Fitch Upgrades Temese Funding 1 plc's Class C & D Notes
GBP15.0m class B notes due November 2021: affirmed at 'AAAsf'; Stable Outlook
GBP11.2m class C notes due November 2021: upgraded to 'AAAsf' from 'Asf'; Stable Outlook
GBP9.2m class D notes due November 2021: upgraded to 'AA-sf' from 'Asf'; Stable Outlook
GBP62.5 class E notes due November 2021: not rated
The transaction is a securitisation of UK equipment lease receivables originated by Investec Asset Finance plc, a wholly owned subsidiary of Investec Bank plc (BBB/Stable/F2), and granted to small/medium-size companies, corporates and public bodies. The transaction is static and the notes amortise sequentially.
KEY RATING DRIVERS
The upgrade of the class C and D notes reflects the relative increase in credit enhancement (CE) since closing in November 2013 due to portfolio amortisation. The class B notes started amortising in August 2016, as soon as the class A notes were paid in full. CE for the class B notes has risen to 77.0% from 8.8% at closing, for the class C notes to 45.1% from 4.5% and for the class D notes to 18.9% from 1.0%.
The rating on the class C and D notes was previously limited to 'Asf' because the liquidity reserve is only available to support interest payments on the class A and B notes. However, a non-amortising cash reserve can be used to pay interest on all rated notes provided it is not depleted covering losses during the life of the transaction. Our analysis has shown that the cash reserve will be sufficient to cover interest payments on all outstanding rated notes including the class C and D. Contributing factors are the portfolio amortisation, increased CE, strong transaction performance and the existence of standby operational counterparties. The transaction benefits from an appointed back-up servicer (Virtual Lease Services Ltd) and a standby cash administrator (Wells Fargo Bank International), which mitigates potential servicer discontinuity and payment interruption risk.
The class D notes are capped at the rating of the account bank (HSBC Bank plc; AA-/Stable) due to excessive direct counterparty dependency. CE for these notes relies exclusively on the cash reserve, which is deposited with the account bank. If the bank 'jumps-to-default' without prior remedial actions, we would expect to downgrade the class D notes by 10 notches or more.
As of the August 2016 reporting date, the portfolio had amortised to GBP35.2m from GBP264m in October 2013. Delinquency ratios of 30-days plus have remained low since closing and stand at 0.2%. Defaults are 2.4% of the initial pool balance and are in line with Fitch's expectations to date. Recoveries have been consistently strong; currently standing at 50.6% compared with our base case of 35.0%.
Expected impact upon the note rating of increased defaults and reduced recoveries:
Class B/C/D: Current Rating: 'AAAsf'/'AAAsf'/'AA-sf'
Increase base case defaults by 50%: 'AAAsf'/'AAAsf'/'AA-sf'
Reduce base case recoveries by 50%: 'AAAsf'/'AAAsf'/'AA-sf'
Increase base case defaults by 50% and reduce base case recoveries by 50%: 'AAAsf'/'AAAsf'/'AA-sf'
DUE DILIGENCE USAGE
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch 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 affected the rating 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 and concluded that there were no findings that affected the rating analysis.
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of the originator's 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.