Celeste Mortgage Funding PLC

Transcription

1 Presale: Celeste Mortgage Funding PLC Primary Credit Analyst: Andrea Giacobello, London (44) ; Secondary Contact: Neil Monro, London (44) ; Table Of Contents British Pound Sterling-Denominated Residential Mortgage-Backed Floating-Rate Notes Transaction Summary Notable Features Strengths, Concerns, And Mitigating Factors Transaction Structure Notes Terms And Conditions Collateral Description Credit Structure Hedging Risk Credit And Cash Flow Analysis Scenario Analysis Sector Credit Highlights Surveillance MARCH 11,

2 Table Of Contents (cont.) Standard & Poor's 17g-7 Disclosure Report Related Criteria And Research MARCH 11,

3 Presale: Celeste Mortgage Funding PLC British Pound Sterling-Denominated Residential Mortgage-Backed Floating-Rate Notes This presale report is based on information as of March 11, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Class Preliminary rating* Preliminary amount (mil. ) Class size (%) Available credit enhancement (%) Interest A AAA (sf) TBD Three-month LIBOR plus 0.85% B AA (sf) TBD Three-month LIBOR plus 1.05% C A (sf) TBD Three-month LIBOR plus 1.20% D BBB (sf) TBD Three-month LIBOR plus 1.70% E BB (sf) TBD Three-month LIBOR plus 2.10% F B (sf) TBD Three-month LIBOR plus 2.50% G NR TBD Three-month LIBOR plus 1.00% H NR TBD Three-month LIBOR plus 1.00% Subordinated notes NR TBD 1.41 N/A Three-month LIBOR plus 1.00% Step-up margin (%) Step-up date March March March March March March March March March 2020 Legal final maturity March 2045 March 2045 March 2045 March 2045 March 2045 March 2045 March 2045 March 2045 March 2045 *The rating on each class of securities is preliminary as of March 11, 2015, and subject to change at any time. We expect to assign final credit ratings on the closing date subject to a satisfactory review of the transaction documents and legal opinion. Standard & Poor's ratings address timely interest and principal payments. This is the initial credit enhancement. N/A--Not applicable. NR--Not rated. TBD--To be determined. Transaction Participants Originators Basinghall Finance (96.3%) and GMAC RFC Ltd. (3.7%) Beneficial title seller Basinghall Mortgage Finance No.1 Ltd. Joint lead managers Macquarie Bank Ltd., London Branch and Credit Suisse Securities (Europe) Ltd. Arranger Macquarie Bank Ltd., London Branch Special servicer Basinghall Finance Ltd. MARCH 11,

4 Transaction Participants (cont.) Portfolio administrator Standby portfolio administrator Cash administrator Standby cash administrator Agent bank and principal paying agent Trustee Issuer account bank Collection account bank Basinghall Finance Ltd. Homeloan Management Ltd. Basinghall Finance Ltd. Citibank N.A., London Branch Citibank N.A., London Branch Citicorp Trustee Co. Ltd. Citibank, N.A., London Branch HBSC Bank PLC Transaction Key Features* Expected closing date Collateral TBD U.K. buy-to-let mortgage loans Principal outstanding of the provisional pool (mil. ) Country of origination England and Wales Concentration (%) London and Southeast England Property occupancy Buy-to-let 94.87% Weighted-average indexed current LTV ratio (%) Weighted-average original LTV ratio (%) Average loan size balance ( ) (per borrower) 268,880 Largest loan-size ( ) (borrower level) 4,833,840 Weighted-average seasoning (months) Weighted-average margin (%) 2.15 Arrears exceeding one-month (%) 4.17 Projected arrears (%) 5.93 Redemption profile (%) Interest-only Credit reserve fund (%) 1.50 Target credit reserve fund (%) 2.25 Credit reserve fund liquidity amount (%) 0.70 Target Credit reserve fund liquidity amount (%) 0.70 Mortgage loan priority First-ranking *Data is based on a provisional pool as of Dec. 31, 2014 (loans that have passed their maturity date are not included). Based on Standard & Poor's methodology, including valuation haircuts relating to the current LTV ratio. The subordinated note retained by the seller will fund this at closing to 1.5% of the rated balance at closing, building up to 2.25% of the closing pool through excess spread. This 1.5% at closing is split into the credit reserve fund liquidity amount, funded at 0.7% of the outstanding balance of rated notes, and the remaining being credit reserve fund available amounts. TBD--To be determined. LTV--Loan-to-value. Transaction Summary Standard & Poor's Ratings Services has assigned its preliminary credit ratings to Celeste Mortgage Funding PLC's class A, B, C, D, E, and F notes. At closing, Celeste Mortgage Funding will also issue unrated notes. At closing, the issuer will purchase the beneficial interest in a portfolio of U.K. residential mortgages from the beneficial title seller (Basinghall Mortgage Finance No.1 Ltd.), using the proceeds from the issuance of the rated and unrated MARCH 11,

