Fitch Takes Various Rating Actions on Five Dutch Non-Conforming RMBS

LONDON--()--Fitch Ratings has affirmed 15, downgraded four and upgraded two tranches of five Dutch non-conforming RMBS. The transactions are Eurosail NL and EMF-NL series jointly originated by ELQ Portefeuille I BV (ELQ) and Quion 50, and Spaarck Hypotheken's Principal Investment Mortgages 1 SA (PRIM). The ELQ originated transactions are serviced by CMIS ('RPS2-'). A portion of EMF Prime 2008-A's portfolio is also serviced by Quion ('RPS2'), while PRIM loans are fully serviced by Vesting Finance ('RPS2-').

A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS

Performance Remains Weaker Compared to Prime

As of the most recent interest payment date, three-month plus arrears ranged from 4.7% (PRIM) to 12.3% (EMF Prime 2008-A) of the outstanding collateral balance, while the average three-month plus arrears figure in the Fitch-rated prime Dutch RMBS is 0.89%. Over the past 12 months three-month plus arrears in the ELQ transactions have decreased on average by 103 basis points (bp). In contrast, arrears in PRIM increased by 203bp. Fitch expects a decline in late stage arrears across all five transactions as the Dutch housing market gradually recovers, making foreclosure economically viable.

Repossessions and Realised Losses

The downgrades in EMF Prime 2008-A reflect Fitch's concerns over the increase in the volume of loans that have been subject to foreclosure activities (2.7% of the original portfolio balance) and resulting realised losses (1.4%). Gross excess spread over the past 12 months averaged 60bp of the outstanding portfolio balance per annum. It has been insufficient to cover for period realised losses leading to an increase in the outstanding balance of losses allocated to the principal deficiency ledger to EUR2.3 million as of October 2014 from EUR90,000 as of October 2013.

The average increase in loans with properties that have been foreclosed upon and realised losses across all five deals over the past 12 months is 220bp and 110bp, respectively. As a result of increased foreclosure activities and losses, the reserve funds in the ELQ transactions have reported drawings. As of October 2014, the reserve funds of EMF 2008-1, Eurosail 2007-1 and Eurosail 2007-2 stood at 40%, 93% and 62% respectively. The affirmations in the Eurosail transactions and EMF 2008-1 reflect the fact that despite the recent reserve fund drawings the transactions still have sufficient levels of credit enhancement to withstand expected losses derived for respective rating levels.

The Negative Outlook on the majority of ELQ tranches reflects the agency's concerns over the high number of borrowers in the three-month arrears which could lead to further utilisation of reserve funds and subsequent build-up in principal deficiency ledgers.

Meanwhile, the reserve fund in PRIM remains fully funded.

Payment Interruption Exposure in EMF Transactions

Following the default of Lehman Brothers, the EMF transactions were left without liquidity facilities, resulting in increased exposure to payment interruption risk in case of servicer default. According to Fitch's criteria, the structures do not have sufficient liquidity to withstand a three-month temporary loss of principal and interest receipts, which would be required to cover for senior fees and senior interest in a higher interest rate environment. For this reason, the ratings in EMF transactions are capped at 'Asf'.

Sufficient Credit Enhancement in PRIM

Despite the weaker asset performance of the portfolio, the continued deleveraging of the portfolio has led to a build-up in the level of credit enhancement available to the notes of PRIM. This has resulted in an upgrade of the class B and C notes to 'AAAsf' and 'Asf', respectively.

RATING SENSITIVITIES

Deterioration in asset performance may result from economic factors, in particular the increasing effect of unemployment. A corresponding increase in new defaults and associated pressure on excess spread levels, beyond Fitch's stresses could result in negative rating action.

In addition, given that majority of loans have now reverted to variable-rate loans in all five portfolios, a sudden rise in interest rates may cause performance to weaken significantly and thus may cause further downgrades.

The rating actions are as follows:

EMF-NL 2008-1

Class A2 (XS0352315526) affirmed at 'Asf'; Outlook Negative

Class A3 (XS0359127387) affirmed at 'Asf'; Outlook Negative

EMF-NL Prime 2008-A B.V.

