Fitch Places Honours Plc Notes on Negative Watch
GBP57.1m Class A1 notes: 'AAsf' on RWN
GBP 54.2m Class A2 notes: 'AAsf' on RWN
GBP27.1m Class B notes: 'Asf' on RWN
GBP 14.6m Class C notes: 'BBBsf' on RWN
GBP9.7m Class D notes: 'Bsf' on RWN
This transaction is a refinancing of the previous Honours Plc transaction that closed in 1999, a securitisation of student loans originated in the UK by the Student Loans Company Limited.
The RWN reflects uncertainty around a recent unexplained spike in loans deferred with arrears, together with a yet unresolved provision for a potential liability from a Consumer Credit Act (CCA) non-compliance investigation. In addition, the servicer transfer costs have contributed to an un-cleared GBP2.5m principal deficiency ledger (PDL) balance.
KEY RATING DRIVERS
Loans Deferred with Arrears Up
Loans deferred with arrears increased to GBP10.7m at end-August 2016 from GBP2m in August 2015. Deferred loans with no arrears are eligible for cancellation given a set of circumstances; however, loans deferred with arrears are not, and therefore represent an additional potential loss to the transaction. The note ratings are sensitive to the loans deferred in arrears default assumption, which in the absence of an established cause for the increase cannot be reasonably ascertained. It is also unclear whether the servicer has implemented any remedial action.
Uncertainty on CCA Non-Compliance Provision
A GBP10.9m provision has been allocated for liabilities and charges arising from potential non-compliance with certain aspects of the CCA in relation to arrears notices sent to borrowers. Although the provision represents the directors' best estimate to meet the liabilities, the final amount is still to be determined and discussed with the Financial Conduct Authority (FCA).
Expenses Add Pressure on Junior Notes
On 29 January 2016, the capita administrator agreement was terminated and Link Financial Outsourcing Ltd was appointed administrator. Over the last 12 months, expenses have risen, adding pressure to the junior notes. However, as of end-August 2016 the observed senior fees have reverted to historical values. Without the additional issues highlighted above Fitch would have expected the PDL to have been cleared, although this now remains uncertain.
Deferred loans with no arrears (GBP128.4m) are eligible for cancellation, typically after 25 years. Fitch has incorporated a cancellation profile that leads all loans to be cancelled by transaction maturity. As the transaction is strongly reliant on the UK government to make cancellation payments on deferred loans, the rating of the notes is therefore capped to that of the UK government (AA/Negative).
While the outcome of the non-compliance investigation is pending it is also not clear to what extent borrower reimbursements would be applied either through the priority of payments or as "set-off" against loan balances. Fitch has modelled various outcomes and when applied in addition to the deferred loans in arrears category, potentially leads to downgrade of at least between one (class A) and three notches (class B to D). The RWN represents the potential for this to be resolved in the next six months.
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.
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.
Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction 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.
Prior to the transaction closing, Fitch did not review the results of a third party assessment conducted on the asset portfolio information.
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.
-Investor reports up until end-August 2016 and provided by Deutsche Bank
-Notice to Noteholders - RNS - London Stock Exchange published by the issuer dated February 2016 and September 2016
-Rating of UK from Fitch's sovereigns group as of 27 June 2016.