5 notes. The proceeds of the subordinated notes will be used to fund a credit reserve fund. Our preliminary ratings reflect our assessment of the transaction's payment structure, cash flow mechanics, and the results of our cash flow analysis to assess whether the notes would be repaid under stress test scenarios. Subordination and the credit reserve fund available amount provide credit enhancement to the notes. Taking these factors into account, we consider the available credit enhancement for the notes to be commensurate with the assigned preliminary ratings. Notable Features The million preliminary pool (as of Dec. 31, 2014) comprises first-lien U.K. buy-to-let residential mortgages owned by Basinghall Mortgage Finance No.1. The originators are Basinghall Finance Ltd. (96.3%) and GMAC RFC Ltd. (3.7%). Chart 1 The collateral pool comprises first-lien U.K. buy-to-let residential mortgage loans, 1.86% of which have previous county court judgments (CCJ). The portfolio's weighted-average current loan-to-value (LTV) ratio is 77.68% (according to our methodology, which includes haircuts to valuations when the valuation method was not a full MARCH 11,

6 surveyor valuation). The class A to F notes' interest rate is equal to three-month British pound sterling LIBOR plus a class-specific margin. As the notes' interest will be based on an index of three-month sterling LIBOR, there is a basis risk mismatch. This is because the underlying collateral contains loans that are linked to the seller's standard variable rate, the Bank of England Base Rate (BBR), or three-month sterling LIBOR (that resets at a different reset date to the notes). As a result, we stress the historical difference between the index paid on the assets and the liabilities. Our analysis then uses the percentiles of the resulting distribution according to table 20 of our U.K. residential mortgage-backed securities (RMBS) criteria (see "U.K. RMBS Methodology And Assumptions," published on Dec. 9, 2011). This transaction will not benefit from a swap to hedge interest rate or basis risk. The issuer will pay interest according to the interest payment priority. Under the transaction documentation, interest payments on all classes of notes (excluding the senior class of notes), can be deferred if the issuer has insufficient funds. Consequently, any interest deferral would not constitute an event of default. However, our preliminary ratings address the timely interest and ultimate principal payments on the notes. While all classes of notes were able to pass our cash flow stresses under these assumptions, if a class of notes were to defer interest, we would lower our rating on that class of notes to 'D (sf)'. Strengths, Concerns, And Mitigating Factors Strengths All of the mortgages in the portfolio are first-lien residential mortgages and the portfolio is well-seasoned, in our view. The issuance of the unrated notes will fund the credit reserve fund at closing to 1.5% of the rated balance at closing. This credit reserve fund comprises the credit reserve fund liquidity amount and credit reserve fund available amounts. The credit reserve fund available amounts will provide credit enhancement to all of the classes of notes. Excess spread can replenish the credit reserve fund on each interest payment date (IPD) up to the required documented amount (2.25% of the balance of rated notes at closing). The credit reserve fund liquidity amount is funded at 0.7% of the outstanding balance of the rated notes. Any excess upon subsequent amortization is transferred to the credit reserve available amounts. The credit reserve fund liquidity amount is available to mitigate interest shortfalls on the outstanding classes of notes and senior expenses, subject to the transaction not having breached certain conditions on the cumulative default triggers and amount recorded in the principal deficiency ledger. The issuer can use principal receipts to mitigate interest shortfalls on the outstanding classes of notes and senior expenses, subject to the transaction not having breached certain criteria related to cumulative default triggers and amounts recorded on the principal deficiency ledger. Principal receipts can also be used to top up the credit reserve liquidity amount to the extent it was drawn to mitigate interest shortfalls on the outstanding classes of rated notes and senior expenses. As the notes will amortize sequentially, credit enhancement can build up over time for the outstanding classes of notes. This will improve the transaction structure's ability to withstand performance shocks. The transaction will never revert to paying principal on a pro rata basis. Any losses on the portfolio and any use of principal as available revenue receipts would result in the issuer recording a principal deficiency ledger (PDL) amount. MARCH 11,

