Fitch Affirms 3 Ludgate Funding UK Non-Conforming RMBS Deals
The Ludgate series are securitisations of near prime and non-conforming residential mortgages originated by Freedom Funding Ltd (LG 2006 and 2007) and Wave Lending Limited (LG 2008).
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Sufficient Credit Enhancement (CE)
The CE available to the notes in the series is sufficient to withstand current rating stresses, as reflected in the affirmations. The credit protection is provided by the securitised mortgage portfolios as well as fully funded and non-amortising reserve funds of GBP1.1m and GBP1.7m in LG 2006 and 2007, respectively, and by a non-amortising reserve of GBP7.6m (95% of its target level) in LG 2008.
Stable Asset Performance
Late stage arrears (loans with more than three monthly payments overdue) range from 2.9% of the outstanding portfolio balance (LG 2007) to 4.9% (LG 2008), well below Fitch's UK Non-Conforming RMBS Index, currently at 9.8%. The cumulative balance of mortgage loans where the collateral has been repossessed is reported at between 3.7% of the original portfolio balance (LG 2006) and 10.1% (LG 2008), below the sector average of 10.5%.
During the past 12 months, realised cumulative losses have been stable in LG 2006 and LG 2007, accounting for 1% and 2% of the original pool balance, respectively. Fitch notes that realised losses in LG 2008 remain above the sector average (2.9%) and have increased to 3.7% (0.15pp year-on-year). However, lower period losses, compared with the immediate post-crisis period, have allowed the reserve fund to replenish from GBP2.9m (36.4% of the target) reached in January 2012 to the current amount.
In Fitch's view, the reason for LG 2008's worse performance is the lower credit quality collateral. The weighted average sustainable loan-to-value (106.8%) ratio is higher than in the other two transactions of the series (87.6% and 100.2% for LG 2006 and LG 2007 respectively) and the weighted average seasoning of the portfolio at closing (eight months) suggests that most of the portfolio was originated at the peak of the housing market.
Unhedged Basis Risk
The mismatch between the Bank of England Base Rate (BBR) received on the mortgage portfolio and the three-month Libor paid on the notes is not hedged in LG 2006. Nevertheless, the additional stresses applied by the agency to account for this risk are offset by the sufficient CE available to the rated tranches.
With 100% borrowers on BBR-linked mortgages in all three transactions, an increase in BBR could lead to performance deterioration of the underlying assets given the weaker profile of non-conforming borrowers in these pools. Should defaults and subsequent losses increase beyond Fitch's standard assumptions, this could lead to downgrades.
There is no basis rate swap in Ludgate 2006. If the BBR-LIBOR spread differential increases beyond Fitch's assumptions, there could be a reduction in cash flows, which could contribute to reserve fund draws and reduce CE, leaving the structure exposed to potential downgrades.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed 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 pools and the transactions. 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.
Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions 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.
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 HML as at January 2015 (LG 2008), March 2015 (LG 2007) and June 2015 (LG 2006)
- Transaction reporting provided by US Bank as at June 2015 (LG 2006) and July 2015 (LG 2007 and LG 2008)
The model below was used in the analysis
EMEA RMBS Surveillance Model.
The rating actions are as follows:
Ludgate Funding Plc Series 2006 FF1 (LG 2006):
Class A2a (ISIN XS0274267862): affirmed at 'AAAsf'; Outlook Stable
Class A2b (ISIN XS0274271203): affirmed at 'AAAsf'; Outlook Stable
Class Ba (ISIN XS0274268241): affirmed at 'Asf'; Outlook Stable
Class Bb (ISIN XS0274271898): affirmed at 'Asf'; Outlook Stable
Class C (ISIN XS0274272359): affirmed at 'BBsf'; Outlook Stable
Class D (ISIN XS0274272862): affirmed at 'CCCsf'; Recovery Estimate (RE) 100%
Class E (ISIN XS0274269645): affirmed at 'CCCsf'; RE 95%
Ludgate Funding Plc Series 2007 FF1 (LG 2007):
Class A2a (ISIN XS0304503534): affirmed at 'AAAsf'; Outlook Stable
Class A2b (ISIN XS0304504003): affirmed at 'AAAsf'; Outlook Stable
Class Ma (ISIN XS0304504698): affirmed at 'Asf'; Outlook Stable
Class Mb (ISIN XS0304505232): affirmed at 'Asf'; Outlook Stable
Class Bb (ISIN XS0304508681): affirmed at 'BBBsf'; Outlook Stable
Class Cb (ISIN XS0304509739): affirmed at 'BBsf'; Outlook Stable
Class Da (ISIN XS0304510158): affirmed at 'CCCsf'; RE 100%
Class Db (ISIN XS0304512105): affirmed at 'CCCsf'; RE 100%
Class E (ISIN XS0304515546): affirmed at 'CCsf'; RE 20%
Ludgate Funding Plc Series 2008-W1 (LG 2008)
Class A1 (ISIN XS0353588386): affirmed at 'AAAsf'; Outlook Stable
Class A2b (ISIN XS0353589608): affirmed at 'Asf'; Outlook Stable
Class Bb (ISIN XS0353591505): affirmed at 'BBBsf'; Outlook Stable
Class Cb (ISIN XS0353594434): affirmed at 'BBsf'; Outlook Stable
Class D (ISIN XS0353595597): affirmed at 'CCCsf'; RE 100%
Class E (ISIN XS0353600348): affirmed at 'CCsf'; RE 80%