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Rating Action:

Moody's upgrades 10 notes in Aire Valley Master Trust

04 Nov 2014

London, 04 November 2014 -- Moody's Investors Service has today upgraded the ratings of 10 notes issued from the Aire Valley UK residential mortgage-backed securities (RMBS) master trusts.

In addition, Moody's has confirmed the ratings of 2 notes which were previously placed on review for potential upgrade on 22 September 2014 and today's rating actions conclude these reviews. Series 2A1 and 2A2 from the 2007-1 issuance remain on watch for downgrade given the swap linkage to Royal Bank of Scotland plc (RBS) that affects the credit quality of these notes.

Please refer to the end of the Ratings Rationale section for a list of affected ratings.

RATINGS RATIONALE

PRIMARY RATIONALE FOR RATING UPGRADES

Today's rating actions reflect (i) the positive collateral outlooks on the UK Buy to Let RMBS sector (ii) sufficiency of credit enhancement for the revised rating levels and (iii) lower Milan CE assumption. The lower Milan CE is driven by the updated and additional information received on the mortgage loans in the pool as well as the collateral performance.

--- COLLATERAL PERFORMANCE

The Aire Valley Mortgages portfolio is performing in line with Moody's expectations. Moody's maintained its loss expectations at 2.3% of the original pool balance in the transaction. Moody's revised its MILAN CE assumption to 17% from 19%. The loss expectation and the MILAN CE are the two key parameters used by Moody's to calibrate the loss distribution curve, which is one of the inputs into the RMBS cash-flow model.

The downward adjustment of MILAN CE is a result of additional information received in relation to the borrowers with bad credit history which was previously not updated and so Moody's made conservative assumptions on the proportion of loans with such features. The increase in house prices in the UK since 2009 have contributed to indexed LTV of approx 70%, compared to 80% current LTV. In addition Aire Valley Mortgages benefits from a substantial seasoning of the collateral of 9 years.

--- EXPOSURE TO COUNTERPARTIES

Moody's rating analysis also took into consideration the exposure to key transaction counterparties including the roles of servicer, account bank, and swap provider. Moody's assessed the exposure to the swap counterparties when revising ratings and notes that the exposure to swap counterparties continues to affect the credit quality of the notes. Series 2A1 and 2A2 from the 2007-1 issuance remain on watch for downgrade given the swap linkage to RBS.

Moody's analyses 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. 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 Series. Moody's gives less benefit to pre-2007 notes in Aire Valley Mortgages if the swap documents contain material deviations from its current criteria. However, newer swaps are generally substantially consistent with its framework and include collateral volatility buffers that Moody's gives value to under its updated criteria.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors or circumstances that could lead to an upgrade of the ratings include (i) further improvements in credit quality and (ii) further deleveraging of the capital structure.

Factors or circumstances that could lead to a downgrade of the ratings include (i) deterioration in swap-counterparty credit quality and (ii) a worse than expected performance of the underlying collateral.

OTHER FACTORS ALSO CONSIDERED

Aire Valley Mortgages was 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 Series A and B would be able to withstand a 40% increase of the collateral pool expected loss; the Series C would be able to withstand a 20% increase and Series D would be able to withstand a increase of 10%, 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 March 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Loss and Cash Flow Analysis:

In its review of Aire Valley Mortgages, Moody's used a Master Trust model to assess 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 Series 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.

Stress Scenarios:

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

List of Affected Ratings:

Issuer: Aire Valley Mortgages 2004 - 1 plc

....EUR 25M Series 3 B2 Notes, Upgraded to Aa1 (sf); previously on Sep 22, 2014 Aa2 (sf) Placed Under Review for Possible Upgrade

....GBP 20M Series 3 C1 Notes, Upgraded to A1 (sf); previously on Sep 22, 2014 A2 (sf) Placed Under Review for Possible Upgrade

....EUR 31M Series 3 C2 Notes, Upgraded to A1 (sf); previously on Sep 22, 2014 A2 (sf) Placed Under Review for Possible Upgrade

....GBP 15M Series 3 D1 Notes, Confirmed at Baa2 (sf); previously on Sep 22, 2014 Baa2 (sf) Placed Under Review for Possible Upgrade

....EUR 22M Series 3 D2 Notes, Confirmed at Baa2 (sf); previously on Sep 22, 2014 Baa2 (sf) Placed Under Review for Possible Upgrade

Issuer: Aire Valley 2005-1, Plc

....EUR 23M Series 2 B2 Notes, Upgraded to Aa1 (sf); previously on Sep 22, 2014 Aa2 (sf) Placed Under Review for Possible Upgrade

....EUR 41.8M Series 2 C2 Notes, Upgraded to A1 (sf); previously on Sep 22, 2014 A2 (sf) Placed Under Review for Possible Upgrade

Issuer: Aire Valley Mortgages 2006 - 1 plc

....US$ 70M Series 1 B1 Notes, Upgraded to Aa1 (sf); previously on Sep 22, 2014 Aa2 (sf) Placed Under Review for Possible Upgrade

Issuer: Aire Valley Mortgages 2007 - 1 plc

....GBP 62.5M Series 1 C Notes, Upgraded to A1 (sf); previously on Sep 22, 2014 A2 (sf) Placed Under Review for Possible Upgrade

....GBP 81.25M Series 2 C Notes, Upgraded to A1 (sf); previously on Sep 22, 2014 A2 (sf) Placed Under Review for Possible Upgrade

Issuer: Aire Valley Mortgages 2007-2 plc

....GBP 84M Series 1 C Notes, Upgraded to A1 (sf); previously on Feb 18, 2014 Upgraded to A2 (sf)

Issuer: Aire Valley Mortgages 2008-1 plc

....GBP 190M Series 2 C Notes, Upgraded to A1 (sf); previously on Feb 18, 2014 Upgraded to A2 (sf)

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.

Steven Becker
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 upgrades 10 notes in Aire Valley Master Trust
No Related Data.
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