario 2, Valencia Hipotecario 3 and Valencia Hipotecario 4
