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Rating Action:

Moody's assigns definitive ratings to notes issued by Warwick Finance Residential Mortgages Number Two PLC

25 Sep 2015

London, 25 September 2015 -- Moody's Investors Service has assigned definitive long-term credit ratings to notes to be issued by Warwick Finance Residential Mortgages Number Two PLC:

....GBP 1241.4M Class A mortgage backed floating rate notes due September 2049, Definitive Rating Assigned Aaa (sf)

....GBP 89.2M Class B mortgage backed floating rate notes due September 2049, Definitive Rating Assigned Aa1 (sf)

....GBP 66.0M Class C mortgage backed floating rate notes due September 2049, Definitive Rating Assigned A1 (sf)

....GBP 57.8M Class D mortgage backed floating rate notes due September 2049, Definitive Rating Assigned Baa2 (sf)

....GBP 46.2M Class E mortgage backed floating rate notes due September 2049, Definitive Rating Assigned Ba2 (sf)

....GBP 56.1M Class F mortgage backed floating rate notes due September 2049, Definitive Rating Assigned B3 (sf)

Moody's has not assigned ratings to the Principal Residual Certificates or Revenue Residual Certificates.

The portfolio backing this transaction consists of UK non-conforming and buy-to-let residential loans originated by Platform Funding Limited and GMAC-RFC Limited.

RATINGS RATIONALE

The ratings take into account the credit quality of the underlying mortgage loan pool, from which Moody's determined the MILAN Credit Enhancement and the portfolio expected loss, as well as the transaction structure and legal considerations. The expected portfolio loss of 5.0% and the MILAN required credit enhancement of 19% serve as input parameters for Moody's cash flow model and tranching model, which is based on a probabilistic lognormal distribution.

Portfolio expected loss of 5.0%: this is lower than most other pre-crisis non-conforming pools in the UK and is based on Moody's assessment of the lifetime loss expectation taking into account: (i) the originators' better than average historical performance, (ii) the current macroeconomic environment in the UK, (iii) the strong collateral performance to date along with an average seasoning of 8.6 years; and (iv) benchmarking with similar UK non-conforming transactions.

MILAN CE of 19.0%: this is broadly in line with other UK non-conforming transactions and follows Moody's assessment of the loan-by-loan information taking into account the historical performance and the pool composition including 26.1% buy-to-let loans and 7.8% loans to borrowers with prior County Court judgments (CCJs).

The transaction will benefit from a reserve fund that will be funded to 2.0% of the initial portfolio balance. The reserve fund will amortise to 3.0% of the current portfolio balance once six years have elapsed since closing. The reserve fund can be used to cover the PDL on all rated notes, but it can only be used to cover interest on the B to F classes of notes when certain conditions are met.

The transaction will also benefit from a liquidity reserve in the event the reserve fund is used to cover losses on the portfolio. The liquidity reserve is available only to cover shortfalls in senior fees and interest payments on Classes A and B. When the reserve fund falls below 1.5% of the outstanding portfolio balance, the liquidity reserve will build up to 2.2% of the outstanding balance of Classes A and B by trapping principal receipts. The liquidity reserve will amortise to 2.2% of the outstanding balance of Classes A and B.

Operational Risk Analysis: Western Mortgage Services Limited ("WMS", not rated) will be acting as servicer. In order to mitigate the operational risk, Homeloan Management Limited ("HML", not rated) is appointed as a back-up servicer, and there will be a back-up servicer facilitator. The transaction benefits from an independent cash manager, Citibank, N.A. (London Branch) (A1/(P)P-1). 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 principal to pay interest for the Classes A to F.

Interest Rate Risk Analysis: The interest rate risk in the transaction will be unhedged. In mitigation the transaction contains a requirement for the servicer to not reduce SVR margin over 3 months Libor below a minimum level of 2.0%. There are no fixed rate loans in the portfolio, but only SVR linked (24.2% of the portfolio), Bank of England Base rate linked (48.4% of the portfolio) and 3 months Libor linked loans (27.3% of the portfolio), therefore the transaction is only exposed to basis risk but not fixed-floating risk.

The 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 with respect to the Notes by the legal final maturity. 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.

The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in January 2015. Please see the Credit Policy 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.

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

Significantly different loss assumptions compared with our expectations at close due to either a change in economic conditions from our central scenario forecast or idiosyncratic performance factors would lead to rating actions. For instance, should economic conditions be worse than forecast, the higher defaults and loss severities resulting from a greater unemployment, worsening household affordability and a weaker housing market could result in downgrade of the ratings. Deleveraging of the capital structure or conversely a deterioration in the notes available credit enhancement could result in an upgrade or a downgrade of the rating, respectively.

Stress Scenarios:

Moody's Parameter Sensitivities: If the portfolio expected loss was increased from 5.0% to 8.75% of current balance, and the MILAN CE was increased from 19.0% to 26.6%, the model output indicates that the Class A notes would still achieve Aaa(sf) assuming that all other factors remained equal. Moody's Parameter Sensitivities quantify the potential rating impact on a structured finance security from changing certain input parameters used in the initial rating.

Moody's Parameter Sensitivities provide a quantitative/model-indicated calculation of the number of rating notches that a Moody's structured finance security may vary if certain input parameters used in the initial rating process differed.

The analysis assumes that the deal has not aged and is not intended to measure how the rating of the security might migrate over time, but rather how the initial rating of the security might have differed if key rating input parameters were varied. Parameter Sensitivities for the typical EMEA RMBS transaction are calculated by stressing key variable inputs in Moody's primary rating model.

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 describes the stress scenarios it has considered for this rating action in the section "Ratings Rationale" of this press release.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Maria Divid
Asst Vice President - 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

Michelangelo Margaria
Senior Vice President/Manager
Structured Finance Group
Telephone:+39-02-9148-1100

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 assigns definitive ratings to notes issued by Warwick Finance Residential Mortgages Number Two PLC
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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