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Rating Action:

Moody's reviews UK reverse mortgage transaction Equity Release Funding (No.3)

18 Oct 2013

London, 18 October 2013 -- Moody's Investors Service today placed on review for downgrade the Class A2 and Class B notes in the UK reverse mortgage transaction Equity Release Funding (No.3) PLC. The primary driver for the reviews is the updated long-term loss projections under stressed house price and repayment assumptions. Moody's has not placed on review the Class A3 notes because they are not affected by the increase in the loss projections. Today's detailed actions are as follows:

Issuer: EQUITY RELEASE FUNDING (NO.3) PLC

....GBP310M A2 Notes, Aaa (sf) Placed Under Review for Possible Downgrade; previously on Jul 17, 2003 Definitive Rating Assigned Aaa (sf)

....GBP42M B Notes, Aa3 (sf) Placed Under Review for Possible Downgrade; previously on Jul 17, 2003 Definitive Rating Assigned Aa3 (sf)

Moody's review will assess the resilience of the affected notes to long-term stress scenarios including a depression in UK house prices, slowing mortality and morbidity rates and voluntary repayment rates materially lower than those observed to date.

RATINGS RATIONALE

The placement on downgrade review of the Class A2 and B notes in Equity Release Funding (No.3) PLC reflect the rise in long-term loss projections under the rating agency's updated stressed house price and repayment assumptions.

The updated loss projections over a long-term horizon show that the affected ratings would be sensitive to a slowdown in voluntary repayment rates, under stressed mortality and morbidity and house price assumptions. As an example, Moody's would expect Aaa (sf) rated notes to be able to withstand a 30% house price decline followed by 0.5% annual house price inflation, combined with increased expected life duration of the borrowers and decreased morbidity and voluntary prepayment rates.

Moody's has increased the overall stress level used in projecting losses compared to the previous review. The review placement is driven by the increased level of stress assumed by Moody's and not by the actual collateral performance. Please refer to "Moody's downgrades senior and mezzanine notes in two UK reverse mortgage transactions" published in October 2012 for detail of the stress levels applied during the previous review.

METHODOLOGY APPROACH

Moody's approach to 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 (sf) house prices inflation and A (sf) mortality rates. 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.

As such, Moody's analysis encompasses the assessment of stressed scenarios.

SENSITIVITY ANALYSIS

Projected loss assumptions remain subject to uncertainty with regard to general economic activity, house prices, rates of mortality, morbidity and voluntary prepayments. Lower-than-expected mortality and morbidity rates and lower house prices would negatively affect the ratings.

REGULATORY DISCLOSURES

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.

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 reviews UK reverse mortgage transaction Equity Release Funding (No.3)
No Related Data.
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