OREANDA-NEWS. Fitch Ratings has assigned Lanark 2016-1 plc's notes expected ratings, as follows:

Class 1A: 'AAA(EXP)sf', Outlook Stable

The notes will represent the eighth public issuance from the Lanark master trust programme. The master trust property consists of prime residential owner-occupied mortgage loans originated in the UK by Clydesdale Bank PLC (Clydesdale) and Yorkshire Bank Home Loans Limited (YBHL). Clydesdale was demerged from National Australia Bank Group on 8 February 2016, which resulted in a downgrade to 'BBB+'/'F2' from 'A'/'F1'.

The trust property will be approximately GBP4.4bn at closing. The expected ratings are based on Fitch's assessment of the underlying collateral, available credit enhancement, the origination and underwriting procedures used by the originators, the servicing capabilities of Clydesdale and the transaction's financial and legal structure.

The assignment of the final rating is subject to the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Portfolio Characteristics

The portfolio will have a weighted average (WA) seasoning of 50 months, a WA original loan-to-value ratio (OLTV) of 71.3% and WA debt-to-income ratio (DTI) of 40.5% at close. The WA OLTV and WA DTI will be in line with the average for UK prime transactions rated by Fitch.

Geographical Concentration

Twenty-eight per cent of the loans in the trust pool (by loan count %) will be concentrated in Scotland, 28.2% in York and Humber, and 8.8% in the North, which is higher than the proportion of the population in these regions. This means the portfolio is more likely to be exposed to regional economic declines or natural disasters such as flooding. Therefore, Fitch has increased the foreclosure frequency (FF) by 15% for all loans in these regions.

Loans Added to Portfolio

Approximately GBP770m of new loans will be added to the trust pool, taking the collateral balance to GBP4.4bn at close from GBP3.7bn currently. As Clydesdale's rating is now below 'A-', the transaction documentation states that Clydesdale must provide a solvency certificate to include new loans into the trust pool. In addition, the compliance of new loans with the representations and warranties in the mortgage sale agreement will now be reviewed by an independent auditor. Fitch has factored in the impact of the new loans into its analysis when calculating the WA FF and recovery rates (RR).

Illiquid Property Adjustment

Around 31.8% of the portfolio falls in the high-value bracket (i. e. the top five percentile of the various property regions), which is at the higher end of UK RMBS transactions rated by Fitch. Fitch applies additional haircuts to the valuations to account for the lower liquidity and demand for such properties in an economic downturn.

RATING SENSITIVITIES

Material increases 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. Fitch's analysis revealed that a 30% increase in the WA FF, along with a 30% decrease in the WA RR, would imply a downgrade of the class 1A notes to 'AA+sf' from 'AAAsf'.

More detailed model implied ratings sensitivity can be found in the presale report which is available at www. fitchratings. com.

DUE DILIGENCE USAGE

Fitch was provided with due diligence information from Deloitte LLP. The due diligence focused on compliance, credit, valuation, the presence of key documents in the loan file and data integrity. The review was conducted on a sample of 457 mortgages. Fitch considered this information in its analysis and the findings did not have an adverse impact on the agency's analysis.

Form 15E has been received from Deloitte LLP with regard to the work performed for this transaction.

DATA ADEQUACY

Clydesdale provided Fitch with a loan-by-loan data template with all of the key data fields completed. The agency typically calculates the sustainable LTV using the current balance (plus the maximum re-draw amount available to each loan) at the time of the portfolio cut-off date, and the valuation corresponding to the date of the most recent advance.

Clydesdale was able to provide details on any form of missed payment a borrower may have made in the 12 months prior to origination based on a borrower's Experian credit score (eg missed bills or loan payments on unsecured or secured debt). However, Clydesdale was unable to provide loan level data on the percentage of borrowers that may have had a prior mortgage arrears. Fitch has therefore assumed 5% of the borrowers in the pool have had some form of prior mortgage arrears based on Clydesdale's origination policy, and applying a conservative uplift on a comparison of transactions where this data has been provided; it has been assumed this occurred in the 6 months prior to origination.

Fitch received repossession information for 619 loans originated by Clydesdale. The data had an overall average quick sale adjustment (QSA) of 27.5%, higher than Fitch's criteria average of around 21%. At a more detailed level, the observed QSA was higher for both houses (25.9%) and flats (37.5%) than the criteria average for those property types. To account for this, the agency applied the higher QSA observed in the data sample to those property types.

Fitch conducted a review of a targeted sample of Clydesdale's origination files. Some errors were found on the classification of employment type for a small number of loans (subsequently explained by a keying error at origination), and the information contained on borrower income verification for pre-crisis loans (around 15% of the pool) was found to be less than that typically observed at peers. Neither finding was considered material enough to warrant any further adjustment. Overall Fitch found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices, and other information provided to the agency on the asset portfolio.

Overall and together with the assumptions referred to above, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is reliable.

To determine the levels of credit enhancement needed to support Fitch's ratings, the agency simulated the transaction's cash flows using a cash flow model incorporating Fitch's cash flow stresses. The cash flow model was provided by Citigroup Global Markets Limited. The cash flow model was reviewed and tested to ensure that key structural features and cash flow mechanisms were correctly incorporated.

SOURCES OF INFORMATION

The information below was used in the analysis:

- Loan-by-loan data provided by Clydesdale as at 29 April 2016

- Transaction reporting provided by Clydesdale as at 22 May 2016

- Loan enforcement details provided by Clydesdale as at 29 April 2016

- Loan performance data provided by Clydesdale as at 29 April 2016

MODELS

The models below were used in the analysis. Click on the link for a description of the model.