Fitch Affirms Tenterden Funding Plc; Outlook Stable
The transaction is a securitisation of prime residential mortgages, originated by AIB Group (UK) Plc (BB+/Positive/B).
KEY RATING DRIVERS
Improving Asset Performance
Arrears ratios (3m+ arrears at 1.3%) have declined from 1.7% last year and moved towards the level seen in the broader UK Prime market (0.8%). Prepayment rates have stabilised at around 9.5% over the past year, marginally lower than the broader market level of 12.5%. Repossessions (cumulative 0.52%) are significantly better than the Prime index level of 0.94%. However, the weighted average loss severity is 37% to date, higher than the market level of 20%-21%. The servicer's strategy on arrears is to focus on returning loans to performing status.
Underwriting and Repossessions Analysis
We applied an underwriting hit and Quick Sale Adjustment (QSA) in line with the originator review and analysis of repossessions data (comprising 205 loans since 2005) conducted at transaction close. We increased the QSA to 25% for non-BTL loans (from a typical level of 17%).
Strong Credit Enhancement
Credit enhancement for the senior tranche is currently 60.8%, up from 51.5% 12 months ago. This makes the class A notes highly resilient to a number of stresses, especially as sequential amortisation applies.
Unhedged Basis Risk
Nearly all loans (99%) track either the BBR or SVR. The basis differential between the loans and the notes (3m LIBOR) is unhedged, which has the potential to squeeze excess spread and erode the credit enhancement available to the notes. We stressed the excess spread accordingly in the analysis. Given the level of credit enhancement, this had no impact on the ratings outcome.
28.1% of the portfolio is concentrated in Greater London and 22.9% in Northern Ireland. Strong geographical concentration in these areas exposes a large portion of the portfolio to region-specific shocks. In line with the agency's criteria, Fitch applied a 15% hit to the foreclosure frequency for the portion of the pool in Greater London and Northern Ireland. This had no impact on the ratings outcome.
As per the amendment in November 2015, the reserve and liquidity funds were moved to Elavon (AA/Stable/F1+) from Barclays (A/Stable/F1). Furthermore, the trigger ratings for Barclays (as account bank) were changed to 'BBB+'/'F2' from 'A'/'F1'. Given the reduction in ratings trigger for the account bank, we factored commingling risk into the analysis and did not deem it to have a material impact on the ratings outcome.
Adverse macroeconomic conditions may affect asset performance with increasing delinquencies and defaults, leading to negative rating action. The transaction may also be specifically exposed to regional performance, given its high concentration in Greater London and N. Ireland.
Unhedged basis risk may compress excess spread, thereby reducing the credit enhancement available to the notes.
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.
Prior to the transaction closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated higher than typical errors. These findings were incorporated into the underwriting hit.
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of AIB's origination files and found inconsistencies or missing data related to the valuation information. These findings were considered in the analysis by applying Hometrack AVM valuations where available.
Overall, and together with the assumptions referred to above, 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 AIB as at 30 November 2015
- Transaction reporting provided by Deutsche Bank and AIB as at 30 November 2015
- Discussions/updates from servicer dated 08 February 2016
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 Tenterden Funding Plc New Issue - Appendix, dated 10 July 2012 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.