Moody's assigns provisional ratings to notes to be issued by Closed Joint Stock Company "Mortgage Agent KHMB-1", Russian RMBS
April 29, 2013 Moody's Investors Service
Moody's Investors Service has assigned provisional long-term credit ratings to Notes to be issued by Closed Joint Stock Company "Mortgage Agent KHMB-1":
RUB [4,940.00] million Class A Residential Mortgage Backed Fixed Rate Notes due 2045, Provisional Rating Assigned (P)Baa3 (sf)
RUB [1,560.00] million Class B Notes were not rated by Moody's.
This transaction is the first securitisation of mortgages originated by JSC Bank of Khanty-Mansiysk (Ba3). The portfolio consists of the Russian residential mortgage loans serviced by Bank of Khanty-Mansiysk. DeltaCredit Bank (Baa3/P-3) will be acting as back-up servicer in the transaction.
The rating takes into account the credit quality of the underlying mortgage loan pool, from which Moody's determined the MILAN Credit Enhancement and the portfolio Expected Loss, as well as the transaction structure and legal considerations. The expected portfolio loss of 8.5% and the MILAN required credit enhancement of 27% serve as input parameters for Moody's cash flow model and tranching model, which is based on a probabilistic lognormal distribution as described in the report "The Lognormal Method Applied to ABS Analysis", published in July 2000.
The most significant driver for the MILAN Credit Enhancement number, which is slightly higher than other MILAN CE numbers in the Russian RMBS transactions, was the limited amount of historical information available from the originator and the fact that for about 66.8% of the borrowers income was verified using forms provided by the bank rather than official tax forms. The main driver for the expected loss, which is also slightly higher with expected losses assumed for other Russian RMBS transactions, was the limited historical data available on the originator's portfolio, as the historical vintage data covers only the period from January 2011 to October 2012. The weighted average current loan-to-value (LTV) of 54.5% is in line with the LTV observed in other Russian RMBS transactions. Another significant driver for rating was the fact that about 47.8% of the loans in the pool are not backed by a mortgage certificate. Although assignment of mortgage rights not evidenced by a mortgage certificate is not prohibited by Russian law, there are additional set-off risks that may arise e.g. from fees and insurance premiums paid by the borrowers, which could be claimed back and offset against monthly payments under the mortgage loan. Moody's took this set-off risk into account when modelling the cash-flows for this transaction.
The transaction benefits from an amortising reserve fund initially sized at 2.0% of the notes at closing and building up to 4.15% of the initial notes balance using the excess spread. The reserve fund is replenished before the interest payment on the unrated Class B notes. Subject to conditions such as no draw on the reserve fund, no unpaid principal deficiency, and no servicer default, the reserve fund may amortise at 4.15% of the outstanding notes down to a floor of 0.85% of initial note balance. The reserve fund amortisation will start on the eighths payment date.
The provisional ratings address the expected loss posed to investors by the legal final maturity of the notes. Moody's issues provisional ratings in advance of the final sale of securities, but these ratings represent only Moody's preliminary credit opinions. Upon a conclusive review of the transaction and associated documentation, Moody's will endeavour to assign definitive ratings to the notes. A definitive rating may differ from a provisional rating. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.
The V Score for this transaction is High, which is in line with the score assigned for the Russian RMBS sector. The High V-Score reflects uncertainty associated with legal and regulatory environment in the sector, limited experience of the originator in the securitisation market, and limited performance data available for the book of the originator. V-Scores are a relative assessment of the quality of available credit information and of the degree of dependence on various assumptions used in determining the rating. High variability in key assumptions could expose a rating to more likelihood of rating changes. The V-Score has been assigned accordingly to the report "V-Scores and Parameter Sensitivities in the Major EMEA RMBS Sectors" published in April 2009.
Moody's Parameter Sensitivities: Even if the portfolio expected loss was increased from 8.5% to 14.9% and MILAN Credit Enhancement was increased from 27% to 43.2%, the model output indicates that the Class A notes would have achieved Baa3.
Moody's Parameter Sensitivities provide a quantitative/model-indicated calculation of the number of rating notches that a Moody's structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged and is not intended to measure how the rating of the security might migrate over time, but rather how the initial rating of the security might have differed if key rating input parameters were varied. Parameter Sensitivities for the typical EMEA RMBS transaction are calculated by stressing key variable inputs in Moody's primary rating model.
The principal methodology used in this rating was Moody's Approach to Rating RMBS using the MILAN Framework published in March 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Other Factors used in this rating are described in Key Legal and Structural Rating Issues in Russian Securitisation Transactions published in June 2007.
In rating this transaction, Moody's used a cash flow model 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, the corresponding loss for each class of notes is calculated 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 (i) the probability of occurrence of each default scenario; and (ii) 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.
Moody's also considered scenarios where the Mortgage Agent has defaulted as a result of non-payment of senior fees or interest on the notes, asset-liability mismatch, or insufficient mortgage coverage. In this case, Moody's assumed that the liquidation of assets occurred and the notes were repaid according to the post-enforcement waterfall using the proceeds of the asset liquidation assuming a recovery rate of 50%. Moody's is currently investigating whether changes to the MBS Law, which came into effect on January 1, 2013, would eliminate or significantly reduce the risk of liquidation of the Mortgage Agent to the extent that this modelling would no longer be necessary. If that is the case, the ratings of the notes of this transaction may be positively affected.
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 in this transaction.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF327119.
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.
Company — Mortgage Agent KHMB-1
Full nameZAO "Mortgage Agent KHMB-1" (CJSC)