Fitch today downgraded Ukraine Mortgage Loan Finance No. 1 Plc and changed the Outlook on Class B to Negative from Stable, according to Fitch Ratings.
Class A (ISIN XS0285818075) downgraded to `BB+` from ‘BBB-’ (BBB minus); Outlook remains Negative
Class B (ISIN XS0285819123) downgraded to `B` from ‘B+’; Outlook changed to Negative from Stable.
The actions follow the downgrades of Ukraine’s sovereign rating and Country Ceiling (both downgraded to ‘B+’ on 17 October 2008), both of which are key reference points used in Fitch’s structured finance criteria. Therefore, the downgrade is primarily driven by the negative macro trends, rather than by an observed deterioration in the performance of the underlying collateral. However, the agency believes borrowers are likely facing increased economic difficulties, which may increase if current negative macro trends are sustained. As such, the outlook for the Class B has been changed to Negative from Stable.
The issuance funds a portfolio of mortgage loans originated within Ukraine by CJSC Privatbank (rated `B`/Outlook Stable), the largest privately owned bank in the country.
The loans are denominated and disbursed in USD. This introduces two risks that, in the agency’s view, have increased over the past weeks. First, authorities may disallow or suspend the expatriation of foreign currency, leading to a liquidity shock at the issuer level. Structural features including a cash reserve and a Transfer & Convertibility (T&C) insurance support 18 months of interest payments on the Class A notes. In Fitch’s view this supports a three-notch rating differential above the Country Ceiling a measure of the likelihood of the introduction of T&C restrictions. The downgrade of the Class A notes therefore maintains this distance above the new Country Ceiling.
Second, the stress in the consumer segment may trigger the interference of public authorities with contractually agreed payment obligations. In the event the sovereign is unable to prevent a substantial devaluation of the Ukrainian Hryvna (UHF), obligors will be confronted with rising payment obligations in UHF terms. This could prompt the authorities to re-denominate USD debt into local currency. Depending on the conversion rate used and the subsequent exchange rate movements, such intervention could lead to collections falling short of their expected amounts in USD terms. The transaction has no structural protection against this risk. As of today, it is unclear how the authorities would react if these risks are realised. However, in Fitch’s view, the risk that such measures will be considered has increased, as the ongoing liquidity crisis puts pressure on Ukraine’s economy. This is reflected in today’s rating action.
The downgrade of the Class B notes was prompted by a revision of Fitch’s assumptions of foreclosure and loss severity, which are tied to the local currency rating of the sovereign. To maintain the previous rating, the Class B notes would need to absorb a higher default and loss severity to capture the increased systemic risk.
Based on the current portfolio reported by Privatbank, Fitch determined a resulting weighted average foreclosure frequency (WAFF) of 58% for a ‘BB+’, 41.1% for a B+ and 28.2% for a ‘B’ scenario. Market value declines (MVD) were assumed at 78.7% (BB+), 66.9% (B+) and 62.2% (B) respectively, resulting in weighted average recovery rates (WARR) of 15.1% (BB+) , 34.9% (B+) and 41.1% for the ‘B’ scenario. Fitch has tested these assumptions in its cash flow model. Although credit enhancement has built up, the Class B does not withstand the results from the RMBS default model tied to a B+ rating as stated above. Testing the results for a ‘B’ scenario shows that the payments due on the notes would be met in accordance with the documentation. Additionally, the rating on the Class A notes was tested successfully using the assumptions linked to a BB+ scenario.
The transaction closed in January 2007 and amortised in strict sequential order. So far, its reported performance has been satisfactory. No defaults have been reported since January 2008, leaving the cumulative default ratio stable at 1.81%. Early delinquency buckets are still at a low level.
Fitch will continue to closely monitor Ukraine’s economic developments and their potential impact on the ratings of the notes.
