Fitch Affirms Three UK RMBS Series
OREANDA-NEWS. Fitch Ratings has affirmed Precise Mortgage Funding No 1 Plc, Precise Mortgage Funding 2014-2 Plc and Mercia No 1 Plc. A full list of rating actions is at the end of this rating action commentary.
The Precise transactions comprise UK non-conforming residential mortgages originated by Charter Court Financial Services (CCFS trading as Exact Mortgage Experts; RPS2-/RSS2); while the Mercia deal is collateralised by a pool of buy-to-let (BTL) prime residential mortgage loans originated by Godiva Mortgages Limited (Godiva), a wholly owned subsidiary of Coventry Building Society (CBS; A/Stable/F1).
KEY RATING DRIVERS
Worst-case Scenario Due to Revolving Nature
The Mercia transaction is still in its revolving period, which is set to end in December 2016. Until then, Godiva will replenish the pool with further loans, subject to certain conditions being met. In its analysis, Fitch modelled a worst-case portfolio by assuming that the additional assets added to the portfolio result in the asset conditions being reached. The credit enhancement (CE) for both tranches was shown to be sufficient to sustain these stresses as reflected by their affirmation.
Solid Asset Performance
The transactions have reported solid asset performance since closing. As of September 2015, the level of arrears by more than three months in all cases remains below 10 bps of the current collateral balance. Mercia No 1 reports one property in possession and none of the deals have reported losses to date. The solid performance seen to date is reflected by the affirmations.
Combined Liquidity and Reserve Fund
The Precise transactions are supported by non-amortising reserve funds (RNRF) set at 3.3% and 3.0% of the rated note balance at close for Precise No 1 and Precise 2014-2, respectively. The RNRFs are divided into two parts that can vary in proportion at any point in time. One is only for liquidity and the other covers both losses and liquidity shortfalls. At transaction close, the RNRFs only provided liquidity, but as the senior notes amortise, the liquidity portions reduce and the reminder becomes available to absorb credit losses.
Unhedged Interest Rate Risk
Both Precise deals comprise loans linked to floating rate loans and fixed rate loans, most of which are expected to revert to floating within the next 12 months. Although the fixed rate loans are hedged, the mismatch between the interest received on the bank base rate loans (11.4% of the current pool in Precise No 1) and the Libor-paying notes is left unhedged when fixed rate loans revert to floating (in contrast all loans in Precise 2014-2 revert to Libor). In its analysis, Fitch stressed the excess spread on Precise No 1 to account for this risk and found the CE available to the rated notes sufficient to withstand such stresses.
As the majority of the underlying portfolios is linked to floating rates and the fixed rate loans will revert to floating an increase in interest rates could lead to performance deterioration of the underlying assets and consequently downgrades of the notes if defaults and associated losses exceed those of Fitch's stresses.
Fitch published an exposure draft for UK residential mortgage assumptions on 22 September 2015 (https://www.fitchratings.com/creditdesk/reports/report_frame_render.cfm?rpt_id=871376).
The proposed criteria, if adopted, will lead to smaller loss expectations for all types of mortgage portfolios. As a result, Fitch expects all outstanding UK RMBS and CVB ratings to either be affirmed or upgraded. If the current criteria are updated after considering market feedback, Fitch will review all existing UK RMBS ratings within six months of the new criteria publication.
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.
Prior to the transactions closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.
Prior to the transactions closing, Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
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:
-Coventry Building Society for Mercia No 1 with a cut-off date of 31 August 2015.
-US Bank for Precise No 1 and Precise 2014-2 with a cut-off date of 30 September 2015.
Transaction reporting provided by
- Coventry Building Society for Mercia No 1 since close and until August 2015
- US Bank since close and until August 2015 for Precise No 1 and September 2015 for Precise 2014-2
-Fitch analysts held an update call with representatives of Charter Court Financial Services Ltd to discuss origination and servicing practices in April 2015.
-Fitch analysts held an update call with representatives of Coventry Building Society to discuss origination and servicing practices in May 2015.
The rating actions are as follows:
Mercia No 1 Plc
Class A1 (ISIN XS0864239529): affirmed at 'AAAsf'; Outlook Stable
Class A2 (ISIN XS0864240295): affirmed at 'AAAsf'; Outlook Stable
Precise Mortgage Funding No 1 Plc
Class A (ISIN XS0992781962): affirmed at 'AAAsf', Outlook Stable
Class B (ISIN XS0992793462): affirmed at 'AAsf', Outlook Stable
Class C (ISIN XS0992793629): affirmed at 'Asf', Outlook Stable
Class D (ISIN XS0992793892): affirmed at 'BBBsf', Outlook Stable
Class E (ISIN XS0992795160): affirmed at 'BBsf', Outlook Stable
Precise Mortgage Funding 2014-2 Plc
Class A (ISIN XS1129892185): affirmed at 'AAAsf', Outlook Stable
Class B (ISIN XS1129895956): affirmed at 'AAsf', Outlook Stable
Class C (ISIN XS1129898893): affirmed at 'Asf', Outlook Stable
Class D (ISIN XS1129914765): affirmed at 'BBBsf', Outlook Stable