Oct 3 - Fitch Ratings has affirmed Equity Release Funding No. 4 Plc (ERF4)
and Equity Release Funding No. 5 Plc (ERF5), two UK Prime RMBS transactions
which comprise reverse mortgages originated by Aviva Plc (not rated). A full
list of rating actions is at the end of this comment.
Given the nature of equity release mortgages, payments are only made by
borrowers when they exit the pool, whether as a result of death, move to
long-term care or voluntary repayment. This subsequently means that the payment
of interest and principal on the notes is dependent on the incident rates of
these factors. In its analysis, Fitch has thus considered house price movements
since transaction close and interest rate stresses, as well as relevant pool
characteristics which affect borrower exit rates, including borrower age and
loan-to-value ratios. The affirmation reflects that the results of the analysis
remain in line with the agency's expectations.
Both transactions feature credit facilities that are aimed at providing funds to
meet senior interest and expenses as and when required, particularly in the
early stages of the transactions when cash inflows are expected to be relatively
low. The credit facility of ERF4 amortises on a fixed schedule and as of July
2012, had utilised GBP160.1m of its maximum balance of GBP206.3m. Additionally,
in ERF4, the principal redemption of the class A1 notes ranks senior to
principal repayment of the credit facility such that this tranche has been able
to amortise since transaction close, and currently stands at 19.8% of its
In ERF5, the credit facility amortises based on a contraction factor and is
drawn only when required. As of July 2012 ERF5 has drawn GBP35.5m of its maximum
balance of GBP188.6m. Principal redemption on all ERF5 notes ranks junior to the
principal repayment of the credit facility such that principal amortisation has
not yet been able to occur. However, the deferral of interest on the class B and
C is expected to begin in October 2012, given the likely breach of the current
annualised House Prince Index trigger of 2% (currently 0.6% based on Nationwide
and -0.28% based on Halifax). Fitch has considered this scenario and expects
that all interest payments will ultimately be made.
Furthermore, for ERF4, GBP0.3m worth of excess spread is trapped on each payment
date falling between October 2011 and July 2029 in order to facilitate the
establishment of a principal liquidity reserve up to a required amount of
GBP23m. Amounts standing to this reserve are used to meet the scheduled class A
principal payments commencing in October 2030. At present, the reserve stands at
GBP1.3m. ERF5 is also required to set up such a liquidity reserve but at a later
stage, being the earlier of either July 2022 or the class A balance amortising
to less than half of its initial balance.
Both ERF4 and ERF5 experienced a step-up on their respective note margins, in
July 2011 and July 2012, respectively. Fitch notes that the deferral of interest
on the subordinated tranches as well as the deferral of step-up interest does
not constitute an event of default.
The rating actions are as follows:
Equity Release Funding No. 4 Plc (ERF4):
Class A1 (ISIN XS0197423188): affirmed at 'AAAsf'; Outlook Stable
Class A2 (ISIN XS0197423345): affirmed at 'AAsf'; Outlook Stable
Class B (ISIN XS0197423774): affirmed at 'AAsf'; Outlook Stable
Class C (ISIN XS0197424236): affirmed at 'BBBsf'; Outlook Stable
Class D (ISIN XS0197424400): affirmed at 'BBBsf'; Outlook Stable
Equity Release Funding No. 5 Plc (ERF5):
Class A (ISIN XS0225883387): affirmed at 'AAAsf'; Outlook Stable
Class B (ISIN XS0225883973): affirmed at 'Asf'; Outlook Stable
Class C (ISIN XS0225884278): affirmed at 'BBBsf'; Outlook Stable
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
The sources of information used to assess these ratings, in addition to those
mentioned in the applicable criteria, were investor reports and loan tapes.
Applicable criteria, 'Counterparty Criteria for Structured Finance
Transactions', dated 30 May 2012, 'EMEA Residential Mortgage Loss Criteria'
dated 7 June 2012 and 'EMEA Criteria Addendum - United Kingdom - Mortgage Loss
and Cash Flow Assumptions', dated 9 August 2012, 'Global Structured Finance
Rating Criteria' dated 6 June 2012, are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Counterparty Criteria for Structured Finance Transactions
EMEA Residential Mortgage Loss Criteria
EMEA Criteria Addendum - United Kingdom - Mortgage and Cashflow Assumptions
Global Structured Finance Rating Criteria