Fitch Affirms UNITE (USAF) II at 'Asf'/Stable
GBP380m initial notes due June 2028 (ISIN XS0942125963): affirmed at 'Asf'; Outlook Stable
GBP185m first new notes due June 2030 (ISIN XS0991898197): affirmed at 'Asf'; Outlook Stable
The transaction is a securitisation arranged for the refinancing of existing indebtedness of the UK Student Accommodation Fund (USAF), which is the sponsor of the SPV borrower, USAF Finance II Limited.
KEY RATING DRIVERS
The affirmation reflects the stable performance of the transaction and the student housing sector in general. The reported loan-to-value ratio (LTV) stands at 41%, with a projected interest cover ratio (ICR) of 3.16x - both well within covenanted levels of 80% and 1.5x respectively.
The firming up of yields, combined with rental growth of 4.2% (calculated on a four-quarter rolling basis, to June 2015), has resulted in the aggregate property value increasing 11% to GBP1,350m as of end-June 2015. Occupancy for the 2014/15 academic year remains high at 98% in line with 2013/14. The portfolio's strong performance is based on the granularity and stability of income stemming from assets in sustained demand.
The terms of the financing allow the borrower a considerable flexibility to adjust leverage by issuing more pari passu debt and/or releasing collateral without debt repayment. Both these are subject to LTV not exceeding 55% and ICR being at least 2x. LTV is recalculated on a quarterly basis against updated external desktop valuations, while ICR is both forward- and backward-looking.
Fitch considers this regime capable of picking up early signs of value deterioration. Nevertheless, the borrower could take advantage of a hypothetical buoyant market in which to increase leverage, and in its analysis Fitch has adjusted leverage so that the LTV and ICR tests break even when risk appetite and operating conditions are both strong. This approach exposes the notes to a full peak-to-trough stress, and thereby builds into the ratings appropriate headroom.
The collateral pool comprises 53 student housing assets which provide almost 19,000 beds in total. The portfolio is diverse, spread over 19 cities and towns, with the top five geographical concentrations representing 57% by market value and the largest single asset making up just 6%. Two-thirds of rental income is derived from direct lets to students with the remainder from both long- and short-term nomination agreements with universities.
As Fitch's rating analysis anticipates a significant increase in leverage, there is headroom to the rating. With this as a possible future course of borrower action, there is less scope for positive rating action. The appropriateness of headroom is a function of volatility in yields and rents over time. If yields or rents are forced sharply away from long-term averages and trends, this could warrant negative rating action. This could be caused by changes in the student accommodation market, such as a reduction in student numbers from overseas or an increase in the supply of alternative student accommodation.
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 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.
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 Unite Students as at 30 June 2015
-Transaction reporting provided by Unite Students as at 30 June 2015
REPRESENTATIONS AND WARRANTIES
A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for the asset class is available by accessing the appendix that accompanies the initial new issue report (see Unite (USAF) II PLC - Appendix, dated 19 November 2013 at www.fitchratings.com). In addition refer to the special report "Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions" dated 12 June 2015 available on the Fitch website.