RPT-Fitch Assigns Eurosail-UK Prime 2007-A Ratings on Restructuring
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June 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Eurosail-UK Prime 2007-A's class A1 notes and assigned ratings to the class A2, M, B and C notes, as follows:
GBP117,477,000 Class A1: upgraded to 'AAAsf' from 'BB+sf'; Outlook Stable
GBP17,825,400 Class A2: assigned 'A+sf'; Outlook Stable
GBP9,144,889 Class M: assigned 'Asf'; Outlook Stable
GBP8,967,461 Class B: assigned 'BBBsf'; Outlook Stable
GBP11,655,614 Class C: assigned 'Csf'; Recovery Estimate of 45%
GBP500,000 Class CR: not rated
The rating actions reflect the second stage restructuring of the transaction on 16 June 2014, following the first stage restructuring that was executed on 6 February 2014 (see 'Fitch Takes Various Rating Actions on Two Eurosail UK RMBS on Restructuring', dated 14 April 2014 at www.fitchratings.com).
KEY RATING DRIVERS
New Capital Structure
The second phase of the transaction restructure involves a restatement of the outstanding class A note balance to GBP117.5m from GBP135.3m and a subsequent renaming of the tranche to class A1. Simultaneously, the existing class M, B, C and D tranches have been cancelled and new notes - the class A2, M, B, C and CR - have been issued. The aggregate current balance of the newly-restated class A1 and newly-issued class A2 equates to the pre-restructured class A note balance.
Similarly, the aggregate balance of the newly-restructured class M, B, C and CR is equivalent to that of the pre-restructured class M, B, C and D notes.
As a result of the restructuring, the available credit enhancement for the rated A1, A2, M, B and C notes presently stands at 29.7%, 18.9%, 13.4%, 8.0% and 0.9%, respectively. The credit support is contributed by a GBP1.5m reserve fund that is permitted to amortise once it reaches 1.5% of the outstanding note balance (currently 0.9%) to a floor amount of GBP0.5m; provided amongst various conditions that the three-months plus arrears (which have been redefined, as part of the first stage restructure, to exclude delinquencies owing to outstanding fees and charges) do not exceed the trigger threshold of 15%. Liquidity Enhancement
From the September 2014 payment date, principal receipts up to a cumulative amount of GBP1.8m will be diverted towards the establishment of a liquidity reserve. This liquidity reserve is available to cover class A1 interest shortfalls and will amortise from September 2015 provided that it is fully funded in the prior period and no drawing is required on the current payment date.
Following a full depletion of the liquidity reserve, the transaction structure also now incorporates the ability for principal to be diverted to cover interest shortfalls on the class A1 in all instances and for the class A2 provided that the principal deficiency does not exceed 75% of the class A2 note balance.
Robust Asset Performance
The underlying portfolio includes a relatively large portion of interest-only mortgages (85%) and loans that were originated at the peak of the market in 2007 (88%). Additionally, buy-to-let mortgages and self-certified borrowers make up 57% and 43% of the portfolio, respectively. Despite these adverse characteristics, the portfolio has continued to perform well, with three-months plus arrears as of March 2014 at less than 0.7% of the outstanding collateral balance. Additionally, the number of properties taken into possession over the life of the transaction has remained limited so that losses incurred to date currently stand at 16bp of the original portfolio balance. Consequently, in its analysis, Fitch has given credit to the asset's robust performance by reducing the underwriting hit applied in the derivation of the portfolio's overall default probability. Nonetheless, the agency remains cautious about the potential implications on affordability when interest rates rise (expected before the end of 2015) considering the relatively low current portfolio weighted-average interest rate of 2.6%.
A modest rise in interest rates could lead to deterioration of the asset portfolio performance. If losses exceed Fitch's expectations, the relatively thin reserve fund could provide insufficient support against depleting excess spread levels and negative rating actions could be taken, particularly on the junior tranches.
Additionally, the relatively weak triggers linked to pro-rata note amortisation, including the 15% threshold for three-months plus in comparison with actual performance, could prevent future upgrades on the mezzanine and junior tranches due to concentration risks.