Fitch Ratings updated its criteria for rating Dutch RMBS transactions backed by the Nationale Hypotheek Garantie (NHG). The action could possibly cause previously rated 'AAA' paper backed by NHGs to be downgraded to 'BBB."

The ratings of RMBS notes that are backed or partially backed by NHG mortgages have been on watch negative by the rating agency since March 2010. The timeframe from then covers an extended consultation period regarding the changes to the NHG default and loss assumptions in the agency's Dutch RMBS rating criteria.

Fitch has kept all 50 outstanding notes of the 15 NHG-backed Dutch RMBS transactions on watch negative.

In many cases, the large extent of these estimated rating migrations reflect the thinness of the credit enhancement currently supporting the notes, rather than any concern regarding transaction performance or the credit quality of the mortgage portfolio, Fitch said.

According to a report from Unicredit, the revised 'AAA' loss assumption ranges from 3.3% to 7.7% of the transaction's current balance, depending on the transaction specifics. This compares to available credit enhancement of often less than 1%.

"The agency calculated that without the benefit of the NHG guarantee, 'AAA' stress losses would be on average four percentage points higher," analysts said. "In our view, this review is another shocking example of major downgrades being in the loop from AAA to low investment grade simply due to criteria changes."

Royal Bank of Scotland (RBS) analysts said that changes to the transactions in question could mitigate the impact of the changes implemented by Fitch.

The rating agency has allowed deal sponsors up to Aug. 19 to indicate whether they intend to make any changes to their deals to limit the new criteria's impact, with a subsequent deadline of Sept. 19 for submission of the data required to reassess the risks of these loans. This is with the expectation that the negative watch status for the affected notes should be resolved by end of November.

According to RBS, the main concern for investors is that bonds continue to be eligible for the European Central Bank repo facility. Most of the remaining deals are single-rated and, as such, are not repo eligible, but DARTS 2, PEARL 1 & 2, and SOUND 1 & 2 senior notes could lose their eligibility if Fitch were to downgrade notes to the full extent indicated.

"That would require that they either have ratings from two other agencies or that the Fitch rating after application of the new criteria continues to be 'A-' or better," RBS analysts said.

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