Approximately GBP 450 million of debt securities affected
Milan, February 15, 2016 -- Moody's Investors Service has today assigned definitive long-term
credit ratings to one class of notes issued by Darrowby No. 4 plc:
GBP 450M Class A Notes due 2048, Definitive Rating Assigned Aaa
(sf)
Moody's has not assigned any rating to the GBP 37M Class B Notes.
The transaction represents the fourth securitisation rated by Moody's
backed by mortgage loans originated by Skipton Building Society ("SBS",
Baa2/P-2 and A2(cr)/P-1(cr)). The assets supporting
the notes, which amount to around GBP 487 million, consists
of UK prime owner-occupied residential mortgage loans extended
to individuals and are backed by first economic lien mortgages,
on residential properties located in UK. The portfolio will be
serviced by SBS and SBS also acts as cash manager. The back-up
servicer facilitator: Structured Finance Management Limited will
facilitate the search for a suitable back-up servicer and back-up
cash manager in case Skipton's counterparty risk assessment falls below
Baa3(cr). In case there is no servicer report the calculations
will be done based on estimates.
RATINGS RATIONALE
The rating of the notes is based on an analysis of the underlying pool
of mortgage loans, sector wide and originator specific performance
data, protection provided by credit enhancement, the roles
of external counterparties and the structural integrity of the transaction.
The expected portfolio loss of 1.2% over the original pool
balance at closing and the MILAN required credit enhancement "MILAN CE"
of 8.0% serve as input parameters for Moody's cash flow
model, which is based on a probabilistic lognormal distribution.
The key drivers for the portfolio expected loss, which at 1.2%
is in line with other prime UK prime RMBS transactions, are:
(i) 9 years of vintage data for cumulative 90+ arrears and cumulative
repossessions which show an average for the former of around 3%
- 4% and around 1% for the latter; (ii) loan-by-loan
repossession data covering the period between 2011 until middle of 2015
which shows that the average loss severity is around 25%;
(iii) a weighted average (WA) loan-to-value (LTV) of around
68.2%; (iv) benchmarking with other UK prime transactions;
and (v) the criteria for further advances and product switches.
The key drivers for the MILAN CE, which at 8.0% is
in line with other UK prime RMBS transactions, are: (i) a
WA current LTV of 68.2%; (ii) the criteria for further
advances and product switches which are slightly weaker than in Darrowby
No. 3 Plc with regards to the weighted average original LTV limit
which is partially mitigated by the lower limit for the interest only
loans; and (iii) benchmarking with other UK prime RMBS transactions.
Transaction structure: The transactions benefits from a reserve
fund that is funded to 2.5% of the total notes issued (equivalent
to 2.71% of the rated note balance). The reserve
fund will start to amortise down to 2.75% of the outstanding
balance of the notes on the interest payment date which falls at least
6 months after closing subject to a minimum of 2.0% and
a maximum of 2.5% of the initial balance of the notes.
The reserve fund is replenished before the principal payment on Class
A and interest and principal payments on Class B which means that the
reserve fund mainly acts as source of liquidity for the Class A notes
and items senior thereto. Although the reserve fund can act as
credit support and cover Class A PDL it would only act as credit support
in the most extreme loss scenarios.
Interest rate risk analysis: HSBC Bank plc (Aa1(cr)/P-1(cr))
is the swap counterparty for the fixed mortgages in the transaction.
The SVR and BBR mortgages will be unhedged and therefore Moody's applied
a haircut to the interest the pool is generating. Moody's has performed
various scenario analysis to assess the sensitivity and impact of different
SVR, BBR, Libor and CPR assumptions on the ratings of the
notes.
Moody's Parameter Sensitivities: If the portfolio expected loss
was increased to 3.6% from 1.2% and the MILAN
CE remained at 8.0%, the model output indicates that
the Class A notes would still achieve Aaa assuming that all other factors
remained unchanged. 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.
The principal methodology used in this rating was "Moody's Approach to
Rating RMBS Using the MILAN Framework" published in January 2015.
Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodology.
The analysis undertaken by Moody's at the initial assignment of a rating
for an RMBS security 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 A DOWNGRADE OF THE RATING:
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 forecasted, with 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 a downgrade of
the rating, respectively. Additionally, counterparty
risk could cause a downgrade of the rating due to a weakening of the credit
profile of a transaction counterparty. Finally, unforeseen
regulatory changes or significant changes in the legal environment may
also result in changes 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.
David Bergman
Vice President - Senior Analyst
Structured Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100
Michelangelo Margaria
Senior Vice President/Manager
Structured Finance Group
Telephone:+39-02-9148-1100
Francesco Di Constanzo
Associate Analyst
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100
Moody's assigns definitive ratings to one class of UK RMBS notes issued by Darrowby No. 4 plc
