Sept 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Paragon Mortgages (No.18) plc’s notes final ratings, as follows:
GBP238,100,000 Class A: ‘AAAsf’, Outlook Stable
GBP15,700,000 Class B: ‘AAsf’, Outlook Stable
GBP13,700,000 Class C: ‘Asf’, Outlook Stable
GBP5,500,000 Class D: ‘NRsf’
The notes are backed by prime buy-to-let mortgages originated by Paragon Mortgages (2010) Limited (Paragon), a wholly owned subsidiary of The Paragon Group of Companies plc. The ratings are based on Fitch’s assessment of the underlying collateral, available credit enhancement (CE), Paragon’s origination and underwriting procedures, the servicing capabilities of Paragon Finance plc as delegated by the administrator, Paragon, the capabilities of Homeloan Management Limited (HML) as standby administrator, and the transaction’s legal structure.
Credit enhancement for the class A notes at 15.78% will be provided by the subordination of the class B notes (5.75%), class C notes (5.02%), the unrated class D notes (2.01%), a non-amortising reserve fund of 3.0%, which was fully funded at closing, and excess spread.
The reserve fund will increase to 4% of the initial note balance if 60+ day arrears exceed 3% of the outstanding portfolio balance or cumulative losses exceed 2% of the initial note balance.
Prime BTL Portfolio
This is a prime BTL portfolio with a weighted average (WA) seasoning of 4 months, a WA original LTV of 72.9%, an indexed WA current LTV of 72.3% and a WA interest coverage ratio of 82.9%. The proportion of loans concentrated in London, Outer Metropolitan and the south east is 54.9%.
The portfolio consists entirely of BTL loans and Fitch continues to stress the portfolio’s default rates beyond those of a prime owner-occupier portfolio at all rating levels, despite the fact historically the Paragon series has been one of the better performing BTL series. The series continues to perform robustly with low arrears and defaults. Three-month plus arrears were below 75bps for the entire series as of March 2013. This was factored into Fitch’s rating analysis.
Libor Linked Products
The transaction has a high percentage of LIBOR-linked loan products (61.8%) and loans that revert to a LIBOR-linked product (37.6%) in comparison with previous Paragon transactions, which had a high percentage of standard variable rate loan products. As the notes are also paying LIBOR, there is less uncertainty regarding the amount of future excess spread in this deal than in past deals, which Fitch has accounted for in its cash flow analysis.
Counterparty Rating Trigger Risks
The rating triggers for the issuer account bank, qualified investments, collection account bank and derivative counterparties in the transaction documents have specific references to Fitch criteria. This creates a degree of uncertainty regarding future counterparty arrangements but Fitch does not expect this mechanism to negatively affect the notes’ ratings as long as the administrator maintains counterparties that are consistent with Fitch’s counterparty criteria.
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 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 result in a downgrade of the class A notes to ‘AAsf’.
More detailed model implied ratings sensitivity can be found in the new issue report which is available at www.fitchratings.com.
Paragon provided Fitch with a loan-by-loan data template and a number of key fields were missing. Paragon was unable to provide Fitch with borrowers’ county court judgement, prior bankruptcy order, individual voluntary arrangements details or prior mortgage arrears history before the date of loan origination. Fitch assumed that 2% of the pool consists of loans with adverse credit and consequently increased the default probabilities of these loans.
Fitch was provided with data on loans repossessed by Paragon between 2001 and 2013 and the QSA, at 32.0%, was higher than Fitch’s base QSA assumption of 22% for UK transactions. Fitch increased the QSA to reflect this data. Fitch has reviewed the results of an agreed-upon procedures report conducted on this portfolio and has not found any material errors.
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 (RW&Es) with those of typical RW&Es for that asset class is available by accessing the appendix that accompanies the new issue report (see “Paragon Mortgages (No.18) Plc - Appendix”, at www.fitchratings.com).
Link to Fitch Ratings’ Report: Paragon Mortgages (No.18) PLC