7 Concerns and mitigating factors The beneficial title seller, Basinghall Mortgage Finance No.1 will sell the beneficial interest in the mortgages to the issuer. The beneficial title seller's ability to repurchase a loan if a representation or warranty is breached is, in our view, limited. To mitigate this, the seller and Basinghall Finance, have made representations to the issuer to repurchase loans upon material breach of asset representations or warranties and if Basinghall Finance elects to make a port, a further advance, or a product switch for any mortgage loans in the portfolio. The portfolio is geographically diverse, but under our U.K. RMBS criteria, at 57.46% the pool exhibits excessive geographical concentration in London and Southeast England. We have addressed this factor in our analysis in line with our U.K. RMBS criteria. Of the preliminary pool, 81.23% of loans have an original LTV ratio of more than 80%. Loans with higher LTV ratios historically perform worse than other similar loans. We have addressed this factor in our credit analysis in line with our U.K. RMBS criteria. Within the preliminary pool, 4.17% of the loans are more than one month delinquent. We have also projected arrears to incorporate our expectation of arrears in the pool. As 67.53% of the loans are linked to the BBR and 3.99% pay the standard variable rate (SVR), a basis mismatch risk arises, as the notes will pay three-month pound sterling LIBOR. There is also a basis mismatch risk here, as the LIBOR reset date on the notes differs from that on the loans. As a basis risk swap has not hedged the transaction's exposure to basis risk, we have addressed this through stressing the cash flows from the assets. We have taken the historical difference between the index paid on the assets and the liabilities. Our analysis then uses the percentiles of the resulting distribution according to table 20 of our U.K. RMBS criteria. This is a prime RMBS transaction, with various features that we view as being typically higher risk. Of the loans in the pool, 94.87% secure buy-to-let properties and 98.97% are interest-only loans. Of the borrowers, 1.86% have had at least one CCJ. We have addressed all of these features accordingly in our credit analysis in line with our U.K. RMBS criteria. If any of the originators become insolvent, mortgage collection amounts that have been paid into the collection account may become part of its bankruptcy estate. To mitigate this risk, collections are transferred daily into the issuer bank account and a declaration of trust is in place for the collection accounts. Transaction Structure At closing, Celeste Mortgage Funding will issue nine classes of notes. It will use the issuance proceeds to purchase full a beneficial interest in each of the mortgage loans within the portfolio from the beneficial title seller. The issuer will grant security over all of its assets in the security trustee's favor. Seller and originators Basinghall Mortgage Finance No.1 is the beneficial title seller, with Basinghall Finance (96.3%) and GMAC RFC Ltd. (3.7%) having previously originated the loans in the pool. Basinghall Finance will be the special servicer for all of the loans in the pool. We are satisfied that Basinghall Finance is capable of performing its functions in the transaction as servicer. At closing, Basinghall Finance will delegate the portfolio management of the mortgage loans to Homeloan Management Ltd. (Above Average ranking as a primary and special servicer of U.K. residential mortgages). In our view, the loans in the pool are well-seasoned and we have analyzed the previous arrears performance and have MARCH 11,

8 incorporated this into our credit analysis through our arrears projections. Notes Terms And Conditions Celeste Mortgage Funding will pay interest quarterly beginning in June The notes pay interest equal to three-month LIBOR plus a class-specific margin. The notes' coupons will increase to a step-up margin after month 60. Thereafter, the notes will pay a step-up coupon of three-month LIBOR plus the step-up margin. All of the notes will reach legal final maturity in a timeframe to be determined. Optional redemption of the notes The issuer may redeem the rated notes at their outstanding principal amount with any accrued (and unpaid) interest on each interest payment date on and from the optional redemption date or on any interest payment date on which the aggregate current balance of the mortgage loans (excluding enforced loans) as of the immediately preceding cut-off date is equal to or less than 10% of the aggregate principal outstanding of the notes at closing. Collateral Description As of the pool cut-off date on Dec. 31, 2014, the preliminary pool that we reviewed totaling million, comprised 1,431 loans secured by U.K. owner-occupied (5.13%) and buy-to-let (94.87%) properties. Of the loans in pool, 98.97% are interest only. Interest-only loans generally exhibit a higher historical default probability than full repayment loans and we have accounted for this risk in our credit analysis. The pool's seasoning is generally high, with a weighted-average seasoning of 87.8 months (see chart 2). We view loans with high seasoning as having lower risk profiles than loans with otherwise identical characteristics. However, the pool includes loans that have had severe delinquencies in the past and have only recently become current. Since these loans generally exhibit higher default probabilities than loans that have never been delinquent, we have accounted for this risk in our credit analysis. MARCH 11,

