119 notes upgraded, 31 notes downgraded, 56 notes affirmed and 11 notes placed on review for upgrade
London, 18 February 2014 -- Moody's Investors Service has today upgraded the ratings of 113 notes
issued from the Aire Valley and Granite UK residential mortgage-backed
securities (RMBS) master trusts. Moody's has also upgraded
the ratings of six notes issued by Whinstone Capital Management Limited.
Whinstone is a synthetic UK RMBS transaction referencing the reserve funds
in the Funding entity of Granite master trust. These upgrades were
primarily driven by Moody's positive outlook on UK Prime and buy-to-let
(BTL) collateral, performance improvement in the deals, and
increased credit enhancement due to deleveraging.
In addition, Moody's has downgraded the ratings of 31 notes
issued from the Aire Valley and Granite master trusts, due to cross-currency
swap counterparty exposure. These affected notes were previously
placed on review for downgrade on 14 November 2013 and today's rating
actions conclude these reviews.
Moody's has also affirmed the ratings of 54 notes issued from the
Aire Valley and Granite master trusts and two notes issued by Whinstone
2 Capital Management Limited. Whinstone 2 is a synthetic UK RMBS
transaction referencing the reserve funds in the Funding 2 entity of Granite
master trust.
Concurrently, the positive collateral outlook, recent performance
improvement and increased credit enhancement for Aire Valley and Granite
has prompted Moody's to place the ratings of 11 notes in these master
trusts on review for upgrade. However, the swap linkage to
Royal Bank of Scotland plc (RBS) continues to affect the credit quality
of these notes (Moody's placed RBS's A3 long-term rating
on review for downgrade on 12 February 2014 https://www.moodys.com/research/Moodys-reviews-Royal-Bank-of-Scotlands-ratings-for-downgrade--PR_291987).
The swap documentation contains provisions for the swaps to be transferred
if RBS's long-term rating falls below A3. Any future
rating action will take into account the conclusions of the RBS rating
review and any changes to the transactions that result from this.
Please click on this link (http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF357470)
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
- Principal Methodology used
- Lead analyst
- Person approving the credit rating
- Releasing office
RATINGS RATIONALE
PRIMARY RATIONALE FOR RATING UPGRADES
Today's upgrade actions reflect the positive collateral outlooks
on the UK Prime and BTL RMBS sectors due to the robust domestic recovery
and continued low interest-rate environment. The Aire Valley
upgrades also reflect improved collateral performance, whilst the
substantial increase of credit enhancement as a result of deleveraging
also prompted the Granite upgrades. Both Aire Valley and Granite
master trusts' collateral pools are no longer revolving and the
issuers are currently using all the trusts' principal receipts to
repay notes in sequential order. This is because both trusts breached
their non-asset-triggers in May 2012 and November 2008,
respectively, and repayment of seller share is time subordinated.
--- COLLATERAL PERFORMANCE
Aire Valley's improved performance is evidenced in the decrease
of loans 90+ days in arrears to 1.0% of the current
collateral pool, compared with its historical peak of 5.5%
in 2009. Moody's decreased the Aire Valley collateral pool
expected loss to 2.3% from 2.8% of the current
collateral pool balance, taking into account historical losses,
expected delinquency roll rates and anticipated loss severities for the
portfolio.
Moody's has updated the Aire Valley MILAN CE to 19% from
21% following its assessment of updated loan-by-loan
information of the outstanding collateral pool.
Granite's performance has also improved and Moody's expects
a further decline in line with the positive prime mortgage collateral
outlook. Loans 90+ days in arrears are currently 4.6%
of the current collateral pool, a significant reduction from the
historical high of 6.9% in 2011. Moody's collateral
pool expected loss for Granite remains unchanged at 2.1%
of the current collateral pool.
Moody's has updated the Granite MILAN CE to 19% from 23%,
following its assessment of updated loan-by-loan information
of the outstanding collateral pool.
--- CREDIT ENHANCEMENT
Trust deleveraging has prompted increased credit enhancement for all Granite's
notes. The amount of deleveraging is higher for Granite Funding
as these deals were issued earlier than Granite Funding 2, which
results in greater credit enhancement levels for Granite Funding notes
compared with those from Funding 2. Class A, Class B,
Class M, and Class C notes of Granite Funding have credit enhancement
levels of at least 54%, 40%, 31% and
14% respectively compared with 42%, 31%,
21% and 7% respectively for Funding 2.
PRIMARY RATIONALE FOR RATING DOWNGRADES
The downgrades reflect the impact of exposure to swap counterparties
as detailed in "Approach to Assessing Swap Counterparties in Structured
Finance Cash Flow Transactions" published on 12 November 2013.
This updated approach determines the rating impact on notes exposed to
swap counterparties based on various factors. These factors include
(1) the rating of the counterparty; (2) the swaps' rating trigger
provisions; (3) the type and tenor of the swap; (4) the amount
of credit enhancement supporting the notes; (5) the size of the relevant
note; and (6) the rating of the notes before linkage.
