(Repeat for additional subscribers)
June 30 (The following statement was released by the rating agency)
Fitch Ratings has assigned Precise Mortgage Funding
2014-1 plc's notes expected ratings, as follows:
Class A: 'AAA(EXP)sf', Outlook Stable
Class B: 'AA(EXP)sf', Outlook Stable
Class C: 'A(EXP)sf', Outlook Stable
Class D: 'BBB(EXP)sf', Outlook Stable
Class Z: not rated
The final ratings are subject to the receipt of final documents conforming to
information already received.
Credit enhancement for the class A notes at 15.0% will be provided by the
subordination of the class B to class Z notes.
The transaction is an RMBS securitisation of near-prime residential mortgages
that were originated by Charter Court Financial Services (CCFS), trading as
Precise Mortgages (Precise or the originator) in the UK (excluding Northern
Ireland). The loans are serviced by Charter Court Financial Services Limited
KEY RATING DRIVERS
Post-Crisis, Near-Prime Mortgages
The loans in the portfolio are post-crisis originations that have been
underwritten using near-prime criteria. Borrowers can be accepted with minor
levels of prior adverse credit history, but the levels of prior adverse in the
pool are small in comparison with the levels seen during the peak of the cycle
Limited Performance History, Stringent Underwriting
Precise began originating loans in 2010 and as such can only provide fairly
limited loan performance data. The data covers 44 months, but there is only 12
months of history where the sample is greater than 1,000 loans. However, Fitch
believes that this is adequately offset by the stringent underwriting criteria
and controls in place. Given this, and that the non-prime default matrix was
used, the agency applied a minor 10% downward adjustment to the base default
Unrated Orignator and Seller
The originator and seller are not rated entities and may have limited resources
available to repurchase any mortgages in the event of a breach of
representations and warranties (RW) given to the issuer. Whilst Fitch considers
this a weakness, there are a number of mitigating factors that make the
likelihood of a RW breach remote.
Hedged Fixed/Floating Risk
As at 20 June 2014 the portfolio was around 61.5% fixed rate loans, with the
rated notes paying three-month Libor plus a margin. A balance-guaranteed swap is
in place, where the issuer pays fixed and receives three-month GBP Libor.
Combined Liquidity, General Reserve
The transaction is supported by a non-amortising rated note reserve fund set at
3.0% of the rated note balances at closing. The reserve fund is initially
isolated to provide only liquidity support at the point of closing, covering
primarily class A liquidity shortfalls and liquidity shortfalls to the other
rated notes. As the senior notes amortise, the liquidity portions reduce and the
remainder becomes available to absorb credit losses. As the reserve fund is not
available to absorb credit losses at the time of closing, the agency has not
included it in credit enhancement calculations.
Material increases in the frequency of defaults and loss severity on defaulted
receivables could produce loss levels higher than Fitch's base case
expectations, which in turn may result in potential negative rating actions on
the notes. Fitch's analysis revealed that a 30% increase in the weighted average
(WA) foreclosure frequency, along with a 30% decrease in the WA recovery rate,
would result in a model-implied downgrade of the class A notes to 'Asf' from
'AAAsf' and a model-implied downgrade of the class B notes to 'BBB+sf' from
More detailed model implied ratings sensitivity can be found in the presale
report which is available at www.fitchratings.com.
Precise provided Fitch with a loan-by-loan data template. All relevant fields
were provided in the data tape, with the exception of prior mortgage arrears,
where Precise was unable to differentiate between loans having had one to six
months of prior arrears and those having had seven to 12 months prior arrears.
Performance data on historical static arrears was provided for all loans
originated by Precise, but the scope of the data was limited by the small
origination volumes (around GBP725m of owner-occupied, buy-to-let and short-term
mortgage loans) and the length of available history (the first Precise
origination was in early 2010).
Due to Precise's limited origination history of Precise, it was only able to
provide loan-level data for a single sold repossession. However, Precise
provided a data tape in Fitch's template for 217 sold repossessions that have
been serviced by Exact, which included the Precise originated loans. Although
the majority of the sample was not for loans originated by Precise, the agency
considers the performance of the servicer to be one of the key components in
determining sold possession performance. Given this, the agency assumed an
average quick sale adjustment of 23%, which although conservative, did give some
credit for the performance of the servicer in selling possessed properties. The
market value decline assumptions were adjusted to reflect these assumptions.
On a site visit to Precise's offices Fitch conducted a file review to check the
quality of Precise' originations on a larger number of loans that would be
reviewed during a review of an established prime lender.
Fitch has also reviewed the results of an agreed-upon procedures (AUP) report
conducted on the portfolio, which checked the accuracy of the data file provided
to Fitch for its rating analysis. The AUP report showed there were no material
errors in the data sample that had been tested.
It is Fitch's opinion that the data available for the rating analysis was of
To analyse the CE 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. The cash flow tests showed that each class
of notes could withstand loan losses at a level corresponding to the related
stress scenario without incurring any principal loss or interest shortfall and
can retire principal by the legal final maturity.
A comparison of the transaction's Representations, Warranties & Enforcement
Mechanisms to those typical for that asset class is available by accessing the
appendix that accompanies the presale report (see "Precise Mortgage Funding
2014-1 Plc - Appendix", at www.fitchratings.com).
Link to Fitch Ratings' Report: Precise Mortgage Funding No. 2014-1 plc