9 Chart 2 The pool is mainly concentrated in Southeast England and London (57.46%; see chart 4). This concentration is higher than the level that we consider highly concentrated. We have therefore adjusted for this in our analysis according to our U.K. RMBS criteria. MARCH 11,

10 Chart 3 MARCH 11,

11 Chart 4 The pool's 83.32% weighted-average original LTV ratio is above the average for a typical U.K. RMBS transaction, calculated using our U.K. RMBS criteria (see chart 5). We consider that borrowers with minimal equity in their property are less likely to be able to refinance and are more likely to default on their obligations than borrowers with lower original LTV ratio loans. At the same time, loans with high current indexed LTV ratios are likely to incur greater loss severities if the borrower defaults. Of the pool, 18.16% has a current indexed LTV ratio between 90% and 100%, and 0.94% have a current indexed LTV ratio of greater than 100%. Our weighted-average current LTV ratio is 77.68%. This figure accounts for haircuts to valuations when the valuation method was not a full surveyor valuation. MARCH 11,

12 Chart 5 MARCH 11,

13 Chart 6 Of the pool, 2.97% comprises repayment mortgage loans and 98.97% are interest-only loans. According to our U.K. RMBS criteria, if the aggregate long-term interest-only percentage is greater than 50% of the total pool balance, we apply an adjustment factor to the excess amount above 50%. We view interest-only loans with less than 10-year terms as having a higher risk of default than repayment mortgages and long-term interest-only loans. Of the interest-only loans, only 1.67% have less than 10-year maturities. We consider interest-only loans with short maturities to be riskier than long-dated comparable loans, all else being equal. We believe this risk arises from potential insufficient funds in a repayment vehicle to redeem the principal balance, or refinancing options not being available to the borrower. We incorporated this risk into our analysis by incorporating an adjustment factor for these loans. Currently, 4.17% of loans in the preliminary pool are more than one-month delinquent. In our analysis, we also incorporated an arrears projection for the pool in the near to medium term. We determine this projection based on analyzing the historic arrears performance data of the originators' mortgage books or specific pools, where available. Our projection is 5.93%. MARCH 11,

14 Repurchase of the loans The beneficial title seller will repurchase the affected loans: Upon material breach of asset representations and warranties; If the borrower is granted a further advance; and If the borrower chooses to switch mortgage products. Credit Structure A combination of subordination, the credit reserve fund, and excess spread on the mortgage loans will provide credit support for the notes (see table 1). Table 1 Credit Enhancement Class Preliminary rating Class size (%) Initial credit enhancement (%) A AAA (sf) B AA (sf) C A (sf) D BBB (sf) E BB (sf) F B (sf) G NR H NR Subordinated notes NR 1.41 NR NR--Not rated. TBD--To be determined. Celeste Mortgage Funding will open the issuer transaction account with Citibank N.A., London Branch. The transaction account will be subject to the transaction documents, which we expect will specify that the issuer must take remedial actions, including replacing Citibank N.A. as the bank account provider with a suitably rated financial institution, if: At any time, our long-term issuer credit rating (ICR) on the bank account provider falls below 'A', where the short-term rating is at least 'A-1'; or Our long-term ICR on the bank account provider falls below 'A+', if it does not have a short-term rating. Borrower payments are received into collection accounts in legal title holder. All amounts in the collection accounts at the end of each business day will be transferred to the transaction account. The transaction documents will establish a declaration of trust over any amounts in the collection account. We understand that the transaction documents will specify that the issuer must take remedial actions, including the replacement of any collection account bank as collection account provider with a suitably rated financial institution, if: Our long-term ICR on the collection bank account provider (National Westminster Bank) falls below 'BBB', where the short-term rating is at least 'A-2'; or Our long-term ICR on the collection bank account provider falls below 'BBB+', if it does not have a short-term MARCH 11,

