Fitch Affirms Thrones 2013-1 plc at 'AAAsf'; Outlook Stable
The transaction is a UK non-conforming RMBS comprising owner-occupied (37.6%) and buy-to-let (62.4%) loans originated by Heritable Bank (subsidiary of the Icelandic bank Landsbanki) between 2003 and 2008. Landsbanki went into administration in 2008. In May 2013 the pool of loans was sold to Cherub Funding Limited and in July 2013 it was securitised.
KEY RATING DRIVERS
Sufficient Credit Enhancement
Current credit enhancement (CE) for the class A notes stands at 43.4% of the outstanding portfolio balance, up 4.5pp over the last 12 months following the portfolio's amortisation. The substantial protection of the notes provided by CE supports today's affirmation of the notes.
As of end-April 2016, late-stage arrears (loans with more than three monthly payments overdue) were reported at 2.4% of the current portfolio balance, better than Fitch's UK All Non-conforming Index (15.3%). However, total arrears have increased 5.9pp on a yearly basis to 14.3%. Nevertheless properties currently in repossession remain limited at 0.1% of the original portfolio. The main risk drivers are borrowers subject to unsatisfied country court judgments prior to the loan's origination (6.7% of the total pool vs. 12.3% of the portfolio in arrears), and self-employed with certified income (43.5% of the portfolio vs. 50.7% of arrears cases). Fitch applies to these groups and to other high-risk borrowers (first time buyers, unemployed, etc.) increased foreclosure frequencies to account for their weaker credit profiles.
Basis Risk Mismatch Unhedged
Eighty-eight per cent of the current portfolio is composed of mortgages paying a weighted average standard variable rate (SVR) equal to 5.8%. The mismatch between the SVR received on the collateral assets and the three-month Libor payable to the noteholders remains unhedged. Fitch assumes the long - term SVR to be equal to the three month Libor plus a margin of 2 to 3% (based on cross-lender comparison) and applies haircuts to the actual mortgage rates accordingly.
Interest-only Maturity Concentration
The transaction is exposed to the risk associated with interest-only loans, reported at 93.6% of the portfolio. Fitch performed a sensitivity analysis assuming a higher probability of default where more than 20% of the portfolio are interest-only loans maturing in any three-year period and found no impact on the ratings.
With 100% borrowers on variable-rate mortgages, an increase in interest rates could lead to performance deterioration of the underlying assets, given the weaker credit profile of non-conforming borrowers in the portfolio. A material increase in the frequency of defaults and loss severity on defaulted receivables could produce loss levels greater than Fitch's base case expectations, which in turn may result in negative rating actions 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's closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated that 31 loans had no valuation report attached. Such findings were not considered in this analysis as the model already applies haircuts to property values as per Fitch's criteria.
Prior to the transaction's closing, Fitch conducted a review of a small targeted sample of Heritable'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 Mars Capital as at 31 March 2016.
-Transaction reporting provided by Mars Capital as at 20 April 2016.