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Rating Action:

Moody's downgrades the ratings of six notes and confirms the rating of one note in Equity Release Funding (No.4) and Equity Release Funding (No.5) PLC

12 Mar 2014

London, 12 March 2014 -- Moody's Investors Service has today downgraded the ratings of four notes in the UK reverse mortgage residential mortgage-backed securities (RMBS) transaction, Equity Release Funding (No.4) plc, and downgraded the ratings of two mezzanine and junior notes and confirmed the ratings of one senior note in the UK reverse mortgage RMBS transaction, Equity Release Funding (No.5) plc. The rating impact of linkage to a swap provider has prompted today's action.

Today's rating action concludes the review of the ratings in these transactions. Moody's placed the affected notes on review on 14 November 2013, in relation to swap counterparty exposure following the introduction of the rating agency's updated approach to assessing swap counterparties in structured finance cash flow transactions ("Approach to Assessing Swap Counterparties in Structured Finance Cash Flow Transactions", published on 12 November 2013: https://www.moodys.com/research/Approach-to-Assessing-Swap-Counterparties-in-Structured-Finance-Cash-Flow--PBS_SF344857).

For a detailed list of affected ratings refer to the end of this press release just before regulatory disclosures section.

RATINGS RATIONALE

Today's rating action reflects the impact of linkage to Morgan Stanley (Baa2/P-2) that acts as a swap guarantor in both transactions.

Moody's has incorporated into the ratings the risk of additional losses to noteholders in the event the affected transactions become unhedged. Morgan Stanley provides swaps hedging the mismatch between the reference rates of the assets and liabilities in both transactions. Assets backing the notes are referenced to either (i) UK Retail Price Index, or (ii) fixed rate of interest of c. 7%, while the notes are referenced to 3 months GBP LIBOR. The swaps do not provide excess spread to the transactions. Net swap payments in recent periods were in favour of the swap counterparty in both transactions, given the current interest rate environment. However, net swap payments could be in favour of the issuer in future. Swaps in both deals contain replacement triggers at loss of Baa2.

Moody's concluded that the linkage to the ratings of the swap counterparty to Classes A2, B, C and D in Equity Release Funding (No.4) and to Classes B &C in Equity Release Funding (No.5) was not fully mitigated through available credit enhancement. Moody's confirmed ratings of Class A in Equity Release Funding (No.5) because the available credit enhancement mitigated potential losses from becoming unhedged.

METHODOLOGICAL APPROACH

Moody's methodological approach to rating and monitoring transactions from the Equity Release Funding series is based on deal-specific cash flow modelling to determine the timeliness of payments and expected losses by legal final maturity of each class of notes.

Moody's calculates the corresponding loss for each class of notes based on the incoming cash flows from the assets and the outgoing payments to third parties and noteholders. The cash flow model contains scenarios for each rating level that correspond to a level of stress on house prices, mortality, morbidity and prepayment rates.

Moody's used mortality data by the UK Institute and Faculty of Actuaries to estimate the probability of death of the borrowers. In order to calculate the expected repayment profile of each loan Moody's stressed the mortality rates by applying improvement factors on each rating level. For example, Aaa (sf) improvement factor ranged from 12% to 8% depending on the age and gender of the borrower. In all investment grade scenarios, Moody's assumed that prepayment and morbidity rates drop by around 50% of the rates actually observed in the transaction. Moody's tested different house price inflation scenarios. For example, Aaa (sf) stress assumed a permanent drop of 35% during the first year of the deal. Finally, Moody's tested if each note's repayment schedule would be satisfied under combinations of different scenarios for mortality and house price inflation levels as a function of target ratings.

In monitoring transactions from the Equity Release Funding series, Moody's considered the overall level of stress to be sufficient if a note passes on house prices and mortality stresses up to three notches below the target note rating. For example, an Aa (sf) rated note would be sufficiently stressed at the combination of a A (sf) house prices inflation and a A (sf) mortality rates stress. Moody's assumed that the house price inflation is not directly correlated with mortality. Moody's used comparatively long performance histories available in the Equity Release Funding series to calibrate its monitoring approach.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:

Factors or circumstances that could lead to a downgrade of the ratings affected by today's action would be the worse-than-expected performance of the underlying collateral, and deterioration in the credit quality of the counterparties. Lower-than-expected mortality and morbidity rates and lower house prices would negatively affect the ratings. Deterioration in credit quality of Morgan Stanley below Baa2 and lack of replacement or other mitigants may negatively affect the ratings due to the linkage to the swap guarantor.

Factors or circumstances that could lead to an upgrade of the ratings affected by today's action would be the better-than-expected performance of the underlying assets, and a decline in counterparty risk.

STRESS SCENARIOS:

As described in previous paragraphs, Moody's analysis encompasses the assessment of stressed scenarios.

LIST OF AFFECTED SECURITIES

Issuer: EQUITY RELEASE FUNDING (NO.4) PLC

....GBP215M A2 Notes, Downgraded to A2 (sf); previously on Nov 14, 2013 Aa3 (sf) Placed Under Review for Possible Downgrade

....GBP61M B Notes, Downgraded to Baa2 (sf); previously on Nov 14, 2013 Baa1 (sf) Placed Under Review for Possible Downgrade

....GBP16.5M C Notes, Downgraded to Baa3 (sf); previously on Nov 14, 2013 Baa2 (sf) Placed Under Review for Possible Downgrade

....GBP1M D Notes, Downgraded to Baa3 (sf); previously on Nov 14, 2013 Baa2 (sf) Placed Under Review for Possible Downgrade

Issuer: EQUITY RELEASE FUNDING (NO.5) PLC

....GBP315M A Notes, Confirmed at Aa2 (sf); previously on Nov 14, 2013 Aa2 (sf) Placed Under Review for Possible Downgrade

....GBP43M B Notes, Downgraded to Baa1 (sf); previously on Nov 14, 2013 A3 (sf) Placed Under Review for Possible Downgrade

....GBP23M C Notes, Downgraded to Baa3 (sf); previously on Nov 14, 2013 Baa2 (sf) Placed Under Review for Possible Downgrade

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.

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 these transactions in the past six months.

In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.

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.

Lyudmila Udot
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

Christophe de Noaillat
MD - Structured Finance
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 the ratings of six notes and confirms the rating of one note in Equity Release Funding (No.4) and Equity Release Funding (No.5) 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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