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13 Nov 2014
London, 13 November 2014 -- Moody's Investors Service has determined that the proposed restructuring
(the "Proposal"), if implemented, will not, in and of
itself and at this time, result in a downgrade or withdrawal of
the current ratings of the notes (the "Notes") issued by Arkle Master
Issuer PLC ("Arkle") and Permanent Master Issuer plc ("Permanent",
together the "Issuers"). Moody's opinion addresses only the credit
impact of the Proposal, and Moody's is not expressing any opinion
as to whether the Proposal has, or could have other, non-credit
related effects that may have a detrimental impact on the interests of
note holders and/or counterparties.
The Proposal consists of the following:
- Changes to the account bank structure and triggers with the option
to collateralise certain amounts held in the funding account bank
- Inclusion of the ability to repurchase loans on an on-going
basis that are 3 months or more in arrears
- Removal of the rating trigger to redirect the direct debit payments
- Changes to the funding swap trigger levels
- Change of the definition of Authorised Investments to include
Aaa-mf rated money market funds
- Introduction of flexibility to adopt in the future a panel bank
arrangement to have the ability to invest funds held in the funding account
with banks that are at least rated P-1 and A2
- Removal of the requirement to appoint an auditor to test whether
the loans complied with the relevant reps & warranties upon loss of
the Seller's P-1 rating
- Amendments to the loan warranties to allow the addition of new
loans originated by Bank of Scotland plc (A1/ P-1) under the Halifax
brand into Arkle and loans originated by Lloyds Bank Plc (Lloyds) (A1/
P-1) into Permanent.
Moody's considers the Proposal, if implemented, would not,
in and of itself and at this time, result in a downgrade or withdrawal
of the current ratings of the Notes issued by the Issuers.
Below is the detailed description and analytical considerations for the
key changes presented in the Proposal.
Amendments to account bank structure
It is proposed to modify the Funding GIC Account structure by establishing
an additional account, the Funding Collateralised GIC Account.
The Funding GIC Account is required to hold a minimum amount of funds
to ensure the timely payment of interest on the rated notes and payment
of senior fees at the next interest payment date as well as the amounts
accumulated for the repayment of Bullet notes on their legal maturity
date, collectively referred to as time critical monies. Any
amount that is not required to be held in the Funding GIC Account can,
at the option of the Cash Manager, be transferred to the Funding
Collateralised GIC Account, provided that the Funding Collaterised
GIC Account Bank will post eligible collateral into a custodian account
to match, after applying the valuation percentages, amounts
held in the Funding Collateralised GIC Account. The Funding Collateralised
GIC Account Bank will be required to transfer amounts held in the Funding
Collateralised GIC Account to the Funding GIC Account if the Funding Collateralised
GIC Account Bank is rated below P-2. If funds held in the
Funding Collateralised GIC Account are not transferred into the Funding
GIC Account prior to an interest payment date, the liquidation mechanism
aims that recovery amounts from the sale of the collateral are received
within the grace period of the notes at the latest. Moody's
notes that there is some uncertainty as to the interpretation of certain
aspects of the legal regime in relation to collateral arrangements.
This uncertainty results in increased linkage to Lloyds (Arkle)/Bank of
Scotland (Permanent). The collateral in the custodian account is
held in their name with the respective Issuer benefiting from a secured
charge over the collateral. Although the collateral arrangements
have been structured with the aim to mitigate this uncertainty,
in the event of an insolvency of Lloyds (Arkle)/Bank of Scotland (Permanent),
there could be uncertainty over the timely enforcement of the security.
In the remote scenario where the structure does not mitigate the uncertainty,
Moody's notes that there could be some delays in realising collateral
within the grace period of the notes and so the transaction would rely
on the funds held in the Funding GIC Account (including the time critical
monies) together with accumulated proceeds to ensure timely payment of
interest under the notes.
In the case for the Mortgage Trustee GIC Account, the transfer trigger
will be removed. In mitigation the proposal includes the obligation
to appoint a stand-by Mortgage Trustee GIC Account Bank if the
rating of the Mortgage Trustee GIC Account Bank falls below A3.
Such stand-by account bank would step in upon the insolvency of
the Mortgage Trustee Account Bank. The account bank criteria are
in line with those specified in "The Temporary Use of Cash In Structured
Finance Transactions: Eligible Investment and Bank Guidelines" published
on March 2013. However, Moody's notes that there is linkage
to the Mortgage Trustee GIC Account Bank in the transaction. In
the event funds held in the Mortgage Trustee GIC Account are not accessible
prior to an interest payment date, the transaction relies exclusively
on proceeds accumulated over the previous two months (as transfers from
the Mortgage Trustee GIC account are made monthly to the Funding GIC account)
and the reserve funds being sufficiently funded to ensure timely payment
of interest under the notes. Moody's has taken the probability
of losses arising from funds held in the Mortgage Trustee GIC Account
into account in its cashflow analysis.
Repurchase of loans in arrears
It is proposed to amend the Mortgage Sale agreement to allow the Seller
to repurchase loans that are three or more months in arrears. It
is a condition that the Seller delivers a solvency certificate to the
Mortgages Trustee at completion of such repurchase. To enhance
the transparency of such repurchase the investor report will disclose
such loans bought back by the Seller. Moody's notes that such option
increases the linkage to the Seller due to the risk of claw back of the
proceeds received by the Mortgages Trustee for the repurchased loans in
case of Seller insolvency.
Removal of the trigger for redirection of direct debits
At present, if the servicer is downgraded below P-1 all direct
debits made into the collection account held with Bank of Scotland plc
(A1/ P-1) for Permanent and Lloyds Bank Plc (A1/ P-1) for
Arkle are required to be redirected to an appropriately rated bank.
It is proposed that this requirement for redirection is removed.
Moody's notes that the majority of the borrowers within the Arkle and
Permanent pool pay via direct debit and that there is a daily sweep of
funds into the Mortgage Trustee GIC Account. Moody's considered
the loss on the collection account arising from funds being commingled
upon the insolvency of the collection account bank.
Amendment to the Funding swap trigger levels
It is proposed to amend the ISDA Master Agreement and lower the collateral
trigger requirements under the swap to A3 from A1 (from A2 for Permanent)
and lower the transfer trigger requirements to Baa1 from A3. Moody's
has assessed the probability and impact of a default of the swap counterparty
on the ability of the Issuer to meet its obligations under the transaction,
including the impact of the loss in the event the transaction became unhedged.
The principal methodology used in these ratings was "Moody's Approach
to Rating RMBS Using the MILAN Framework" published in March 2014.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
Moody's will continue monitoring the ratings. Any change in the
ratings will be publicly disseminated by Moody's through appropriate media.
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Associate Managing Director
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's: No Rating impact following amendments to Arkle and Permanent Master Issuer plc
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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