OREANDA-NEWS. Fitch Ratings has upgraded five and affirmed 26 tranches of 6 UK non-conforming (NC) RMBS transactions: EMF-UK 2008-1 Plc (EMF), Eurosail-UK 07-4 BL Plc (ES0704), Landmark Mortgage Securities No1. Plc (LMS 1), Landmark Mortgage Securities No2. Plc (LMS 2), Landmark Mortgage Securities No3. Plc (LMS 3) and Mortgage Funding 2008-1 Plc (MF08).

The transactions have been removed from Rating Watch Positive (RWP), where they were placed in December 2015. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

Stable Asset Performance

The prolonged low interest rate environment combined with a robust economic environment in the UK has supported borrower affordability, as evidenced by declining arrears balances.

In terms of late stage arrears, LMS 1, LMS 2 and LMS 3 three month plus arrears (3m+) as a portion of the outstanding pool balance have declined in line with the Fitch NC index. The strongest performer has been LMS 3, with 3m+ at around 5% at April 2016. The weakest performer is LMS 1 with around 3m+ of 14% as of March 2016.

EMF has consistently outperformed the NC index throughout its life with 3m+ at around 8% of the pool balance as at March 2016. Despite this, repossessions have increased more than the decrease in late stage arrears, which is against the general trend of the NC index. However, the transaction remains a strong performer overall. ES0704 and MF08 have stabilised with 3m+ balances remaining stable at around 17% and 20% of their respective pool balances over the past year. This compares with the NC index at around 9% as at March 2016.

Solid Credit Enhancement (CE)

The transactions closed in 2006 (LMS 1), 2007 (LMS 2, LMS 3 and ES0704) and 2008 (EMF and MF08) and are well seasoned. As a result CE has built up through note amortisation, and the transactions currently have fully funded reserve funds, with the exception of MF08 which does not have a reserve fund in place. The upgrades and affirmations reflect the CE.

LMS 2 currently amortises pro rata and EMF will switch to pro rata amortisation of the notes on the September 2016 payment date providing the performance triggers continue to be met. This limits future CE build up but will help to limit reductions in excess spread as the weighted average margin on the notes remains constant. Furthermore, the liquidity reserve in EMF will amortise in line with the class A1a and A2a note balances from the September 2016 payment date.

Unhedged BBR and SVR Loans

The LIBOR linked notes on EMF, ES0704 and MF08 are all exposed to basis risk from unhedged loans that are linked to BBR. As per its criteria, Fitch has applied a haircut to the margins on those loans to account for the mismatch in indices'. A significant portion of the loans in LMS 1 are linked to SVR, and in line with its criteria Fitch has applied an adjustment to the SVR resulting in a reduction in excess spread. After applying the stresses, Fitch concluded that the current CE was sufficient to affirm and in some cases upgrade the ratings.

Counterparty Exposure

Following the downgrade of Royal Bank of Scotland (RBS) on 19 May 2015, the bank can only support 'Asf' rating as a direct support counterparty, as is the case in LMS 3. The highest rating across LMS 3 is currently 'Asf', and the cap has no rating impact on any of the rated tranches.

Tail Risk

LMS 1 has fewer than 400 borrowers remaining in the pool. The decreased granularity could lead to a destabilisation in performance, limiting future upgrades.

RATING SENSITIVITIES

In Fitch's opinion, borrower affordability is being supported by the low interest rate environment. This is evidenced by declining three month plus arrears balances. However, low constant prepayment rates suggest that borrowers have been unable to refinance, leaving performance of the pools highly sensitive to future interest increases.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. 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.

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

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 Acenden and Kensington as at 29 February 2016 and 30 April 2016

- Transaction reporting provided by Acenden, BNY Mellon and TMF as at 13 March 2016, 14 March 2016, 17 March 2016 and 18 April 2016.

- Loan enforcement details provided by Acenden, BNY Mellon and TMF as at 13 March 2016, 14 March 2016, 17 March 2016 and 18 April 2016.