Class A2 (XS0362465535) downgraded to 'BBB+sf' from 'Asf'; Outlook Negative

Class A3 (XS0362465881) downgraded to 'BBB+sf' from 'Asf'; Outlook Negative

Class B (XS0362466186) downgraded to 'B+sf' from 'BBsf'; Outlook Negative

Class C (XS0362466269) downgraded to 'CCCsf' from 'Bsf'; Recovery Estimate 80%

Class D (XS0362466772) affirmed at 'CCsf'; Recovery Estimate 0%

Eurosail 2007-1 B.V.

Class A (XS0307254259) affirmed at 'AAsf'; Outlook Negative

Class B (XS0307256114) affirmed at 'Asf'; Outlook Negative

Class C (XS0307257435) affirmed at 'BBBsf'; Outlook Negative

Class D (XS0307260496) affirmed at 'Bsf'; Outlook Negative

Class E1 (XS0307265370) affirmed at 'CCCsf'; Recovery Estimate 0%

Class ET (XS0307265883) affirmed at 'CCCsf'; Recovery Estimate 0%

Eurosail 2007-2 B.V.

Class A (XS0327216569) affirmed at 'AAAsf'; Outlook Stable

Class M (XS0330526772) affirmed at 'AAsf'; Outlook revised to Negative from Stable

Class B (XS0327217880) affirmed at 'BBBsf'; Outlook Negative

Class C (XS0327218425) affirmed at 'BBsf'; Outlook Negative

Class D1 (XS0327219159) affirmed at 'Bsf'; Outlook Negative

Principal Residential Investment Mortgages 1 SA

Class A (XS0736639112) affirmed at 'AAAsf'; Outlook Stable

Class B (XS0736642686) upgraded to 'AAAsf' from 'AAsf'; Outlook Stable

Class C (XS0736644203) upgraded to 'Asf' from 'A-sf'; Outlook Stable

Additional information is available at www.fitchratings.com.

Sources of information - in addition to those mentioned in the applicable criteria, the sources of information used to assess the ratings were Investor and Servicer reports and loan-by-loan data provided.

Applicable criteria: 'Global Structured Finance Rating Criteria' dated 20 May 2014, 'Rating Criteria for Structured Finance Servicers' dated 30 January 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds' dated 13 May 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' dated 13 May 2014, 'Criteria for Interest Rate Stresses in Structured Finance Transactions' dated 23 January 2014, 'EMEA Criteria Addendum - Netherlands - Mortgage Loss and Cash Flow Assumptions' dated 03 June 2014, 'EMEA Residential Mortgage Loss Criteria' dated 28 May 2014, 'EMEA RMBS Cash Flow Analysis Criteria' dated 28 May 2014, 'EMEA RMBS Master Rating Criteria' dated 28 May 2014 and 'Global Criteria for Lenders' Mortgage Insurance in RMBS' dated 23 June 2014 are available at www.fitchratings.com.

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389

Rating Criteria for Structured Finance Servicers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=731750

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725537

EMEA Residential Mortgage Loss Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749272

EMEA RMBS Cash Flow Analysis Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749273

EMEA RMBS Master Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749271

Global Criteria for Lenders' Mortgage Insurance in RMBS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749070

EMEA Criteria Addendum - Netherlands - Mortgage Loss and Cash Flow Assumptions - Effective from 13 June 2013 to 3 June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709979

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=925576

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Contacts

Fitch Ratings
Lead Surveillance Analyst
Michal Kiska
Analyst
+44 20 3530 1275
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
+44 20 3530 1445
or
Committee Chairperson
Sanja Paic
Senior Director
+44 20 3530 1282
or
Media Relations:
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Lead Surveillance Analyst
Michal Kiska
Analyst
+44 20 3530 1275
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
+44 20 3530 1445
or
Committee Chairperson
Sanja Paic
Senior Director
+44 20 3530 1282
or
Media Relations:
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com