Moody's has downgraded 29 pre-2007 notes in Aire Valley and
Granite, because Moody's now gives less benefit for older
swaps containing material deviations from its current criteria.
However, because newer swaps are generally substantially consistent
with its framework -- and include collateral volatility
buffers that Moody's gives value to under its updated criteria --
only two notes issued post-January 2007 have been downgraded.
Therefore, notes issued pre-January 2007 have been downgraded
if the counterparty is rated A1 or below whilst newer notes have only
been impacted if the counterparty is rated A3 or below. As with
other UK RMBS master trusts, given the uncertainty of transaction
documentation as to whether deal credit enhancement is available to cover
swap losses, Moody's has assessed the deals using both the
scenarios where credit enhancement is available, and where swap
losses are allocated directly to the affected class. Due to the
high severity on these tranches when deal credit enhancement is not available,
there are a limited number of instances where the class A notes are rated
below that of a more subordinated note.
PRIMARY RATIONALE FOR REVIEW FOR UPGRADE PLACEMENTS
The review for upgrade placements primarily reflect the positive collateral
outlook, recent performance improvement and increased credit enhancement.
At the same time, swap linkage to RBS affects the credit quality
of these notes. The swap documentation contains provisions for
the swaps to be transferred upon loss of RBS's long-term
A3 rating and the resolution of the review on these tranches will take
into account any changes that result from RBS's rating, and
the subsequent swap impact.
--- LINKAGE TO RBS
If Moody's confirms RBS's rating, then it is likely
that these notes will be upgraded in line with similar notes that do not
have swap exposure to RBS. However, if Moody's downgrades
RBS below A3 and the swap is not transferred under the same terms,
upward rating pressure will be minimal.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A further build-up of credit enhancement and improvements in credit
quality (greater than Moody's would expect) would prompt upward
pressure on the ratings. If the underlying mortgage market continues
to improve, increased activity will cause the transaction to deleverage
via principal redemptions. A positive underlying mortgage market
will also help to minimise arrears levels and contain loss severities.
Deterioration in swap-counterparty credit quality or higher-than-expected
losses would exert downward pressure on the ratings. Due to the
isolated swap approach, counterparty credit deterioration could
negatively affect cross-currency notes, such as those with
exposure to RBS (A3, rating under review for downgrade).
Losses may be higher than expected due to uncertainties about the evolution
of general economic activity in the UK, interest rates and house
prices. If realised recovery rates are lower or default rates are
higher than expected, the ratings would be negatively affected.
OTHER FACTORS ALSO CONSIDERED
Aire Valley and Granite were structured to eliminate the risk of issuer
balance-sheet insolvency, through their reliance on post
enforcement call options (PECOs). The UK Supreme Court concluded
in July 2011 that it is possible for structured finance issuers with full
recourse notes to become balance-sheet insolvent under English
law. Therefore, PECOs generally do not prevent issuers from
becoming balance-sheet insolvent, regardless of whether the
PECO holder is contractually bound to exercise its rights. Due
to the current levels of enhancement and the swaps 'disapplying'
insolvency as an event of default, the risk associated with the
PECO not being effective is reduced.
SENSITIVITY ANALYSIS
Moody's tested the sensitivity of the ratings to various stress scenarios.
The results show that the ratings of all Class A,B and M notes would
be able to withstand a 40% increase of the collateral pool expected
loss, and for all other notes an increase of 20%, all
other parameters remaining constant.
The principal methodology used in these ratings was Moody's Approach to
Rating RMBS Using the MILAN Framework published in November 2013.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
LOSS AND CASHFLOW ANALYSIS
Sufficient credit enhancement at all levels in the capital structures
of Granite and Whinstone mean that Moody's has not conducted cash
flow analysis for these deals. Instead, Moody's benchmarked
each tranche's credit enhancement level against empirical loss scenarios
to determine the final expected loss on each note. In addition,
Moody's considered scenario cases including an increase of the collateral
pool expected loss by 20% to 40% from the current level.
Today' rating actions are in line with the results of both the base-case
and stressed scenarios.
In its review of Aire Valley, Moody's used its Master Trust cash
flow model, to determine the loss for each tranche. The cash
flow model evaluates all default scenarios that are weighted considering
the probabilities of the lognormal distribution assumed for the portfolio
default rate. In each default scenario, Moody's calculates
the corresponding loss for each class of notes given the incoming cash
flows from the assets and the outgoing payments to third parties and noteholders.
Therefore, the expected loss for each tranche is the sum product
of (1) the probability of occurrence of each default scenario; and
(2) the loss derived from the cash flow model in each default scenario
for each tranche.
STRESS SCENARIOS
As described in the previous section, Moody's analysis encompasses
the assessment of stressed scenarios.
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.
Moody's describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
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.
Angela Jung
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
Annabel Schaafsma
Associate Managing Director
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 takes multiple actions on Aire Valley, Granite and Whinstone UK RMBS notes
