NON-PERFORMING loans in First Active's mortgage securitisation vehicle have reached such a high level they threaten to activate an emergency clause designed to protect senior bond-holders.

Celtic Residential Mortgages 12, which was launched in June 2007 in the early stages of the credit crunch, raised €1.95bn for First Active and its parent Ulster Bank and includes 100% mortgages.

Ulster Bank chief executive Cormac McCarthy has acknowledged in press interviews that loans arrears are one of the serious issues facing his bank and its sister institution, First Active. Interest rolls-ups for developers may shortly have to end as arrears must not be allowed to get out of control, he has admitted. These roll-ups involve interest being added to the loan principal in the hope the interest will be repaid later on.

Since its launch almost two years ago, arrears in the vehicle have risen significantly and rose 27% in the last quarter alone, according to an investor's report. The report indicates that 5.36% of the mortgages in the transaction, totalling over €86m, are now in arrears.

It also indicates that 3.27% of the mortgages, totalling over €50m, have arrears of three months or more.

This threatens to activate a protection clause which kicks in when the amount of such non-performing mortgages hits 2.7%. The clause alters the priority of payments to bond-holders in the event of the transaction ending prematurely.

Under normal circumstances, all classes of bond-holder are paid a pro-rata amount based on the outstanding amount due to them. But the 2.7% clause in Celtic Residential 12 changes this so that senior bond-holders are paid first, sacrificing subordinate bond-holders in the process.

Despite the high level of non-performing loans, the clause in Celtic Residential 12 has yet to be activated due to the age of the vehicle but, unless arrears fall dramatically, it will be triggered in June 2010.

An Ulster Bank spokeswoman admitted the 2.7% clause was designed to safeguard its senior bond-holders but said the levels of arrears in Celtic Residential 12 weren't unusual.

"Although the level of arrears has increased this trend is typical behaviour of the arrears on securitisation transactions in the first years following the deal completion," she said.

However, investor reports for the bank's last pre-credit crunch deal, Celtic Residential 11, indicates that non-performing loans in that vehicle are running at 1.6%.