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Rating Action:

Moody's upgrades ratings in three UK residential mortgage backed securities transactions

18 Oct 2016

London, 18 October 2016 -- Moody's Investors Service has today upgraded the ratings of 10 notes and affirmed the ratings of 13 notes in Auburn Securities 4 PLC (Auburn 4), Auburn Securities 5 PLC (Auburn 5) and Brunel Residential Mortgage Securitisation No. 1 PLC (Brunel). The rating action reflects the upgrade of the Counterparty Risk Assessment (CR Assessment) of counterparties acting amongst others as servicer and swap counterparty in the transactions and, for Auburn 4 and Auburn 5, the correction of an error in our assessment of swap counterparty risk for tranche E and the change in approach for modelling swap counterparty risk for tranche D.

Moody's affirmed the ratings of the notes that had sufficient credit enhancement to maintain the current rating on the affected notes.

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

RATINGS RATIONALE

The rating action is prompted by:

- the upgrade of Bank of Ireland's CR Assessment to A3(cr). Bank of Ireland acts amongst others as servicer, cash manager and swap counterparty in Brunel,

- the upgrade of Permanent TSB p.l.c's (Permanent TSB) CR Assessment to Ba2(cr). Permanent TSB acts as the back-up servicer and swap counterparty in the Auburn 4 and Auburn 5 transactions.

See Moody's takes rating actions on Irish banks, http://www.moodys.com/viewresearchdoc.aspx?docid=PR_355209.

- The correction of an error in our assessment of the swap counterparty risk for tranche E in Auburn 4 and Auburn 5,

- the change of our approach to model the swap counterparty risk for tranche D in Auburn 4 and Auburn 5.

No Revision of Key Collateral Assumptions:

As part of the rating action, Moody's maintained its lifetime loss expectation for the portfolio reflecting the collateral performance to date.

Moody's has also assessed loan-by-loan information as a part of its detailed transaction review to determine the credit support consistent with target rating levels and the volatility of future losses. As a result, Moody's has maintained the portfolio credit Milan assumption at 10%, 11% and 14.7% for Auburn 4, Auburn 5 and Brunel respectively.

Increase in Available Credit Enhancement

Non-amortising reserve funds and, in the case of Auburn 4 and 5, sequential amortization led to the increase in the credit enhancement available in these transactions.

For instance, the credit enhancement for tranche D in Auburn 4 increased from 2.6% to 9.9% since closing and the credit enhancement for tranche D in Auburn 5 increased from 1.8% to 7.0% since closing. The credit enhancement for the most senior tranches in Brunel affected by today's rating action (Class A4a, A4b, A4c) increased from 8.1% to 22.6% and the credit enhancement for Class B4a and B4b from 6.1% to 18.6% since closing.

Counterparty Exposure

Today's rating actions took into consideration the notes' exposure to relevant counterparties, such as servicer and swap counterparty.

Moody's considered how the liquidity available in the transactions and other mitigants support continuity of note payments, in case of servicer default, using the CR Assessment as a reference point for servicers. Following the upgrade of Bank of Ireland's CR Assessment to A3(cr), the rating of the Class A4a, A4b, A4c notes in Brunel are not constrained by operational risk anymore. Moody's considers that the reserve fund of currently 6.7% is sufficient to support payments in the event of servicer disruption. As a result, Moody's upgraded the A4 tranches in Brunel to Aaa(sf).

Moody's assessed the exposure to Bank of Ireland acting as swap counterparty. Moody's analysis considered the risks of additional losses on the notes if they were to become unhedged following a swap counterparty default by using the CR Assessment as reference point for swap counterparties. Moody's concluded that the ratings of the notes in Brunel are not constrained by the counterparty exposure arising from the swap agreement entered between the issuer and Bank of Ireland.

Moody's also assessed the exposure to Permanent TSB acting as swap counterparty in Auburn 4 and 5. Tranches D and E in Auburn 4 and 5 respectively were previously constrained by the counterparty exposure arising from the swap agreement entered into between the issuer and Permanent TSB. Assets backing the notes in these two transactions are mostly referenced to the Bank of England Base Rate (BBR), while notes are referenced to one-month GBP LIBOR. The two transactions include a swap agreement with Permanent TSB to hedge this risk.

For tranche D, to determine the incremental loss that the tranche will incur if the transaction becomes unhedged, we previously applied the Step 3 Table from Moody's Approach to Assessing Swap Counterparties in Structured Finance Cash Flow Transactions, published in March 2015. However, this swap methodology also allows modelling the risk as an alternative approach. After modelling the swap exposure, Moody's concluded that tranche D is not constrained by the exposure to the swap counterparty due to the nature of the swap (basis risk), the relatively short swap tenor and the credit enhancement available for this tranche.

