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Announcement:

Moody's: No Rating impact following amendments to Arkle and Permanent Master Issuer plc

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.

Steven Becker
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Annabel Schaafsma
Associate Managing Director
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: No Rating impact following amendments to Arkle and Permanent Master Issuer plc
No Related Data.
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