Fitch Affirms Gemgarto 2015-1; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Gemgarto 2015-1 and removed the class B to X1 notes from Rating Watch Positive. A full list of rating actions is at the end of this rating action commentary.
The transaction is a securitisation of near-prime mortgages, originated by Kensington Mortgage Company (KMC; RSS2+) and serviced by Homeloan Management Ltd (HML; RPS1-/RSS2+).
The affirmation and removal from RWP follow a review of the structure and reflect current credit enhancement (CE) and performance to date.
KEY RATING DRIVERS
KMC extends loans to borrowers with one-off adverse credit events and has underwriting criteria that are relatively stricter than the broader non-conforming market. Therefore, while the non-conforming criteria applies, Fitch has taken into account the originator's relatively tighter underwriting standards by applying a beneficial underwriting adjustment to the foreclosure frequency.
Payment Interruption Risk Mitigated
Fitch has tested the ability of the structure to withstand the loss of the servicer. The agency acknowledges that Acenden (RPS2+) will likely take over servicing the loans from HML in the next 12 months. The strong business relationship between Acenden and KMC, which are owned by the same partnership, greatly mitigates the risk of an interruption of notes' payments as a back-up servicer is already in place for all practical purposes. Nevertheless, the agency tested the support offered by the liquidity reserve over two interest payment dates. The liquidity available to the structure is deemed sufficient to guarantee timely payments of senior expenses and interest due on the class A and B notes, under a stressed interest rate environment.
The collection account bank, Barclays Bank plc (A/Stable/F1), must be replaced if its rating falls below 'BBB+'/'F2'. According to Fitch's criteria, the replacement language at 'BBB+'/'F2', combined with a concentration of borrowers' payments at the start of the month, results in a material risk of commingling for structured finance notes rated above the 'Asf' category. The agency assumed a commingling loss equal to one month of interest and principal collections and reduced the credit enhancement (CE) available to the class A and B notes. The structure was resilient to the reduction in CE and the stress did not have a material impact on the rating outcome.
In sizing the commingling risk, we assumed a prepayment rate at a more conservative level of 20% (in line with UK transactions originated since 2012), rather than the high level (between 30-40%) currently observed in the transaction as borrowers refinance at the end of their fixed rate period.
Increasing CE on Mezzanine Tranches
The portion of the reserve fund providing credit support is currently minimal as the majority of the fund is dedicated towards liquidity coverage for the class A and B notes. However, as the class A and B notes amortise, part of the excess liquidity reserve will be transferred to the non-liquidity reserve fund that provides protection against credit losses. Consequently, we expect the mezzanine tranche's CE to increase from its current low level as the senior notes amortise.
Excess Spread and Basis Risk
Payments on the class X1 notes are made solely through excess spread receipts. There is basis risk arising from the delay between LIBOR reset on the loans and on the notes. The excess spread has been adjusted to reflect this risk and was found to have no impact on the ratings.
Asset performance, particularly with a large portion of loans reverting to floating rate, is exposed to interest rate risk (given that rates are currently at historical lows).
Adverse macroeconomic conditions may have a negative impact on asset performance and lead to negative rating action.
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 no adverse findings material to the rating analysis.
Prior to the transactions closing, Fitch conducted a review of a small targeted sample of Kensington'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.