OREANDA-NEWS. Fitch Ratings has affirmed Albion No.3 Plc's (Albion 3) class A notes (XS1280451128) 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

Increase in Default Probability Assumptions

The transaction closed in September 2015. As of May 2016, performance has been muted, with limited arrears (0.3% of the current portfolio balance) and no properties taken into possession by the lender. Fitch recognises that the asset performance is driven by the strong pool characteristics, as reflected in the affirmation and Stable Outlook. The portfolio is entirely composed of residential owner-occupied properties. 89.6% of the borrowers in the pool are classified as being employed, with all self-employed having certified their income at loan origination. Interest-only loans (including Part&Part) represent only 17% of securitised assets.

Despite the sound performance in recent years, historical data from LBS's overall mortgage book has been worse than its peer average. Hence, at transaction close Fitch increased the loans' foreclosure frequency by 5%. We also applied this approach in this analysis.

In Fitch's view, borrowers currently on fixed (92.2% of the portfolio) or teaser rates (2.9%; 4.2% including loans indexed to the Bank of England Base Rate) will be exposed to payment shock when their mortgages re-set to LBS's standard variable rate (SVR, 5.69%) at the end of the initial discount period. The potential shock has been captured by increasing the default probability of each borrower by 10%, both at transaction close and in this review.

Higher Quick Sale Adjustment

Ahead of transaction close, Fitch received the sale prices for properties taken into possession by LBS for its entire mortgage book. The information received suggested that sale prices were lower than expected, compared with similar data received from UK peers. Consequently, Fitch applied a higher quick sale adjustment (QSA), which resulted in lower recovery rates for the pool.

Sufficient Credit Enhancement

While the reserve account bank (Lloyds Bank, A+/Stable//F1) is subject to minimum rating triggers of 'A'/'F1', the transaction documentation stipulates a minimum rating of 'BBB-'/'F2' for the transaction account bank (LBS). This is below the minimum counterparty rating trigger outlined in Fitch's counterparty criteria ('A' or 'F1'). To account for this difference, the agency assumed the default of LBS and a loss of four months of borrower collections (7.3% of the current portfolio balance). The reduced class A credit enhancement of 5.9% was sufficient to affirm the class A rating despite the higher default probability and lower recovery rates assumptions.

Payment Interruption Risk Mitigated

The fully funded reserve fund equal to 2% of the class A notes will amortise to 1% of the original portfolio balance. The reserve 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 minus the amount standing on the general reserve ledger at that point. The facility will be funded using principal proceeds received from the portfolio.

Counterparties Not Confirmed by Issuer's Representatives

In its analysis of the transaction Fitch assumed that the key counterparties have not changed since close. Any evidence contrary to this assumption will be analysed in accordance with Fitch's criteria and reflected in the rating, if necessary.

RATING SENSITIVITIES

Increases in the frequency of foreclosure and losses following the sale of properties taken into possession, beyond Fitch's stresses, could lead to negative rating action on the notes.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch 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 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 16 May2016

- Transaction reporting provided by LBS as at 30 May 2016

- Sales proceeds information received as at 30 June 2015

MODELS

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