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
