LONDON--(BUSINESS WIRE)--Fitch Ratings has withdrawn its rating on Eurosail-UK 2007-4BL PLC's class A3a, A3c and B1a notes and assigned ratings to the new class A3, A4, A5 and B1a notes. The agency has also upgraded Class A2a, C1a and D1a notes and affirmed Class E1c following the transaction restructuring. A full list of rating actions is provided at the end of this commentary.
The transaction is a securitisation of first-charge, near-prime and sub-prime residential mortgages originated by Southern Pacific Mortgage Limited, Preferred Mortgages Limited, Alliance and Leicester Plc and Matlock Bank Limited.
Following the bankruptcy of the transaction's EUR/GBP currency swap provider, Lehman Brothers, a stipulated claim amount of USD175m had been agreed with the issuer. Up until 12 November 2014, the issuer had received USD89.8m of these claims and the remaining amount was monetised in an auction on 13 November 2014, resulting in sales proceeds worth USD26m.
The aggregated proceeds of USD116m received by the issuer represent approximately 66% of the stipulated claim amount, all of which were converted into GBP74m.
KEY RATING DRIVERS
Currency Exposure Removed
The first phase of restructuring involved a redenomination of the class A2a, A3a, B1a, C1a and D1a notes to GBP from EUR at the spot rate of 0.78625GBP=1EUR.
Following redenomination on the September 2014 interest payment date (IPD), on the December 2014 IPD, cash recoveries from the terminated hedging agreement, supplemented by a reserve fund of GBP3.3m were applied towards restructuring costs. A payment to residual certificate holders was also made. The issuer also made a partial redemption on each of the classes A3a, A3c, B1a, C1a, D1a and E1c. Following these payments, the reserve fund was brought back to the same level of GBP3.3m.
The class B1a notes incurred a write-up of 7.7% (GBP3.1m) in order to restore the balance between mortgage assets and notes. The write up comes as a result of excess proceeds being available from claims received from the swap termination, which were sufficient to cover the under-collateralisation following redenomination.
Revised Capital Structure
In the second phase of restructuring, the existing class A3a and A3c notes were cancelled and simultaneously, new A3, A4 and A5 notes have been issued, such that their aggregate balance is equivalent to that of the combined balance of pre-restructured class A3a and A3c notes.
The current level of credit support available to the A2, A3, A4, A5, B1a, C1a, D1a, and E1c notes is 78%, 43%, 34%, 29%, 19%, 9%, 3% and 1% respectively. The credit enhancement is provided by a GBP3.3m reserve fund that is permitted to amortise once it reaches 2% of the outstanding note balance (currently 0.84%) with no floor. The amortisation of the reserve fund is subject to, amongst other conditions, three-months plus arrears (excluding delinquencies owing to outstanding fees and charges) not exceeding 17.5% of the current portfolio balance.
Fitch has conducted a full asset and cashflow analysis of the transaction resulting in upgrades and affirmations of the existing notes. Simultaneously, the ratings on the class A3a, A3c and B1a notes were withdrawn and ratings of 'AAAsf', 'AAsf', 'AA-sf' and 'BBB+sf' were assigned to the class A3, A4, A5 and B1a notes respectively, reflecting the net positive impact of the transaction restructuring. As a comparison the previous class A3a and A3c note were rated 'CCsf'.
Liquidity Support
From the December 2014 IPD, principal receipts up to a cumulative amount of GBP2.5m will be diverted towards the establishment of a liquidity reserve. This liquidity reserve will be available to cover interest shortfalls on the class A2 and A3 notes. It will amortise to 1% of the sum of the balance of class A2 and A3 notes from December 2015 provided that it is fully funded in the prior period. Other amortisation triggers also include: no requirements for drawings on the then current payment date, three months plus arrears excluding repossessions below 22.5% of the outstanding portfolio balance, cumulative balance of loans with properties in possession below 17.5% of the original pool balance and cumulative loss below GBP19.5m from day of restructuring.
Following a full depletion of the liquidity reserve, the transaction structure will allow principal collections to be diverted to cover interest shortfalls on the class A2, A3, A4 and A5 notes.
Margin Increase
Following restructuring, the margin on the class A3, A4, and A5 notes is 95bps, higher than that paid on the class A3a and A3c notes prior to restructuring. The margin on the A2, B1a and C1a also increased from 16bps, 36bps and 65bps to 30bps, 100bps and 125bps respectively.
Fitch's analysis showed that the level of credit enhancement, along with other transaction features sufficiently mitigate this increased cost of the structure.
RATING SENSITIVITIES
Fitch believes that a sudden sharp increase in interest rates will put a strain on borrower affordability, particularly given the weaker profile of the underlying non-conforming borrowers. If defaults and associated losses increase beyond the agency's stresses, the junior tranches may be downgraded.
Fitch has taken the following rating actions:
Class A2a (XS 0311680747): upgraded to 'AAAsf' from 'BBsf'; Outlook Stable
Class A3a (XS 0311702657): Withdrawn
Class A3c (XS 0311704356): Withdrawn
Class A3 (XS 1150797600): assigned 'AAAsf'; Outlook Stable
Class A4 (X S1150799481): assigned 'AAsf'; Outlook Stable
Class A5 (XS1150799721): assigned 'AA-sf'; Outlook Stable
Class B1a (XS0311705759): Withdrawn
Class B1a (XS0311705759): assigned 'BBB+sf'; Outlook Stable
Class C1a (X50311708696): upgraded to 'Bsf' from 'Csf'; Outlook Stable
Class D1a (XS0311713001): upgraded to 'CCsf' from 'Csf', Recovery Estimate of 50%
Class E1c (XS0311717416): affirmed at 'Csf'; Recovery Estimate of 0%
Additional information is available at www.fitchratings.com.
Sources of information - investor reports, as well as loan-by-loan level data.
Applicable criteria 'Global Structured Finance Rating Criteria' dated 4 August 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds' dated 14 May 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' dated 14 May 2014, 'Criteria Addendum - UK - Residential Mortgage and Cash Flow Assumptions' dated 30 May 2014, 'EMEA Residential Mortgage Loss Criteria' dated 28 May 2014, 'EMEA RMBS Cash Flow Analysis Criteria' dated 28 May 2014, 'EMEA RMBS Master Rating Criteria' dated 28 May 2014 are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Criteria Addendum: UK - Residential Mortgage Loss and Cash Flow Assumptions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748367
EMEA Residential Mortgage Loss Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749272
EMEA RMBS Cash Flow Analysis Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749273
EMEA RMBS Master Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749271
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=954055
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.