Fitch Affirms Guildford No.1 plc; Outlook Stable
Class A1 (ISIN XS1169113617): affirmed at 'AAAsf'; Outlook Stable
Class A2 (ISIN XS1169113963): affirmed at 'AAAsf'; Outlook Stable
The transaction is a securitisation of residential owner-occupied (48%) and buy-to-let (BTL; 52%) mortgages originated in England and Wales by Leeds Building Society (LBS; A-/Stable/F1).
KEY RATING DRIVERS
Performance Within Expectations
The arrears trend matches Fitch's expectations from transaction close in February 2015, with the proportion of loans in arrears by at least three months reaching 0.1% by November. The historical data on LBS's mortgage book showed below average performance for pre-crisis mortgages. To reflect this history, Fitch adjusted its assumptions increasing the default probability by 15%. The analysis suggests that the available credit enhancement is sufficient to withstand the increased stresses, which supports the affirmation and Stable Outlook.
Interest Burden Stresses
As of December 2015, 72.8% of the loans in the pool pay a fixed teaser rate. These loans are scheduled to revert to LBS's standard variable rates (SVR) by 2020 if they are not prepaid or a further fixed rate period is not agreed. The current SVR of 5.99% for BTL and 5.69% for owner-occupied mortgages are amongst the highest in the industry for such mortgage products. The prepayment rates so far suggest that many borrowers are currently opting to refinance at the end of their teaser period, but Fitch assumes in its stress scenarios that borrowers will roll on to their respective SVR. These scenarios represent a stress on borrower affordability given the current SVR levels, so Fitch increased its foreclosure frequency assumptions for these loans by a further 10%.
The notes pay a fixed interest rate and the structure is not hedged. Combined with the variable rate paid by the borrowers, this may result in higher excess spread levels compared to those seen in other RMBS, especially in rising interest rate scenarios.
As per its criteria, Fitch analysed the unhedged risk caused by the mismatch between the SVR received on the mortgage portfolio and the fixed rate paid on the notes by assuming a long-term SVR equal to Libor plus 300bp and reducing the available gross excess spread accordingly.
Payment Interruption Risk Mitigated
The reserve fund is available to cover senior fees and interest payments on the class A notes and to clear the class A principal deficiency ledger. It is no longer amortising having reached its floor level at GBP15.6m. In its analysis of potential servicer disruptions, Fitch considered the reserve to be sufficient to cover transaction fees and notes' interest payments for 15 months.
Ineligible Counterparty Exposure
LBS is the collection account bank and guaranteed investment contract provider in this transaction. In line with Fitch's criteria, the bank should hold Issuer Default Ratings of at least 'A'/'F1' in order to be an eligible direct support counterparty to structured finance notes rated 'AAAsf'. Fitch notes that the transaction documentation requires the account bank to be replaced within 30 calendar days after becoming insolvent. Combined with the monthly frequency of note payments, this resulted in an assumed commingling loss equal to two months of interest and principal collections, which Fitch factored into its analysis. Credit enhancement, provided by overcollateralisation and the reserve fund, which is held with Lloyds Banking Group plc (A+/Stable/F1), was deemed sufficient to withstand these losses.
As fixed-rate and tracker loans ultimately revert to LBS's SVR, a sudden sharp increase in the SVR would put a strain on borrowers' affordability. As borrowers refinance out of the portfolios, the notes may become exposed to adverse selection. A subsequent increase in arrears and losses beyond Fitch's stresses may trigger negative rating action on the notes, if not offset by the natural increase in credit enhancement.
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 errors or missing data, particularly with regards to borrowers' income and missing property valuation amounts. These findings were considered in this analysis by assuming a 15% increase in the portfolio base foreclosure frequency.
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of LBS's origination files and found inconsistencies or missing data related to primary and secondary borrowers' income, confirming the AUP findings. These findings were considered in this analysis by assuming a 2.5% haircut to the primary borrowers' income and a 28.5% haircut to the secondary borrowers' income.
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 LBS as at December 2015
- Transaction reporting provided by LBS as at December 2015
The models below were used in the analysis. Click on the link for a description of the model.
EMEA RMBS Surveillance Model
EMEA RMBS Surveillance Model.
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 Guildford No. 1 - Appendix, dated 17 February 2015 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.