OREANDA-NEWS. This announcement corrects the version published on 12 March 2015 to include the rating sensitivities.

Fitch Ratings has downgraded eight tranches of the Business Mortgage Finance PLC (BMF) series and affirmed 24 tranches, following a review of the transactions' performance. A full list of rating actions is below.

The BMF transactions are securitisations of mortgages to small and medium-sized enterprises and the owner-managed business community, originated by Commercial First Mortgages Limited (CFML).

KEY RATING DRIVERS
Weaker Performance of Later Vintages
Over the past year, arrears across the entire series have continued to trend downwards. As of February 2015, the volume of loans in arrears by three months or more as a percentage of the current portfolio balance, ranged between 12.6% (BMF 7) and 26.8% (BMF3) compared with 19.2% (BMF7) and 30% (BMF3) a year ago. The reduction in arrears is mainly attributable to the sale of properties taken into possession as the servicer, CFML, continues to clear its legacy portfolio. These sales have in turn led to the high levels of losses incurred across the series, especially for the later transactions, BMF5, BM6 and BMF7.

In particular, cumulative possessions have exceeded 23% of the respective original balance in BMF5, BM6 and BMF7 compared with 14% and 19% in the slightly more seasoned BMF3 and BMF4 transactions. Consequently, the later transactions have recorded higher losses to date, with figures reaching 14.1% of the original balance in BMF5 compared to the lower 5.5% in BMF3.

Reserve funds in each of BMF5, BMF6 and BMF7 have been fully depleted and amounts recorded on the principal deficiency ledgers continue to build up. With principal deficiencies exceeding the balances of the most junior class C tranches, they now represent 16.8%, 51.6% and 53.1% of the respective class B balances. Conversely, the reserve fund in BMF3 has fluctuated just below its target level and is now at 97.5% of its required amount. While the reserve fund in BMF4 remains limited, it has marginally increased to 11.6% of its target, given the lower amount of losses incurred over the last two periods.

Nonetheless, outstanding properties in possession remain high across the series, ranging between 1.9% (BMF4) and 8.9% (BMF5) of outstanding portfolio balances. Fitch expects a further deterioration in principal deficiencies across the later transactions as sales and subsequent losses continue to erode the available excess spread.

In Fitch's view, the weaker performance of the BMF5, BMF6 and BMF7 has not been offset by a sufficient build-up in credit support. For this reason, the agency has downgraded tranches across BMF5 as well as the senior notes in BMF6 and BMF7. The affirmation of BMF3 and BMF4 reflect the adequate levels of credit enhancement, supported by slightly more robust performance.

Increased Quick Sale Adjustment (QSA) Assumption
Taking into account the absence of up-to-date information regarding the buy-to-let portions remaining in the portfolios and considering the types of property backing the loans, a criteria-driven QSA of up to 29% could have been applied. However, the analysis of loan level possession data suggests that the average implied QSA incurred upon the sale of properties is actually higher at 40%. Consequently, in its analysis, Fitch has increased its QSA assumption with the effect of reducing recovery rates.

Additionally, the possession data provided evidence of higher actual observed recovery rates in BMF3 and BMF4 at about 57% and 77%, respectively, compared with the 30% range for the later three transactions. The agency believes that the high loss severities in BMF5, BMF6 and BMF7 are exacerbated by the higher portions of peak-of-the market originations in these transactions compared with the earlier vintages.

Furthermore, Fitch has factored into its analysis high foreclosures costs such as those incurred when bringing the properties to a more viable state for sale, coupled with relatively large amounts of accrued interest that tend to be due at time of foreclosure. The agency estimates that these costs result in a reduction in recovery rates of between 20% and 25%.

Timely Interest on Class A Detachable Coupon (DAC)
The payments due on each of the class A DAC in BMF4, BMF5, BM6 and BMF7 rank pro rata and pari passu with the standard class A interest payments (excluding step-up amounts). In Fitch's view, the fully-funded and amortising liquidity facility in each transaction is adequate to cover for potential shortfalls in the class A DAC. For this reason, the DACs in the series have been affirmed at 'AAAsf'.

