OREANDA-NEWS. May 15, 2009. Fitch Ratings has downgraded Kazakh Mortgage Backed Securities 2007-I B.V.'s (Kazakh MBS) notes and maintained the notes' ratings on Rating Watch Negative (RWN). Kazakh MBS is a securitisation of residential mortgage loans originated by BTA Ipoteka (BTAI), a wholly-owned subsidiary of BTA Bank (RD). The notes ratings are as follows, reported the press-centre of KASE:

Class A (ISIN XS0293196266) downgraded to 'BB+' from 'BBB+'; remains on RWN; assigned a 'LS1' Loss Severity Rating Class B (ISIN XS0293196696) downgraded to 'B' from 'BBB'; remains on RWN; assigned a 'LS1' Loss Severity Rating Class C (ISIN XS0293196779) downgraded to 'CCC' from 'BB'; remains on RWN; assigned a 'RR4' Recovery Rating.

The downgrades were prompted by concerns regarding the transaction's future performance following a rapid increase in 1-30 day delinquencies to 14.9% of the portfolio in April from 7.3% in February 2009. To a large degree, Fitch attributes this performance deterioration to the 25% devaluation of the tenge versus the US dollar in March 2009.

The agency's concerns are compounded by the ongoing downward pressure on the tenge which it expects will further impact borrower affordability. Fitch is additionally concerned that if BTAI is unable to continue servicing the mortgage portfolio, its replacement by the transaction's back-up servicer - Halyk Bank ('B+'/Negative) - could result in considerable operational disruptions.

BTAI has repurchased virtually all distressed loans since closing, leaving the transaction with only one defaulted loan to date. Fitch estimates that had BTAI not repurchased these loans, the defaults would have amounted to 5.8% of the original portfolio as of March 2009. Fitch believes that the increase in 1-30 day delinquencies will roll-over to a large degree into long-term delinquencies and defaults in coming quarters because of continued devaluation pressures and due to BTAI's inability to keep repurchasing distressed loans.

Fitch downgraded BTA Bank's Long-term Issuer Default Rating (IDR) to 'RD' from 'CC'/RWN on 24 April 2009 following the initiation of a debt restructuring procedure with its wholesale creditors. Failure to reach an agreement could result in the insolvency of BTA and BTAI, which would also raise the risk that the receiver may challenge the assignment of the mortgage loans in a Kazakh court.

If BTAI does become insolvent, its replacement by Halyk Bank as the servicer of the portfolio is likely to cause at least temporary operational disruptions. Concerns in this area relate mainly to the possibility that a substantial number of borrowers would have to be convinced to pay into the
issuer's account, in addition to the difficulty that the back-up servicer may have in servicing delinquent and defaulted loans. Fitch notes that a potential notification to borrowers of the assignment of their loans, and the transfer of mortgage files to the back-up servicer, would only take place after a servicer termination event is declared by the transaction's trustee.

Fitch has updated its modeling for the transaction to incorporate the effects of BTAI's possible insolvency. The agency is now assuming in its rating scenarios that 40% of borrowers in the portfolio will stop making payments for a period of six months following notification of the assignment. Fitch has assumed that three months of interest and principal collections, inclusive of prepayments, will be paid to BTAI's accounts after insolvency, resulting in a commingling loss for the transaction. Fitch has also assumed a lengthened foreclosure process, with the property liquidation occurring at around 30 to 46 months following first arrears, depending on the considered rating scenario.

The agency believes that the class A notes could withstand portfolio defaults of 50%, with recoveries of around 30% of the defaulted balance. This recovery rate would imply a fall in the USD-equivalent value of each foreclosed property, due to a fall in property values and/or the depreciation of the local currency, of around 80% on average from indexed valuations. The class B notes could withstand a default rate of 42% and have a recovery rate of 40%, which implies an MVD of around 76%, while class C would survive a default rate of 32% and have a recovery rate of 60%, implying an MVD of around 66%.

According to the same analysis, the liquidity facility provided by ABN Amro ('AA-' /'F1+'/Stable), which is currently 7.82% of the notes outstanding, would allow the servicing of the notes' interest to be maintained in the event of high delinquencies, defaults and commingling losses.

Data from the Statistical Agency of Kazakhstan (SAK) suggest Kazakh house prices have lost approximately a further 10% since the middle of 2008, and are now comparable to levels seen in early 2006. Recovery rates are likely to be affected by the lack of liquidity in the housing market as well as the recent devaluation of the tenge: Fitch estimates that the proportion of loans with original Loan-to-Value (LTV) above 90% has risen from negligible levels at closing to more than 16% of the portfolio as of March 2009, solely due to the depreciation of the local currency. Nonetheless, the average LTV is still low, at 66%, when related to original property values and 53% when property values are indexed using SAK's figures.