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Rating Action:

Moody's affirms rating on the existing Note and assigns definitive ratings to new non-conforming UK RMBS Notes issued by Optimum Three Limited

01 Nov 2018

Frankfurt am Main, November 01, 2018 -- Moody's Investors Service ("Moody's") has today affirmed the rating of the Senior Loan Facility A Notes (reclassified to Senior Notes) and assigned definitive long-term credit ratings to the Variable Funding Notes (VFN) issued by Optimum Three Limited:

....GBP 11.2M Variable Funding Notes due November 2053, Assigned A2 (sf)

....GBP 30M (Current Outstanding) Senior Notes due July 2043, Affirmed A2 (sf); previously on July 26, 2017 Assigned A2 (sf)

Moody's has not assigned a rating to the Mezzanine Notes and Junior Loan Facility.

The Senior Notes and the Variable Funding Notes (collectively, the Class A Notes) rank pari passu without preference or priority among themselves at all times as to payments of interest and principal.

This transaction is a revolving warehouse securitisation by Optimum Group (not rated), with an additional ramp up period of up to a maximum of 12 months and consists of mortgage loans extended to obligors located in England, Scotland and Wales with some of the borrowers being credit impaired. The portfolio with initial size at closing of GBP 30.85 million consists of small second charge loans only.

The rating action reflects an amendment to the transaction documents. Among the major changes are the amendment of the advance rates (85% for the prime loans and 70% for the near-prime loans), removal of an AUP requirement after addition of 7% new loans to the pool (instead there will be an annual AUP performed on the portfolio and a quarterly re-underwriting) and the introduction of new classes of Notes.

RATINGS RATIONALE

The ratings of the Notes take into account, among other factors: (i) the performance of other transactions launched by Optimum Credit Limited; (ii) the credit quality of the underlying mortgage loan pool, from which Moody's determined the MILAN Credit Enhancement (MILAN CE) and the portfolio expected loss; (iii) legal considerations; (iv) the initial credit enhancement provided to the senior Notes by the junior Notes (minimum subordination is 16.25%, based on the advance rates and the 9% limit on the near-prime loans) and the reserve fund of 1% of the borrowing base; and (v) the ability to add new loans to the collateral pool subject to certain conditions during the 18-month revolving period.

Expected Loss and MILAN CE Analysis

The MILAN CE reflects the loss Moody's expects the portfolio to suffer in the event of a severe recession scenario. The expected portfolio loss of 8.5% and the MILAN CE of 35% serve as input parameters for Moody's cash flow model.

Portfolio expected loss of 8.5% is higher than in other UK non-conforming RMBS transactions of ca. 5.9%, owing to: (i) 100% of the pool consists of second-lien mortgages; (ii) the performance of comparable originators; (iii) the current macroeconomic environment and our view of the future macroeconomic environment in the UK; (iv) the lack of historical information; (v) the eligibility criteria and concentration limits for newly added receivables which will add additional risk to the target portfolio during the ramp up period; and (vi) benchmarking with similar UK non-conforming transactions.

MILAN CE of 35% is higher than the UK Non-Conforming RMBS average and follows Moody's assessment of the loan-by-loan information taking into account the following key drivers on the eligibility criteria and concentration limits: (i) the pool will only consist of second lien mortgage loans; (ii) the revolving nature of the transaction with a ramp up period allowing the pool to grow to an amount 11.34 times of the funded pool at closing, the portfolio limits on LTV (69%), share of loans disbursed to borrowers with one or more satisfied or unsatisfied CCJs (5%), share of loans disbursed to borrowers with five or more satisfied or unsatisfied CCJs (1%), the permissible portion of near-prime loans (9%), share of buy-to-let properties (0.75%), regional concentration (33% for a single region and 70% for the top three regions), exposure to self-employed borrowers (25%), property values (maximum 25% of the pool may be exposed to the properties with value exceeding GBP 750,000 in any part of England (excluding Greater London), Wales, and Scotland, and GBP 1 million for Greater London); and (iii) the current portfolio characteristics including single borrower concentration and LTV distribution.

Transaction structure

The reserve fund is equal to 1% of the borrowing base. The reserve fund will be replenished after the PDL cure of the Class A Notes and can be used to pay senior fees and costs and interest on the Class A Notes.

Operational Risk Analysis

Optimum Credit Limited is servicer in the transaction while Citibank, N.A., London Branch (A1/(P)P-1 Senior Unsecured & Other Short Term) is acting as cash manager. In order to mitigate operational risk, Link Mortgage Services Limited (not rated) will act as back-up servicer. To ensure payment continuity over the transaction's lifetime the transaction documents incorporate estimation language whereby the cash manager can use the three most recent servicer reports to determine the cash allocation in case no servicer report is available. The transaction also benefits from the equivalent of 1.7 months liquidity assuming a stressed Libor assumption of 5.7%.

Interest Rate Risk Analysis

Around 74.6% of the loans in the pool are fixed rate loans reverting to Optimum SVR with the remaining proportion linked to Optimum SVR. Around 2.24% of the loans are fixed rate loans with a tenure of 3-5 years. To mitigate the fixed floating mismatch there will be a fixed floating swap provided by NatWest Markets Plc (Baa2/P-2 & A3(cr)/P-2(cr)) to cover any fixed to floating rate risk for the loans with a tenure of 3-5 years. Moody's has taken into account the absence of a basis swap to mitigate the difference between the reset dates of the assets and the liabilities, the absence of fixed to floating swap for loans maturing within 2 years and the swap structure (which is a fixed schedule swap) in the stressed margin vector used in the cash flow modelling. Moody's also took into account in the cash flow modelling the covenant under the senior loan agreement which would prevent the originator from selling any additional loans to the warehouse if following the sale of the new loans the excess spread after senior fees and senior loan interest would fall below 3%.

Principal Methodology

The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The analysis undertaken by Moody's at the initial assignment of ratings for an RMBS securities may focus on aspects that become less relevant or typically remain unchanged during the surveillance stage. Please see "Moody's Approach to Rating RMBS Using the MILAN Framework" for further information on Moody's analysis at the initial rating assignment and the on-going surveillance in RMBS.

The definitive ratings address the expected loss posed to investors by the legal final maturity of the Notes. In Moody's opinion, the structure allows for timely payment of interest and ultimate payment of principal at legal final maturity for all rated Notes. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed but may have a significant effect on yield to investors.

No provisional ratings were assigned on the issued Notes.

Factors that would lead to an upgrade or downgrade of the ratings:

Upward pressure on the ratings could result from better-than-expected performance of the underlying assets. Downward pressure on the ratings could result from significantly different loss assumptions compared with our expectations at close due to either a change in general economic and real estate market conditions from our central scenario forecast or idiosyncratic performance factors. A deterioration in counterparty creditworthiness could also cause a downgrade of the ratings.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Yuezhen Wang
Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anthony Parry
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Stanislav Nastassine
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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