RPT-Fitch affirms Mercia No.1 plc at 'AAAsf'/Stable
Dec 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the rating of the class A notes of Mercia No.1 plc, as follows:
Class A1 (ISIN XS0864239529): affirmed at 'AAAsf'; Outlook Stable
Class A2 (ISIN XS0864240295): affirmed at 'AAAsf'; Outlook Stable
The transaction comprises a portfolio of buy-to-let prime mortgage loans originated by Godiva Mortgages Limited (Godiva), a wholly owned subsidiary of Coventry Building Society (CBS; A/Stable/F1).
KEY RATING DRIVERS
Strong Performance of Portfolio
The affirmations reflect the underlying portfolio's strong performance. As of end-October 2013, only six loans representing 0.05% of current pool balance were in arrears by more than three months. Given the low level of late-stage arrears and no outstanding properties in possession to date, Fitch expects losses to be limited and fully covered with excess spread, which stands at approximately 1.5% of current pool balance.
Transaction Still in Revolving Period
The revolving period ends in December 2016, which allows Godiva to replenish the pool with further loans, subject to certain conditions. Thus in its analysis Fitch has stressed the portfolio to assume that further loans are sold into the portfolio up to the limits outlined in the asset conditions, and modelled a worst-case portfolio whereby current credit enhancement (CE) for both tranches was shown to be sufficient to sustain the stresses.
CE Likely to Increase Once Revolving Period Ends
At present, Fitch views the CE of the rated tranches as commensurate with the rating. Furthermore, given the fully sequential amortisation of the notes and a non-amortising fully funded reserve fund, the agency expects a further build-up of CE on the notes once the revolving period ends.
A modest rise in interest rates is expected to have a negative impact on borrower affordability and potentially lead to a rise in arrears and subsequent default levels.
Material increases in the default frequency and loss severity on defaulted loans could produce loss levels higher than Fitch's base case expectations, which may in turn result in negative rating actions on the notes.
Additionally, a decline in future house prices is likely to reduce recovery rates.
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