Fitch Rates Svensk Hypotekspension Fond 3 AB (publ) 'Asf'/Stable
OREANDA-NEWS. Fitch Ratings has assigned Svensk Hypotekspension Fond 3 AB (publ)'s SEK2,000m class A notes a final rating of 'Asf' with a Stable Outlook.
The transaction is a securitisation of Swedish reverse mortgages.
KEY RATING DRIVERS
Credit Enhancement via Excess Spread
There will be no credit enhancement (CE) at transaction close, but Fitch expects that since all excess spread is retained in the transaction, the portfolio balance will increase relative to the liability balance, providing CE over the lifetime of the transaction.
Loan Redemption Timing
Mortgages will be redeemed when the borrower chooses to prepay the loan, or when the borrower permanently moves into long-term care or dies. The timing of the cash flow hence depends on all these factors and Fitch has used different combinations of stresses to ensure the transaction will not be adversely affected in these scenarios. Because all credit support is provided by excess spread, a high prepayment scenario, combined with a low interest rate scenario, is the most stressful for the structure.
For the first four years the issuer can use the proceeds received to purchase new loans from a predetermined pool of mortgages. Once this pool is depleted, newly originated loans can be purchased. This could lead to a change in the pool composition over time and Fitch has taken this into account in the analysis.
House Price and Rate Movements
All mortgages benefit from a no-negative equity guarantee, which means that neither the borrowers nor their estate is responsible for an amount greater than the sale proceeds of the property. In the event house prices decline substantially, accompanied by high interest rates, the amount due on the loans could be higher than the property value, resulting in a loss.
Fitch has tested the sensitivity of the transaction to hypothetical changes in variables that impact the performance of the assets in a stressed environment.
The combination of a low interest rate scenario, high prepayments and no mortality improvement was found to be the most stressful for the structure. Given the geographical concentration of the assets in the Stockholm area, Fitch has analysed the impact of increase in the market value decline for that region from 26% to 34%, resulting in a model-implied rating of 'A-sf'.
The agency has also assessed the impact of a greater portfolio loss from its base case of the 10 largest loans or 1.8% of the portfolio and found that greater loss to 3.4% would result in a model-implied rating of 'BBBsf'.
Lastly, we tested the sensitivity analysis of our prepayment assumptions. For this sensitivity analysis, the loss of the top 10 loans is reduced by one for each notch below 'Asf'. For example, in a 'BBB+sf' scenario it is assumed eight loans are lost (1.4% of the portfolio) and in the 'BBB-sf' scenario six loans are lost (1.1% of the portfolio). Under this sensitivity test, the model-implied rating of the notes result in a 'BBB+sf' rating with a 15% increase to the prepayments, and a 'BBB-sf' rating with a 30% increase to the prepayments.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch analysed the collateral using transaction specific criteria assumptions which were incorporated in a model provided by the arranger. The working of this model has been checked by Fitch and the output of the model has been deemed appropriate to be used in the rating analysis.
The agency was provided with loan-by-loan information on the portfolio, as of 31 December 2015. All of the data fields included in the pool cut were of good quality.
To gain comfort with the data adequacy, among others, Fitch relied on its own file review undertaken for Svensk Hypotekspension Fond 3 AB (publ) (SHP) at the premises of Bluestep on 27 May 2015. A targeted sample of 30 files was reviewed. The information held on file was confirmed as replicating data provided to Fitch. The files held appropriate underwriting materials, such as ID checks and valuation. As a result, Fitch made no adjustments to its analysis with respect to the data provided.
In addition, the agency reviewed an agreed upon procedures (AUP) report regarding the data provided by SHP, dated November 2015. The AUP included a detailed review of a sample of 461 loan files with a confidence level of 99%. Although the report highlighted a number of administrative errors, these were not deemed to impact the value of the collateral and the enforceability of the mortgages and no adjustment was made as a result.
Furthermore, the agency received loan-by-loan data on 1,577 loans that have been repaid since SHP started originating, this included information on when the loan was originated, the loan amount at time of origination and repayment and the reason for repayment.
Fitch used a third-party model provided by Barclays for use in its analysis.