London, 02 May 2012 -- Moody's downgraded the ratings of 3 senior notes issued by Kensington
Mortgage Securities plc Series 2007-1 ("KMS").
All affected ratings are listed at the end of this press release.
RATINGS RATIONALE
Today's downgrade is driven by the exposure to payment disruption risk.
Payment Disruption Risk:
Homeloan Management Limited ("HML"), which is part of Skipton Building
Society ("Skipton"), acts as servicer and as a back-up cash
manager in KMS. Following the downgrade of Skipton (parent company
of HML) Moody's analyzed continuity of payments following a potential
disruption in functions performed by HML.
Moody's considers current back-up servicing arrangements insufficient
to support payments in the event of servicer disruption despite presence
of a back-up servicer with investment grade sponsor because the
arrangements are not "warm". The back-up servicer in the
affected transaction is Western Mortgage Services Ltd (NR). Parent
of Western Mortgage Services Ltd is Co-Operative Bank Plc (A3/P-2).
The back-up servicer targets full servicing function transfer in
120 days from the relevant appointment. In absence of servicer
reports the cash manager may not be able to perform calculations necessary
to process payments in a timely fashion.
In addition, current back-up cash management arrangements
are not compliant with Moody's operational risk criteria. HML acts
as a back-up cash manager in the affected transactions.
The cash manager is Kensington Mortgage Company (KMC) (NR). Investec
PLC (Ba1/NP) is the parent of KMC. KMC delegated cash management
functions to Investec Bank PLC (Baa3/P-3). In particular,
Moody's notes that there are no automatic termination of cash manager,
no automatic appointment of back-up cash manager and the current
timeline on the transfer of cash management function does not contain
provision to address the timely payment of required amounts.
Moody's also believes that this risk is further exacerbated because the
senior notes are denominated in another currency. A failure to
make timely payments to the swap counterparty could lead to a termination
event under the swap documentation. Moody's concludes that maximum
achievable rating for the notes KMS is Aa2 (sf) in consideration of this
additional risk. Moody's notes that there is sufficient liquidity
available in KMS.
Collateral performance assumptions
Moody's has reassessed its lifetime loss expectations taking into account
the collateral performance to date however this revision is not a driver
of today's rating action.
As of February 2012, loans more than 360 days delinquent comprised
9.9% of the outstanding principal balance of the portfolio.
Only 10% of loans that were more than 360 days delinquent as of
February 2011 have improved their performance and moved into a lower arrears
bucket as of February 2012. For this reason, Moody's considers
loans with delinquencies exceeding 360 days as a proxy for additional
future increases in repossessions and resulting losses above current losses
realization trends. After considering the current amounts of realized
losses and completing a roll rate and severity analysis for the portfolio
Moody's has increased its lifetime expected loss assumption to 11.7%
from 9.0% of the original portfolio balance. The
credit enhancement available under the corresponding notes fully offsets
this deterioration. Consequently, the revision of the loss
assumptions is not a driver of today's rating action. Moody's
did not change its MILAN assumption.
Factors and Sensitivity Analysis
Expected loss assumptions remain subject to uncertainty with regards to
the general economic activity, interest rates and house prices.
Lower than assumed realised recovery rates or higher than assumed default
rates would negatively affect some of the ratings in KMS.
Uncertainty also stems from the timing of a servicing transfer and the
credit strengths of the back-up servicer. Should a servicing
transfer take longer than expected following an operational disruption
or the credit strength of the back-up servicers sponsors deteriorate,
the rating would be negatively affected.
As the euro area crisis continues, the rating of the structured
finance notes remain exposed to the uncertainties of credit conditions
in the general economy. The deteriorating creditworthiness of euro
area sovereigns as well as the weakening credit profile of the global
banking sector could negatively impact the ratings of the notes.
For more information please refer to the Rating Implementation Guidance
published on 13 February 2012 "How Sovereign Credit Quality May Affect
Other Ratings". Please also refer to the recent rating actions
on banks published on 15 February 2012, (please see "Moody's Reviews
Ratings for European Banks" and "Moody's Reviews Ratings for Banks and
Securities Firms with Global Capital Markets Operations" for more information).
In reviewing the affected transactions, Moody's used ABSROM to model
the cash flows and determine the loss for each tranche. The cash
flow model evaluates all default scenarios that are then weighted considering
the probabilities of the lognormal distribution assumed for the portfolio
default rate. In each default scenario, the corresponding
loss for each class of notes is calculated given the incoming cash flows
from the assets and the outgoing payments to third parties and noteholders.
Therefore, the expected loss or EL for each tranche is the sum product
of (i) the probability of occurrence of each default scenario; and
(ii) the loss derived from the cash flow model in each default scenario
for each tranche.
As such, Moody's analysis encompasses the assessment of stressed
scenarios.
The principal methodology used in this rating was Moody's Approach to
Rating RMBS in Europe, Middle East, and Africa published in
October 2009. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
Other Factors used in this rating are described in Global Structured Finance
Operational Risk Guidelines: Moody's Approach to Analyzing Performance
Disruption Risk published in June 2011.
LIST OF AFFECTED SECURITIES
Issuer: Kensington Mortgage Securities plc Series 2007-1
....GBP50M A3a Notes, Downgraded to
Aa2 (sf); previously on Jun 2, 2011 Downgraded to Aa1 (sf)
....EUR270.6M A3b Notes, Downgraded
to Aa2 (sf); previously on Jun 2, 2011 Downgraded to Aa1 (sf)
....US$195M A3c Notes, Downgraded
to Aa2 (sf); previously on Jun 2, 2011 Downgraded to Aa1 (sf)
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with/with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
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.
Lyudmila Udot
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
Barbara Rismondo
VP - Senior Credit Officer
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 downgrades UK NC RMBS notes issued by Kensington Mortgage Securities 2007-1
