London, 18 July 2013 -- Moody's Investors Service has today taken rating action on three Irish
Residential mortgage-backed securities (RMBS) transactions.
Moody's downgraded the rating of one note in Lansdowne Mortgage
Securities No.1 plc and confirmed the rating of two notes in Emerald
Mortgages No. 4 plc and Emerald Mortgages No. 5 Limited.
Insufficiency of credit enhancement to address sovereign risk have prompted
today's downgrade.
Today's rating action concludes the review of the two notes placed on
review on 12 September 2012, following Moody's decision to adjust
the Irish country ceiling to A3 on 6 September 2012 and one note placed
on review on 15 November 2012, following Moody's revision of key
collateral assumptions for the entire Irish RMBS market.
For a detailed list of affected ratings, see towards the end of
the press release, before regulatory disclosures section.
RATINGS RATIONALE
Today's downgrade primarily reflects the insufficiency of credit enhancement
to address sovereign risk. 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/research/Structured-Finance-Transactions-Assessing-the-Impact-of-Sovereign-Risk--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 Irish country ceiling, and therefore the maximum rating that
Moody's will assign to a domestic Irish issuer including structured finance
transactions backed by Irish 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.
Moody's has not revised the key collateral assumptions for any of the
deals. Expected loss assumptions as a percentage of original pool
balance remain at 8% for Lansdowne Mortgage Securities No.
1, 3.4% for Emerald Mortgages No. 4 and 7.7%
for Emerald Mortgages No. 5. The MILAN CE assumptions remain
at 70% for Lansdowne Mortgage Securities No. 1, 22%
for Emerald Mortgages No. 4 and 30% for Emerald Mortgages
No. 5.
-- Exposure to Counterparty Risk
Moody's rating analysis also took into consideration the set-off
risk arising from exposure to EBS Ltd (Ba2, NP), acting as
originator in the Emerald Mortgages No. 4 and 5. For Lansdowne
Mortgage Securities No1, Moody's took into consideration the
exposure to Allied Irish Bank p.l.c (Ba2, NP),
acting as issuer account bank. These exposures do not impact today's
rating action.
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.
The methodologies used in these ratings were Moody's Approach to Rating
RMBS Using the MILAN Framework, published in May 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.
Other Factors used in these ratings are described in "Approach to Assessing
Linkage to Swap Counterparties in Structured Finance Cashflow Transactions:
Request for Comment" (http://www.moodys.com/research/Approach-to-Assessing-Linkage-to-Swap-Counterparties-in-Structured-Finance--PBS_SF289772),
published in July 2012.
In reviewing these transactions, Moody's used ABSROM to model the
cash flows and 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 or EL 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.
THE LIST OF AFFECTED RATINGS
Issuer: Emerald Mortgages No. 4 plc
....EUR1428M A Notes, Confirmed at Ba2
(sf); previously on Sep 12, 2012 Ba2 (sf) Placed Under Review
for Possible Downgrade
Issuer: Emerald Mortgages No. 5 Limited
....EUR2375M A Notes, Confirmed at Baa1
(sf); previously on Nov 15, 2012 Downgraded to Baa1 (sf) and
Remained On Review for Possible Downgrade
Issuer: Lansdowne Mortgage Securities No. 1 p.l.c.
....EUR258M A2 Notes, Downgraded to
Ba2 (sf); previously on Sep 12, 2012 Ba1 (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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Sebastian?Hoepfner
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
Carole Bernard
VP - Senior Analyst
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 one note and confirms two notes in three Irish RMBS transactions