15 rating. Credit reserve fund At closing, the seller will fund the credit reserve fund to 1.50% of the rated note balance through the issuance of the unrated subordinated notes. The fund can accumulate up to 2.25% of the closing pool through excess spread. This credit reserve fund comprises the credit reserve fund liquidity amounts and credit reserve fund available amounts. The credit reserve fund available amounts will provide credit enhancement for all classes of notes that are senior to the unrated class G, H, and subordinated notes. The issuer can use the credit reserve fund available amounts to pay senior expenses and interest and to cure any amounts recorded in the principal deficiency ledgers on the class A to F notes. The credit reserve fund liquidity amount is funded at 0.7% of the outstanding rated note balance, and is amortizing. The amortized excess is released into the credit reserve fund available amounts. The issuer can also use the credit reserve fund liquidity amounts to pay senior expenses and interest on the class A to F notes, provided the transaction meets certain criteria for the amounts recorded on the principal deficiency ledger and cumulative default triggers. Liquidity support The issuer can use principal receipts to mitigate interest shortfalls on the class A to F notes and senior expenses, provided the transaction meets certain criteria for the amounts recorded on the principal deficiency ledger and cumulative default triggers. Criteria to use the credit reserve fund liquidity amounts and principal receipts To use the credit reserve fund liquidity amounts and principal receipts, the following criteria must be met: Senior expenses and class A notes: none. Class B notes: the total PDL balance is less than or equal to the principal amount outstanding of classes B, C, D, E, F, G, and H or the class B notes are the most-senior notes; and cumulative defaults are less than or equal to 43.4% of the loan balance at issuance. Class C notes: total PDL balance is less than or equal to the principal amount outstanding of classes C, D, E, F, G, and H, or the class C notes are most-senior notes; and cumulative defaults are less than or equal to 34.6% of the loan balance at issuance. Class D notes: the total PDL balance is less than or equal to the principal amount outstanding of classes D, E, F, and G, and H, or the class D notes are most-senior notes; and cumulative defaults are less than or equal to 26.2% of the loan balance at issuance Class E notes: the total PDL balance is less than or equal to the principal amount outstanding of classes E, F, G, and H or the class E Notes are the most-senior notes; and cumulative defaults are less than or equal to 17.3% of the loan balance at issuance. Class F notes: the total PDL balance is less than or equal to the principal amount outstanding of classes F, G, and H, or the class F notes are the most-senior notes; and cumulative defaults are less than or equal to 14.5% of the loan balance at issuance. Principal deficiency ledger The cash manager will establish and maintain a PDL, at an aggregate level for classes A to H. Any losses on the portfolio and any use of principal as available revenue receipts would result in the cash manager recording a PDL amount. MARCH 11,

16 The cash administrator will use excess interest to clear any PDL amounts recorded to enable the transaction to be fully collateralized. Revenue payment priority Trustee fees and expenses; Special servicer fees (5 basis points [bps]), portfolio administrator fee (15 bps), cash management fees (5 bps), and other senior fees; Third party expenses; Issuer profit amount up to 300; Class A notes' interest; Class A notes' PDL; Class B notes' interest; Class B notes' PDL; Class C notes' interest; Class C notes' PDL; Class D notes' interest; Class D notes' PDL; Class E notes' interest; Class E notes' PDL; Class F notes' interest; Class F notes' PDL; Credit the credit reserve fund ledger; Subordinated portfolio administration fee (5 bps); After the step-up date, all amounts to be applied as available principal receipts; Class G notes' interest; Class H notes' interest; Subordinated notes' interest; and Excess amounts to the revenue residual certificate holders. Principal payment priority Shortfalls on trustee fees, special servicing fees, senior fees, portfolio administrator fees, cash management fees, other senior fees, third-party expenses, issuer profit amount, and interest on the class A to F notes if the transaction has met the cumulative default trigger and principal deficiency ledger criteria, as explained above; Class A notes' principal; Class B notes' principal; Class C notes' principal; Class D notes' principal; Class E notes' principal; Class F notes' principal; On any payment date after the step-up date, class G notes' interest; Class G notes' principal; On any payment date after the step-up date, class H notes' interest; Class H notes' principal; On any payment date after the step-up date, subordinated notes' interest; Subordinated notes' principal; and Excess amounts to the residual certificate holders. MARCH 11,

