Fitch Affirms Albion No. 2 plc; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Albion No. 2 plc's class A notes (XS0942259143) at 'AAAsf' with a Stable Outlook.
The transaction is a securitisation of UK prime residential mortgage loans originated and serviced by Leeds Building Society (LBS; A-/Stable/F1).
KEY RATING DRIVERS
Strong Asset Performance
At end-February 2016, delinquent loans accounted for 2.7% of the portfolio. However, only a negligible portion (8bps) is represented by loans with more than three monthly payments overdue. No defaulted loans have been reported. Fitch attributes the strong performance to low sustainable loan-to-value (68.7%) and current loan-to-value (62.1%) ratios, as well as the transaction's few adverse portfolio characteristics. Borrowers with full-time employment constitute 87.1% of the portfolio, with all self-employed having certified income. All of the loans were taken either for principal home purchase or re-mortgage purposes.
Significant Increase in Credit Enhancement
Most of the loans are either fixed or have discount rates attached for a set period before they switch to LBS's standard variable rate (SVR, 5.69%). Based on recent prepayment information provided by LBS (current Fitch-calculated constant prepayment rate is 23.1%), it is evident that many borrowers switching to LBS's SVR are refinancing, thus taking advantage of the current low interest rate environment. Higher-than-average loan prepayment rates contributed to an increase in credit enhancement, which currently stands at 29.8% of the asset portfolio, compared with 11% at transaction close in July 2013.
Increase in Default Probability Assumptions
According to Fitch's criteria, the portfolio's geographic distribution is compared with the population distribution across regions. Where there is a significant regional concentration that is at least twice the population, a 15% increase is applied to the default probability of the proportion of the pool in that region.
Additionally, Fitch believes the borrowers in the pool are exposed to payment shock. Eighty-five per cent of the loans will migrate to a SVR over the next three years. The SVR is about two percentage points higher than the current weighted average interest rate paid by such loans. The potential payment shock has been captured by increasing the default probability of each borrower by 5%. The credit enhancement available to the class A was deemed sufficient to absorb the larger expected loss, as reflected in the affirmation of the rating.
Payment Interruption Risk Mitigated
The transaction's fully funded and non-amortising reserve fund represents 10% of the class A balance. It is available to cover both principal deficiencies and interest shortfalls and provides enough liquidity to cover senior fees and class A interest payments for more than one payment date, thus mitigating payment interruption risk. Additionally, should LBS be downgraded to below 'BBB+'/'F2', a separate liquidity facility will be funded for an amount equal to 4% of the then class A notes balance.
The rating is fairly insensitive due to the substantial credit enhancement buffer available but unexpected, large increases in the frequency of defaults and losses following the sale of properties taken into possession could lead to a negative rating action on the notes.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Prior to the transaction closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of LBS's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by LBS as at 31 March 2016
-Transaction reporting provided by LBS as at 16 March 2016