Fitch Assigns Permanent 2015-1 Ratings
OREANDA-NEWS. Fitch Ratings has assigned Permanent Master Issuer plc's (the master issuer) Permanent 2015-1 notes ratings, as follows:
Class 1A1 floating-rate note: 'AAAsf', Stable Outlook
Class 1A2 floating-rate note: 'AAAsf', Stable Outlook
Class 1A3 floating-rate note: 'AAAsf', Stable Outlook
Class 1A4 floating-rate note: 'AAAsf', Stable Outlook
Class 1B floating-rate note: 'AAsf', Stable Outlook
Class 1M floating-rate note: 'Asf', Stable Outlook
Class 1C floating-rate note: 'BBBsf', Stable Outlook
The master trust property consists of mortgage loans originated in the UK by Bank of Scotland Plc (BOS, A+/Stable/F1) under the Halifax brand, and prior to the reorganisation of HBOS plc in September 2007, mortgage loans originated by Halifax plc (Halifax).
The trust property was approximately GBP17bn at closing. The ratings are based on Fitch's assessment of the underlying collateral, available credit enhancement, the origination and underwriting procedures used by the originator, the servicing capabilities of BOS and the transaction's financial and legal structure.
KEY RATING DRIVERS
Reduced Credit Enhancement
The credit enhancement (CE) in the programme has declined following the 2015-1 issuance. The CE available to the class A notes was reduced to 20%, from 36.1% as at the August 2015 investor report but increased from 16.9% at the last issuance (April 2013). The reduction in CE from August 2015 is mainly due to a reduction of the Z-loan to GBP160m from GBP2,548m and a reduction in the reserve fund to GBP216m from GBP405m. Fitch has factored the updated CE into its analysis and concluded that the ratings of the existing notes issued under Permanent are unaffected.
Reduced Minimum Seller Share
The minimum seller share (MSS) has decreased after the 2015-1 issuance. The component of the MSS sized to cover deposit set-off risk is currently 2% based on total savings balances. Other components covered include flexible draw capacity and certain repurchase obligations. Lloyds provided data that showed the balance of deposits are above the GBP75,000 limit of the Financial Services Compensation Scheme. Fitch assessed the MSS and concluded that the reduction would not impact the ratings assigned to the notes issued under the programme.
Peak of Market Originations
Around 40% of the loans were originated during the peak of the market (2005-2007). Data provided for such loans shows they generally perform worse than the market average. To account for this, Fitch increased the base foreclosure frequencies by 5%.
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels larger than Fitch's base case expectations, which in turn may result in negative rating actions on the notes. Fitch's analysis revealed that a 30% increase in the WA foreclosure frequency along with a 30% decrease in the WA recovery rate would result in no changes to the ratings of the notes.
At closing, Fitch also affirmed the ratings of the outstanding notes from the prior issuance under the Permanent Master Issuer, as detailed below:
Permanent Master Issuer Plc Issue 2010-1
Class 3A: affirmed at 'AAAsf'; Outlook Stable
Class 4A: affirmed at 'AAAsf'; Outlook Stable
Permanent Master Issuer Plc Issue 2010-2
Class A3: affirmed at 'AAAsf'; Outlook Stable
Class A4: affirmed at 'AAAsf'; Outlook Stable
Class A5: affirmed at 'AAAsf'; Outlook Stable
Series 3 Class A swap: affirmed at 'AAAsf'; Outlook Stable
Permanent Master Issuer Plc Issue 2011-1
Class 2A1: affirmed at 'AAAsf'; Outlook Stable
Class 2A2: affirmed at 'AAAsf'; Outlook Stable
Class 2A3: affirmed at 'AAAsf'; Outlook Stable
Permanent Master Issuer Plc Issue 2011-2
Class 2A: affirmed at 'AAAsf'; Outlook Stable
Class 3A: affirmed at 'AAAsf'; Outlook Stable
Permanent Master Issuer Plc Issue 2013-1
Class A: affirmed at 'AAAsf'; Outlook Stable
Class M: affirmed at 'Asf'; Outlook Stable
The assigned ratings are based on the assumptions in the existing criteria - Criteria Addendum: UK, dated 11 June 2015. If the proposed changes in Fitch's exposure draft report - Exposure Draft - Criteria Addendum: UK, dated 22 September 2015 are to be adopted the assigned ratings would be unchanged. As the transaction has the ability to change structure and credit enhancement in the future the notes do not benefit from any model-implied upgrades due to changes in the criteria.
More detailed model implied ratings sensitivity can be found in the new issue report, which is available at www.fitchratings.com.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
BoS provided Fitch with a loan-by-loan data template. BoS was not able to provide data on borrower employment type and such loans are flagged as 'unknown' in the pool tape. Further, data on adverse credit (CCJs/BO/IVA) was not captured by the system pre-July 2007 and hence around 30% of the pool are missing this data. Due to the lack of data for borrower employment type, Fitch has increased the foreclosure frequency for a certain proportion of loans.
It is Fitch's opinion that the data available for the rating analysis is of sound quality.
To analyse CE, Fitch evaluated the collateral using its default model ResiEMEA. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. The cash flow tests showed that each class of notes could withstand loan losses at a level corresponding to the related stress scenario without incurring any principal loss or interest shortfall and can retire principal by the legal final maturity.
During a visit to Lloyds' BoS offices in August 2015, Fitch conducted a file review on a small sample of loans. The agency found that the information in the files showed the underwriting practices had been appropriately followed and in general the quality of the records kept was adequate.
Fitch reviewed the results of an agreed-upon procedures report and no material issues were found.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by BoS as at 30 June 2015.
-Transaction reporting provided by BoS as at 16 October 2015.
-Loan enforcement details provided by BoS as at 16 October 2015.
-Loan performance data provided by BoS as at 31 August 2015.