Moody's downgrades Irish RMBS; reviews further issues for downgrade
15 May 2012
FACTS: Moody's has downgraded the ratings of c.€2.6bn of Irish residential mortgage-backed securities (Celtic 12 issued by First Active and Fastnet 2 issued by IPM). It has also placed on review for downgrade the ratings of 16 senior notes in six further transactions (c.€17.3bn). The review will assess whether the current credit enhancement levels are sufficient to support the ratings of these notes under stressed scenarios.
ANALYSIS: According to Moody's, Celtic 12 and Fastnet 2 are performing worse than its expectations at the time of its last review in July 2011. By April 2012, loans more than 90 days in arrears had increased to 16.8% of the current balance in Celtic 12 and 13.2% in Fastnet 2, which implies increases of c.30% and 50% respectively compared to the levels at end-June 2011. The agency notes that cumulative realised losses remain very low at 0.05% of the original pool balance in Celtic 12 and 0.01% in Fastnet 2, reflecting the lengthy enforcement procedures in Ireland and the moratorium imposed on lenders. For this reason, Moody's considers loans with delinquencies exceeding 360 days as a proxy for defaults. At April 2012, the 360+ day delinquencies in the transactions had increased by 50% to 70% compared to June 2011, reaching 6.4% of the current pool balance in both Celtic 12 and Fastnet 2.
In relation to those RMBS placed under review, Moody's is concerned that the amount of credit enhancement may not be sufficient under stressed scenarios, considering the potential for "high loss severities". It notes that at least 75% of the mortgage pools comprise loans with an indexed loan-to-value ratio over 100%. It stresses that the review is primarily driven by its analysis of the available credit enhancement; it has not updated key modelling assumptions, sensitivities, cash-flow analysis and stress scenarios. However, it notes that if house prices were to fall further than it forecasts or debt forgiveness is applied more extensively over the coming quarters than it currently anticipates, the notes' ratings could be further negatively affected.
DAVY VIEW: Moody's stresses that expected loss assumptions remain subject to uncertainty driven by general economic activity, interest rates and house prices. It also cautions that the proposed new Irish personal insolvency legislation could have a negative impact on the ratings of the notes as it might lead to a write-down of the mortgage debt supporting them. The 90 day + arrears levels of 16.8% in Celtic 12 and 13.2% in Fastnet 2 may reflect a BTL component, and hence may not be strictly comparable with the market level of 12.3% for owner-occupiers at end-2011 (a Q1 market figure should be published soon). For the latest reported arrears data by lender please, see our comment 'Irish banks: potential mortgage losses continue to dominate concerns', issued May 14th.