London, 06 May 2014 -- Moody's Investors Service has today downgraded 5 notes and confirmed
2 notes in Paragon Mortgages (No. 9) PLC (Paragon 9). Moody's
has further placed the 5 downgraded notes in Paragon 9 on review with
rating direction uncertain. All notes in Paragon Mortgages (No.
11) PLC (Paragon 11), and Paragon Mortgages (No. 12) PLC
(Paragon 12) remain on review for downgrade. Swap counterparty
exposure has prompted today's action.
Moody's placed all notes in all three transactions on review for
downgrade in relation to swap counterparty exposure on 14 November 2013
following the introduction of the rating agency's updated approach
to assessing swap counterparty linkage in structured finance transactions
(https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF344857).
For a detailed list of affected ratings, see towards the end of
the press release before the regulatory disclosures section.
RATINGS RATIONALE
Today's rating actions reflect the impact on the three transactions of
their exposure to the Royal Bank of Scotland plc (RBS rated Baa1/P-2)
in the case of Paragon 9 and Barclays Bank PLC (Barclays, A2/P-1)
in the case of Paragon 11 and Paragon 12 as their currency swap counterparties.
The rating actions follow the introduction of Moody's updated approach
to assessing swap counterparty linkage in structured finance cash flow
transactions ("Approach to Assessing Swap Counterparties in Structured
Finance Cash Flow Transactions", published 12 November 2013).
-- Paragon 9
As part of its review, Moody's incorporated the risks of additional
losses on the notes in the event of them becoming unhedged following a
swap counterparty default. RBS (Baa1/P-2) is the currency
swap counterparty in this transaction.
Moody's concludes that the current ratings on Classes Aa,
Ab, Ac, Ba and Bb are affected by the exposure to RBS as swap
counterparty which is not mitigated through available credit enhancements.
Their ratings are consequently downgraded to Aa1 (sf), Aa1 (sf),
Aa1 (sf), A1 (sf) and A1 (sf) respectively. The downgrade
of RBS's long-term rating to Baa1 from A3 on 13 March 2014
resulted in a rating event under the swap agreement. Remedial actions
resulting in a significant reduction in swap counterparty risk,
such as a transfer to or a guarantee from a highly rated entity,
could result in an upgrade to the Classes Aa, Ab, Ac,
Ba and Bb notes. However, lack of remedial actions can result
in a further downgrade of the notes. For this reason, Moody's
has decided to place the Classes Aa, Ab, Ac, Ba and
Bb notes on review with rating direction uncertain.
Moody's concluded that the credit enhancement available to Classes
Ca and Cb mitigates the swap counterparty risks. As a result,
their ratings are both confirmed at A2 (sf).
-- Paragon 11 and Paragon 12
Moody's incorporated the risks of additional losses on the notes
in the event of them becoming unhedged following a swap counterparty default.
Barclays (A2/P-1), the currency swap counterparty in both
transactions, has communicated to Moody's its intention to restructure
the currency swaps. As part of its review, Moody's has taken
into consideration Barclays' swap restructuring proposal,
and gives partial benefit to this restructuring until it is fully executed.
Moody's concluded that the credit enhancement available to all classes
of notes in Paragon 11 and Paragon 12 mitigates the swap counterparty
risks in a scenario that Barclays fully implements its swap restructuring
proposal. Moody's maintains that all notes in Paragon 11
and Paragon 12 remain on review for downgrade pending final execution
of the swap restructuring.
UPDATE TO TRANSACTION ASSUMPTIONS
During this review, Moody's conducted a detailed loan-by-loan
analysis and transaction performance review of all three transactions.
All three transactions are performing in line with Moody's current
expected loss assumptions. Borrower concentration in Paragon 11
improved since closing. As a result, Moody's reduced
MILAN in Paragon 11 from 19.48% to 17.50%.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
Upward pressure on the ratings could result from (1) better-than-expected
performance of the underlying assets; (2) implementation of remedial
actions in paragon 9 or restructuring in paragon 11 and 12 that could
fully mitigate the swap counterparty risk ; and (3) a decline in
counterparty risk or country risk.
Downward pressure on the ratings could result from (1) worse-than-expected
performance of the underlying collateral; (2) failure to properly
implement remedial actions in paragon 9 or restructuring in paragon 11
and 12 that could mitigate the swap counterparty risk; and (3) deterioration
in the counterparties' credit quality or a rise in country risk.
