GBP [•] million of rated securities provisionally rated
London, 29 January 2018 -- Moody's Investors Service ("Moody's") has assigned the provisional long-term
credit rating to the following class of certificates to be issued by Tolkien
Funding Sukuk No.1 Plc:
....GBP [•] Certificates due July
2052, Assigned (P)Aaa (sf)
"The certificates to be issued by Tolkien Funding Sukuk No.1
Plc represent our first-rated Sukuk transaction in the UK,"
says Rodrigo Conde Puentes, Assistant Vice President and Analyst
at Moody's. "Islamic Finance is an increasingly important
part of global capital markets -- there is growing demand for investment
and financing that conforms with the ethical and moral principles of the
Islamic faith."
The transaction is a static securitisation of "Diminishing Musharakah
with Ijara finance" contracts extended to individuals in England
and Wales. This transaction is the first securitisation we have
rated that is issued under the Al Rayan Bank label, and the first
UK Sukuk structure rated by Moody's. The portfolio consists of
first lien Home Purchase Plans (HPPs) extended to [1,672] customers
secured by residential properties, with a current pool balance of
approximately GBP [301.4] million.
The assets backing the certificates are first-ranking Home Purchase
Plans (HPPs) originated by Al Rayan Bank PLC (Aa3/P-1 Long term
and Short Term Deposit Ratings, Aa3(cr)/P-1(cr)), the
first-rated UK Islamic bank. All the HPPs in the pool are
secured on residential properties located in England and Wales.
The HPPs are structured as "Diminishing Musharakah with Ijara"
(reducing co-ownership with lease) arrangements; at the time
of the origination, the client chooses a property, agrees
the price with the vendor and then purchases the property with the bank.
The bank then sells its share in the property to the client in installments
over a fixed term (the acquisition payments). In addition to the
monthly acquisition payments, the client pays rent to the bank for
the portion of the property owned by the bank. The rent is assessed
quarterly and benchmarked to the Bank of England base rate (BBR),
although the rent can be fixed for a period of time.
RATINGS RATIONALE
The rating takes into account the credit quality of the underlying HPP
pool, from which Moody's determined the MILAN Credit Enhancement
(CE) and the portfolio expected loss, as well as the transaction
structure and legal considerations. The expected portfolio loss
of [2.5]% and the MILAN required CE of [12]%
serve as input parameters for Moody's cash flow and tranching models.
The portfolio expected loss of [2.5]% is higher than
the UK prime sector owing to: (1) limited delinquency and default
historical information and lack of repossession information data both
from the seller and the industry; (2) Al Rayan Bank PLC origination
policies and procedures; and (3) the current economic conditions
in the UK and the potential impact of a future increase in the benchmark
reference rate on the performance of the HPPs.
The MILAN CE of [12.0]% is higher than the UK Prime
sector, owing to: (1) the weighted-average current
finance-to-value (FTV) of [64]%, which
is in line with the LTV observed in other comparable UK Prime RMBS transactions;
(2) the historical performance of the pool ; (3) the weighted-average
seasoning of [1.86] years; (4) limited delinquency and
default historical information and lack of repossession information data
both from the seller and from the industry; (5) potential tail risks
associated with the asset characteristics, such as potential tax
or recent developments in the Islamic finance market related to the Dana
Gas case; and (6) benchmarking with other UK residential mortgage-backed
securities (RMBS) transactions.
The Reserve Fund will be fully funded at closing and will be [2.0]%
of the initial balance of Certificates. The reserve fund will be
available for senior fees, and for the Certificates profit and Principal
Deficiency Ledger. In addition, the principal on the HPP
will be available to pay profit on the Certificates.
Operational Risk Analysis: Al Rayan Bank PLC is rated Aa3/P-1
and Aa3(cr) and is acting as the originator and servicer, while
Elavon Financial Services DAC (Aa2/P-1) will be acting through
its UK Branch as a cash manager. In order to mitigate the operational
risk, Homeloan Management Limited 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 more than three months liquidity assuming a stressed
Libor environment.
The HPPs in the pool have been transferred to the Issuer through an equitable
assignment under the sale agreement. Prior to the Perfection Event,
Al Rayan Bank PLC will hold the legal title to the properties, and
the Issuer will have a beneficial interest only. Following an occurrence
of the Perfection Event, both the legal and beneficial interest
in the properties will be held by the Issuer. A Perfection Event
is defined as, among others, an insolvency event of the seller,
breach of the servicer obligations or the security trustee determining
that the charged property is in jeopardy.
Risk of Spread Compression and Rental Rate Risk: Spread could potentially
compress in the transaction owing to the absence of a swap for floating
rental rate contracts (44% of the pool) and fixed rent contracts
(56% of the pool). The floating rental rate HPP and the
reversion rental rate of the fixed rental rate HPP are linked to BBR.
A potential mismatch arises given that the profit of the certificates
is linked to Libor 3 months. Moreover, the clients have an
option to switch from a floating rental rate contract to a fixed rental
rate contract during the life of the HPP. There is a potential
risk of spread compression given that a significant portion of the pool
could switch to fixed rental rate contracts and there is no swap in the
transaction. If the switch takes place after the step up date,
the asset would be repurchased by Al Rayan Bank PLC. We have compressed
the spread in the transaction to take potential basis and fixed-floating
mismatch into account.
The provisional rating addresses the expected loss posed to investors
by the legal final maturity of the Certificates. In our opinion,
the structure allows for timely payment of profit and ultimate payment
of principal at par on or before the rated final legal maturity date.
Moody's issues the provisional rating in advance of the final sale of
securities, but this rating only represents Moody's preliminary
credit opinions. Upon a conclusive review of the transaction and
associated documentation, Moody's will endeavor to assign a definitive
rating to the Certificates. A definitive rating may differ from
a provisional rating. Other non-credit risks have not been
addressed, but may have a significant effect on yield to investors.
Stress Scenarios:
Moody's Parameter Sensitivities: If the portfolio expected loss
was increased from [2.5]% to [7.5]%
of the current balance, and the MILAN CE was increased from [12]%
to [19.20]%, the model output indicates that
the Certificates would still achieve Aaa (sf) assuming that all other
factors remain equal. Moody's Parameter Sensitivities quantifies
the potential rating impact on a structured finance security from changing
certain input parameters used in the initial rating. The analysis
assumes that the deal has not aged and is not intended to measure how
the rating of the security might change over time, but instead what
the initial rating of the security might have been under different key
rating inputs.
The principal methodology used in this rating 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 rating
for 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 expectations at
closing due to either a change in economic conditions from a central scenario
forecast or idiosyncratic performance factors would lead to rating actions.
For instance, should economic conditions be worse than forecasted,
the higher defaults and loss severities resulting from greater unemployment,
worsening household affordability and a weaker housing market could result
in a downgrade of the rating. A deterioration in the certificates'
available credit enhancement could also result in a downgrade of the rating.
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 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.
Rodrigo Conde
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
Client Service: 44 20 7772 5454
Olga Gekht
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