RATING SENSITIVITIES
Lending standards for new SMEs loans have tightened since 2009, reducing the possibility for financially distressed borrowers to refinance at better terms. Easing of these rather conservative lending policies could have a favourable impact on the performance of the collateral. The evolution of the commercial property market and its impact on losses incurred on sold properties is another sensitive aspect that Fitch monitors when reviewing the BMF transactions' ratings.

The rating actions are as follows:
BMF3:
Class M notes (XS0223481838): affirmed at 'AAsf'; Outlook Stable
Class B1 notes (XS0223482307): affirmed at 'BBsf'; Outlook revised to Stable from Negative
Class B2 notes (XS0223482729): affirmed at 'BBsf'; Outlook revised to Stable from Negative
Class C notes (XS0223483024): affirmed at 'Bsf'; Outlook revised to Stable from Negative

BMF4:
Class A (XS0249507947): affirmed at 'AAAsf'; Outlook Stable
Detachable A coupon (XS0250410114): affirmed at 'AAAsf'; Outlook Stable
Class M (XS0249508242): affirmed at 'BBsf'; Outlook revised to Stable from Negative
Class B (XS0249508754): affirmed at 'CCCsf'; Recovery Estimate (RE) revised to 95% from 20%
Class C (XS0249509133): affirmed at 'CCsf'; RE 0%

BMF5:
Class A1 notes (XS0271320060): downgraded to 'A+sf' from 'AAsf'; Outlook Stable
Detachable A1 coupon (XS0271321035): affirmed at 'AAAsf'; Outlook Stable
Class A2 notes (XS0271323163): downgraded to 'A+sf' from 'AAsf'; Outlook Stable
Detachable A2 coupon (XS0271323676): affirmed at 'AAAsf'; Outlook Stable
Class M1 notes (XS0271324724): downgraded to 'CCCsf' from 'Bsf'; RE 85%
Class M2 notes (XS0271324997): downgraded to 'CCCsf' from 'Bsf'; RE 85%
Class B1 notes (XS0271325291): affirmed at 'CCsf'; RE revised to 0% from 10%
Class B2 notes (XS0271325614): affirmed at 'CCsf'; RE 0%
Class C notes (XS0271326000): downgraded to 'Csf' from 'CCsf'; RE 0%

BMF6:
Class A1 notes (XS0299445808): downgraded to 'BBBsf' from 'AAsf'; Outlook Stable
Detachable A1 coupon (XS0299535384): affirmed at 'AAAsf'; Outlook Stable
Class A2 notes (XS0299446103): downgraded to 'BBBsf' from 'AAsf'; Outlook Stable
Detachable A2 coupon (XS0299536515): affirmed at 'AAAsf': Outlook Stable
Class M1 notes (XS0299446442): affirmed at 'CCCsf'; RE revised to 75% from 90%
Class M2 notes (XS0299446798): affirmed at 'CCCsf'; RE revised to75% from 90%
Class B2 notes (XS0299447507): affirmed at 'CCsf'; RE 0%
Class C notes (XS0299447846): affirmed at 'Csf'; RE 0%

BMF7:
Class A1 notes (XS0330211359): downgraded to 'BBBsf' from 'Asf'; Outlook Stable
Detachable A1 coupon (XS0330212597): affirmed at 'AAAsf'; Outlook Stable
Class M1 notes (XS0330220855): affirmed at 'CCCsf'; RE revised to 65% from 70%
Class M2 notes (XS0330222638): affirmed at 'CCCsf'; RE revised to 65% from 70%
Class B1 notes (XS0330228320): affirmed at 'CCsf'; RE 0%
Class C notes (XS0330229138): affirmed at 'Csf'; RE 0%.