The principal methodology used in these ratings was "Moody's Approach
to Rating RMBS Using the MILAN Framework" published in March 2014.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
LIST OF AFFECTED RATINGS:
Issuer: Paragon Mortgages (No. 9) PLC
....GBP 346M Aa Notes, Downgraded to
Aa1 (sf) and Placed Under Review Direction Uncertain; previously
on Nov 14, 2013 Aaa (sf) Placed Under Review for Possible Downgrade
....EUR 355M Ab Notes, Downgraded to
Aa1 (sf) and Placed Under Review Direction Uncertain; previously
on Nov 14, 2013 Aaa (sf) Placed Under Review for Possible Downgrade
....US$ 60M Ac Notes, Downgraded
to Aa1 (sf) and Placed Under Review Direction Uncertain; previously
on Nov 14, 2013 Aaa (sf) Placed Under Review for Possible Downgrade
....GBP 7M Ba Notes, Downgraded to A1
(sf) and Placed Under Review Direction Uncertain; previously on Nov
14, 2013 Aa3 (sf) Placed Under Review for Possible Downgrade
....EUR 29.5M Bb Notes, Downgraded
to A1 (sf) and Placed Under Review Direction Uncertain; previously
on Nov 14, 2013 Aa3 (sf) Placed Under Review for Possible Downgrade
....GBP 3M Ca Notes, Confirmed at A2
(sf); previously on Nov 14, 2013 A2 (sf) Placed Under Review
for Possible Downgrade
....EUR 66M Cb Notes, Confirmed at A2
(sf); previously on Nov 14, 2013 A2 (sf) Placed Under Review
for Possible Downgrade
Issuer: Paragon Mortgages (No. 11) PLC
....US$ 985M A1 Notes, Aaa (sf)
Remains On Review for Possible Downgrade; previously on Nov 14,
2013 Aaa (sf) Placed Under Review for Possible Downgrade
....GBP 149.5M A2a Notes, Aaa
(sf) Remains On Review for Possible Downgrade; previously on Nov
14, 2013 Aaa (sf) Placed Under Review for Possible Downgrade
....EUR 219.7M A2b Notes, Aaa
(sf) Remains On Review for Possible Downgrade; previously on Nov
14, 2013 Aaa (sf) Placed Under Review for Possible Downgrade
....GBP 16M B1a Notes, Aa2 (sf) Remains
On Review for Possible Downgrade; previously on Nov 14, 2013
Aa2 (sf) Placed Under Review for Possible Downgrade
....EUR 82.4M B1b Notes, Aa2
(sf) Remains On Review for Possible Downgrade; previously on Nov
14, 2013 Aa2 (sf) Placed Under Review for Possible Downgrade
....EUR 87.5M C1b Notes, A2 (sf)
Remains On Review for Possible Downgrade; previously on Nov 14,
2013 A2 (sf) Placed Under Review for Possible Downgrade
Issuer: Paragon Mortgages (No. 12) PLC
....US$ 1500M A1 Notes, Aaa (sf)
Remains On Review for Possible Downgrade; previously on Nov 14,
2013 Aaa (sf) Placed Under Review for Possible Downgrade
....GBP 145M A2a Notes, Aaa (sf) Remains
On Review for Possible Downgrade; previously on Nov 14, 2013
Aaa (sf) Placed Under Review for Possible Downgrade
....EUR 245M A2b Notes, Aaa (sf) Remains
On Review for Possible Downgrade; previously on Nov 14, 2013
Aaa (sf) Placed Under Review for Possible Downgrade
....US$ 311M A2c Notes, Aaa (sf)
Remains On Review for Possible Downgrade; previously on Nov 14,
2013 Aaa (sf) Placed Under Review for Possible Downgrade
....GBP 25M B1a Notes, Aa2 (sf) Remains
On Review for Possible Downgrade; previously on Nov 14, 2013
Aa2 (sf) Placed Under Review for Possible Downgrade
....EUR 126M B1b Notes, Aa2 (sf) Remains
On Review for Possible Downgrade; previously on Nov 14, 2013
Aa2 (sf) Placed Under Review for Possible Downgrade
....GBP 17M C1a Notes, A2 (sf) Remains
On Review for Possible Downgrade; previously on Nov 14, 2013
A2 (sf) Placed Under Review for Possible Downgrade
....EUR 106M C1b Notes, A2 (sf) Remains
On Review for Possible Downgrade; previously on Nov 14, 2013
A2 (sf) Placed Under Review for Possible Downgrade
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions of the disclosure form.
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.
The analysis relies on an assessment of collateral characteristics to
determine the collateral loss distribution, that is, the function
that correlates to an assumption about the likelihood of occurrence to
each level of possible losses in the collateral. As a second step,
Moody's evaluates each possible collateral loss scenario using a
model that replicates the relevant structural features to derive payments
and therefore the ultimate potential losses for each rated instrument.
The loss a rated instrument incurs in each collateral loss scenario,
weighted by assumptions about the likelihood of events in that scenario
occurring, results in the expected loss of the rated instrument.
As the section on loss and cash flow analysis describes, Moody's
quantitative analysis entails an evaluation of scenarios that stress factors
contributing to sensitivity of ratings and take into account the likelihood
of severe collateral losses or impaired cash flows. Moody's
weights the impact on the rated instruments based on its assumptions of
the likelihood of the events in such scenarios occurring.
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.
Lyudmila Udot
Asst Vice President - 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
Carole Bernard
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Kevin Ma
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 takes multiple actions on Paragon Mortgages (No. 9), (No.11), (No.12) PLC
