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Rating Action:

Moody's takes multiple actions on Aire Valley, Granite and Whinstone UK RMBS notes

18 Feb 2014

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
No Related Data.
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