OREANDA-NEWS. Fitch Ratings has assigned the warehouse loan facilities under the Neptune Rated Warehouse Limited (the warehouse) transaction final ratings, as follows:

GBP3,683,307,958.23 facility A: 'AAAsf', Outlook Stable
GBP368,330,795.82 facility B: 'AAsf', Outlook Stable
GBP294,664,636.66 facility C: 'Asf', Outlook Stable
GBP171,887,704.72 facility D: 'BBB+sf', Outlook Stable
GBP171,886,996.47 mezzanine facility: 'BBsf', Outlook Stable
GBP220,978,950.25 facility F: not rated
GBP73,665,855.63 subordinated note: not rated

This transaction is a non-revolving warehouse facility used by Cerberus European Residential Holdings B.V. (CERH) to finance the purchase of a residential mortgage portfolio from NRAM plc. The warehouse loan facilities are provided by a consortium of four lenders to Neptune Rated Warehouse Limited, an SPV incorporated in England and Wales.

The warehouse is backed by a GBP4.9bn portfolio of seasoned prime UK owner-occupied mortgage loans, predominantly originated between 2005 and 2007 by Northern Rock (NR). Following the nationalisation in 2008, NR was restructured into two separate entities in January 2010: Northern Rock plc and Northern Rock (Asset Management) plc (legally known as NRAM since May 2014) and subsequently transferred to the state holding company UK Asset Resolution Limited (UKAR).

The purchased assets were previously securitised in the Granite Master Trust, which will be collapsed for the purpose of this transaction. NRAM sold the beneficial interest of the GBP11.9bn Granite mortgage portfolio to CERH, which subsequently on-sold the beneficial interest of a randomly selected subset of GBP4.9 mortgages into the warehouse. UKAR is also in the process of selling the share in the NRAM entity to CERH which is expected to be completed by 1H16.

Credit enhancement (CE) on facility A at 25.3% is provided by the subordination of the rated B to mezzanine facilities and the unrated F facility. The transaction also contains a non-amortising reserve fund sized at 1.5% of the initial facility balance, which is fully funded at close through the proceeds of the subordinated note. Of this, 1.5% of facilities A and B outstanding balance consist of the liquidity reserve portion whereby the remaining portion can be used to cure credit losses. Once facility D has been paid-off, the reserve fund is released as available principal.

Facilities A and B are rated for timely payment of interest and principal, while facilities C to mezzanine are rated for ultimate interest and principal payments in accordance with the transaction documentation. The transaction also contains additional subordinated non-interest amounts owed by the warehouse to the loan providers, which are not addressed in Fitch's ratings.

KEY RATING DRIVERS
Seasoned Portfolio
The majority of the loans are 'peak year' (2005-2007) vintages which have a weighted average (WA) seasoning of 117 months, an indexed WA current loan-to-value ratio (CLTV) of 78.2% and a WA debt-to-income ratio (DTI) of 40.4%. Of the portfolio 2.8% is more than three months in arrears and 17.5% of the borrowers are self-employed. Fitch has stressed its default probabilities by 10% to account for the weaker performance of the Granite loans compared with many prime UK pass-through transactions rated by the agency.
Warehouse Securitisation of Purchased Portfolio
CERH acquired the Granite mortgages from NRAM and subsequently sold the beneficial interest of GBP4.9bn loans into the warehouse on the closing date. Legal title remains with NRAM following close and the share sale of NRAM to CERH is expected to be completed by 1H16. Fitch has reviewed the portfolio acquisition history and deems the risk of assets being clawed back as remote.

Permitted Disposals Feature
A key feature of this transaction is CERH's ability to dispose of the mortgage loans with a view to refinancing some or all of the amounts owed by it to the lenders. The assets will be selected on a random basis and such sales are subject to certain disposal conditions such as, among others, no recordings on the principal deficiency ledgers, a minimum par sale price covering accrued interest, and one and three month arrears not exceeding twice their respective levels at close.

Limited Capacity for Repurchase
CERH is not rated by Fitch and may have limited resources to repurchase any mortgages if there is a breach of the representations and warranties given to the warehouse. Fitch analysed historical losses and warranty breaches on the Granite assets and has made an adjustment over the life of the transaction.

Servicer Sale
Servicing is currently carried out by Bradford and Bingley plc (B&B), which was placed into public ownership along with its entire mortgage business with UKAR in November 2010. B&B's servicing platform is currently undergoing a sale process, which is expected to complete in 2016. Fitch has assessed the likely impact of the integration of the successor entity ahead of the sale process and believes the proposed arrangement will help mitigate payment interruption risk. However, due to the weaker performance, large portfolio size, and higher -than-average interim servicing fee, Fitch has applied an increased senior fee assumption of 0.35% from 0.25%.

More information on Fitch's rating analysis is below.

RATING SENSITIVITIES
The ratings and the related analysis performed are based on the assumptions in the existing criteria - Criteria Addendum: UK, dated 11 June 2015. 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 weighted average (WA) foreclosure frequency, along with a 30% decrease in the WA recovery rate, would result in a model-implied downgrade on the rated facilities as follows: facility A to 'A+sf', facility B to 'BBB+sf', facility C to 'BBB-sf', facility D to 'BBsf' and the mezzanine facility to 'Bsf'.

Fitch's exposure draft report - Exposure Draft - Criteria Addendum: UK, dated 22 September 2015 has not been adopted (and the related model has not been through the full validation process), and these were not used in the rating analysis. Fitch has performed a sensitivity analysis which shows that if the criteria in that Exposure Draft (and the related model) were used, the assigned final ratings would remain unchanged from the existing criteria.

More detail on key rating drivers and model implied rating sensitivities can be found in the new issue report available at www.fitchratings.com.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
For its rating analysis, NRAM provided Fitch with a loan-by-loan data template with all of the key data fields completed, other than prior mortgage arrears. The agency typically calculates the sustainable loan-to-value (LTV) using the current balance, and the valuation and corresponding date of the valuation provided (which is indexed against the Halifax house price index). The valuation corresponding to the loan amount at the time of the latest advance for the pool was not provided. However, the original valuations and updated valuations carried out in 2008 by NRAM prior to the loans being placed under UKAR's supervision were provided. Therefore Fitch was not able to calculate an accurate WA CLTV on the loans since the current balance in most instances can only be weighed against the original valuation, which artificially inflates the WA CLTV on the pool.

Fitch conducted an enhanced file review on a targeted sample of NR'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.

Fitch reviewed the draft results of a third party assessment conducted on the asset portfolio information, which indicated errors or missing data mainly related to property type, amount advanced, valuation date and application forms. The majority of findings were reported when the loans migrated to NRAM post NR's insolvency. Fitch has applied a 5% lender adjustment to account for these findings.

To determine the quick sale assumption (QSA), Fitch analysed approximately 11,037 sold repossessions provided by NRAM. The observed QSA was slightly above Fitch's standard assumptions and therefore the QSA assumptions were increased to 17.2% from 17% for owner-occupied houses and to 25.9% from 25% for owner-occupied flats.

Overall and together with the assumptions referred to above, Fitch's assessment of the asset pool 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 NRAM based on a 31 October 2015 cut-off date
- Transaction documentation provided by NRAM as at end-November 2015
- Tax and legal opinions on the portfolio sale as at end-November 2015
- Loan performance data provided by NRAM as at end-September 2015
- Investor reports for the existing Granite Master Trust
- Report on the portfolio of 11,037 sold properties between 2011 and 2015
- Halifax house price index