Fitch Assigns Darrowby No. 4 plc Final Rating
OREANDA-NEWS. Fitch Ratings has assigned Darrowby No. 4 plc's notes a final rating, as follows:
Class A: 'AAAsf', Outlook Stable
Class B: not rated
The transaction is a securitisation of UK prime residential owner-occupied mortgages, originated by Skipton Building Society (SBS; BBB+/Stable/F2).
KEY RATING DRIVERS
The pool is a 26-month seasoned portfolio consisting of fully verified loans with a weighted average (WA) original loan-to-value (LTV) ratio of 73.3%, a lower-than-average WA indexed current LTV of 60.3% and WA debt-to-income ratio of 40.2%. Further advances are allowed up to a maximum of 12.5% of the portfolio, with a maximum permitted WA original LTV of 80%. The portfolio has been stressed up to this limit for modelling purposes.
Quick Sale Adjustment (QSA)
Fitch's analysis of the repossession data received from Skipton revealed that the average discount on sale prices for repossessed properties was 20% for houses and 27% for flats. Fitch has adjusted its market value decline (MVD) assumptions upwards to account for the higher observed QSA for properties repossessed by Skipton.
Liquidity for Interest Payments
An amortising reserve fund (initially 2.5% of the notes' balance at closing) is available to the issuer. This reserve fund provides credit enhancement and liquidity to the rated notes. In the event of a shortfall in revenue receipts to meet interest payments on the rated notes, the reserve fund and principal receipts can be used to meet the interest liability on the class A notes. The reserve fund has a floor at 2% of the initial notes balance.
Interest Rate Swap
To hedge the interest rate risk between the fixed-rate mortgages (75.5% of the pool) and the notes, which are linked to three-month (3M) Libor, the issuer has entered into a swap with HSBC Bank plc. The maximum notional on the swap is GBP200m greater than the scheduled fixed-rate mortgage balance to mitigate the risk of the balance increasing due to further advances and product switches. Fitch has incorporated into its analysis the seniority of the swap subordinated amount to the unrated class B principal deficiency ledger (PDL).
Subject to certain conditions, the issuer is permitted to enter into reverse repo transactions with eligible counterparties as a form of authorised investment. Such reverse repos can be with counterparties with lower ratings than would usually be considered eligible in relation to Fitch's counterparty criteria and as a result an element of market risk could arise on counterparty default. Fitch has reviewed the proposed language and determined that both the operational and market risk have mitigants that sufficiently address the risk.
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels greater 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 WA foreclosure frequency, along with a 30% decrease in the WA recovery rate, would imply a downgrade of the class A notes to 'AA+sf' from 'AAAsf'.
More detailed model implied ratings sensitivity can be found in the new issue report which is available at www.fitchratings.com.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
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.
During the previous 12 months, Fitch conducted a site visit to SBS's offices and a file review to check the quality of SBS's originations. During the site visit, Fitch conducted a review of a small targeted sample of the originator'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 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.
To analyse the credit enhancement levels, Fitch evaluated the collateral using its default model ResiEMEA. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. Fitch rates the notes to the terms and conditions of the notes it always rates notes 'AA' or above for timely interest. Fitch's rating scenarios indicate that the class A notes receive interest payments in our modelling scenarios without incurring any interest shortfall at any time.
SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by SBS as at 31 January 2016
- Loan enforcement details provided by SBS as at 15 September 2015
- Loan performance data provided by SBS as at 29 September 2015