For tranche E, in our previous analysis we modelled the swap exposure using the above-mentioned alternative approach under the swap methodology. However, under this approach we overestimated the incremental loss caused to the tranche in the case of the transaction becoming unhedged. In particular, the previous analysis incorrectly distributed the transaction loss over the weighted average life (WAL) of the portfolio, instead of the WAL of the notes. When reassessing swap linkage for tranche E in Auburn 4 and 5 we distributed the transaction loss over the relevant tranche WAL and accounted for portfolio amortisation over time.

After further accounting for the updated CR Assessment of Permanent TSB as swap counterparty, Moody's concluded that the ratings of the D and E notes are not constrained by the swap counterparty exposure. As a result, Moody's upgraded tranches D and E in both transactions, respectively.

The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in September 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The analysis undertaken by Moody's at the initial assignment of these ratings for RMBS securities may focus on aspects that become less relevant or typically remain unchanged during the surveillance stage. Please see Moody's Approach to Rating RMBS Using the MILAN Framework for further information on Moody's analysis at the initial rating assignment and the on-going surveillance in RMBS.

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 (1) performance of the underlying collateral that is better than Moody's expected, (2) deleveraging of the capital structure and (3) improvements in the credit quality of the transaction counterparties.

Factors or circumstances that could lead to a downgrade of the ratings include (1) an increase in sovereign risk (2) performance of the underlying collateral that is worse than Moody's expected, (3) deterioration in the notes' available credit enhancement and (4) deterioration in the credit quality of the transaction counterparties.

LIST OF AFFECTED RATINGS:

Issuer: Auburn Securities 4 PLC

....GBP597.5M A2 Notes, Affirmed Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa2 (sf)

....GBP40M B Notes, Affirmed Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa2 (sf)

....GBP40M C Notes, Affirmed Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa2 (sf)

....GBP25M D Notes, Upgraded to A1 (sf); previously on Jun 2, 2016 Affirmed Baa3 (sf)

....GBP12.5M E Notes, Upgraded to Baa2 (sf); previously on Jun 2, 2016 Affirmed Ba1 (sf)

....GBP15M M Notes, Affirmed Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa2 (sf)

Issuer: Auburn Securities 5 PLC

....GBP255.6M A2 Notes, Affirmed Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa2 (sf)

....GBP9M B Notes, Affirmed Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa2 (sf)

....GBP18M C Notes, Upgraded to Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa3 (sf)

....GBP11.25M D Notes, Upgraded to A2 (sf); previously on Jun 2, 2016 Affirmed Baa3 (sf)

....GBP5.65M E Notes, Upgraded to Baa3 (sf); previously on Jun 2, 2016 Upgraded to B1 (sf)

....GBP20M M Notes, Affirmed Aa2 (sf); previously on Jun 2, 2016 Upgraded to Aa2 (sf)

Issuer: BRUNEL RESIDENTIAL MORTGAGE SECURITISATION NO. 1 PLC

....EUR1025M A4a Notes, Upgraded to Aaa (sf); previously on Nov 26, 2014 Affirmed Aa2 (sf)

....GBP742.5M A4b Notes, Upgraded to Aaa (sf); previously on Nov 26, 2014 Affirmed Aa2 (sf)

....US$1575M A4c Notes, Upgraded to Aaa (sf); previously on Nov 26, 2014 Affirmed Aa2 (sf)

....EUR127M B4a Notes, Upgraded to Aa1 (sf); previously on Nov 26, 2014 Affirmed Aa3 (sf)

....GBP24M B4b Notes, Upgraded to Aa1 (sf); previously on Nov 26, 2014 Affirmed Aa3 (sf)

....EUR201M C4a Notes, Affirmed Aa3 (sf); previously on Nov 26, 2014 Upgraded to Aa3 (sf)

....GBP30M C4b Notes, Affirmed Aa3 (sf); previously on Nov 26, 2014 Upgraded to Aa3 (sf)

....US$30M C4c Notes, Affirmed Aa3 (sf); previously on Nov 26, 2014 Upgraded to Aa3 (sf)

....EUR157M D4a Notes, Affirmed A3 (sf); previously on Nov 26, 2014 Upgraded to A3 (sf)

....GBP27M D4b Notes, Affirmed A3 (sf); previously on Nov 26, 2014 Upgraded to A3 (sf)

....US$30M D4c Notes, Affirmed A3 (sf); previously on Nov 26, 2014 Upgraded to A3 (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.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

Gaby Trinkaus
Vice President - Senior 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

Masako Oshima
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

No Related Data.
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