17 Hedging Risk The notes' interest rate will be based on an index of three-month sterling LIBOR, while 66.85% of the pool will pay a floating rate linked to BBR, 4.70% will pay an SVR rate (the SVR rate being linked to BBR), and 28.45% will pay a rate linked to three-month sterling LIBOR. The transaction will not benefit from any swap to hedge its exposure to the different indices. We have therefore stressed this by taking the historical difference between the indices paid on the assets and the liabilities. Our analysis then uses the percentiles of the resulting distribution according to table 20 of our U.K. RMBS criteria. Credit And Cash Flow Analysis We stressed the transaction's cash flows to test the credit and liquidity support that the assets, subordinated tranches, and principal and liquidity reserve funds provide. Credit enhancement The 'B' credit enhancement level for the standard U.K. mortgage loan pool is commensurate with our current assumptions of expected losses on that pool. These expected losses vary according to changes in the outlook for the U.K. mortgage market and macroeconomic factors such as unemployment, inflation, and current mortgage performance, among others. The current 'B' level of credit enhancement includes a foreclosure frequency component for the standard U.K. mortgage loan pool, as shown in table 2. We used the assumptions in table 2 as part of our credit analysis of the transaction's underlying assets. Table 2 Assumptions Rating level Base foreclosure frequency component for an archetypical U.K. mortgage loan pool (%) AAA AA 8.00 A 6.00 BBB 4.00 BB 2.00 Default and recovery amounts We model the foreclosure frequency for each loan in the pool, as well as the amount of loss if the property is subsequently sold (the loss severity, expressed as a percentage of the outstanding loan). We model a default of the total mortgage loan balance. We determine the total amount of the unrecovered defaulted balance for the entire pool by calculating the weighted-average foreclosure frequency (WAFF) and the weighted-average loss severity (WALS). When comparing the minimum credit enhancement levels that we consider commensurate with each rating level with that of this pool, we also included interest foregone between the point of default and the receipt of recoveries (see table 3). MARCH 11,

18 Table 3 Assumptions Rating level Minimum credit enhancement level (%) Credit enhancement modeled for this pool (%)* AAA AA A *This is the WAFF multiplied by the WALS including interest. WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. The WAFF and WALS increase in tandem with the rating level because notes with a higher rating should be able to withstand a higher level of mortgage default and loss severity. We base our credit analysis on the loans' and borrowers' characteristics, as well as our subsequent assessment of the WAFF and WALS for this portfolio, which we used as inputs for our cash flow analysis (see table 4). Table 4 Portfolio WAFF And WALS Rating level WAFF (%) WALS (%) AAA AA A BBB BB B WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. For modeling purposes, the repossession market value declines we apply under our U.K. RMBS criteria to calculate the loss severity incorporate our calculation of the degree of over- or under-valuation for each specific region of the U.K. Table 5 shows the resulting market value declines that we used in our analysis of this pool. Table 5 Repossession Market Value Declines At 'AAA', 'AA', And 'A' Rating Levels Region AAA (%) AA (%) A (%) BBB (%) East Anglia East Midlands North Northwest England Northern Ireland Scotland Southeast including London Southwest England Wales West Midlands Yorkshire and Humberside Weighted-average market value decline MARCH 11,

19 Default timings At each rating level, the WAFF specifies the total balance of the mortgage loans we assume to default over the transaction's life. We model these defaults to occur over a three-year recession. Further, we test the effect of the timing of this recession on the ability to repay the liabilities by starting the recessionary period at closing and in year 3. We apply the WAFF to the principal balance outstanding on the closing date. We model defaults to occur periodically, in amounts calculated as a percentage of the WAFF. The timing of defaults follows two paths, referred to as "front-loaded" and "back-loaded" (see table 6). Table 6 Default Timings For Front-Loaded And Back-Loaded Default Curves Recession month Front-loaded defaults (percentage of WAFF per month) Back-loaded defaults (percentage of WAFF per month) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Recovery timings We assume that the issuer regains any recoveries 12 months after a payment default for buy-to-let properties and 18 months after a payment default for owner-occupied properties. The value of recoveries at each rating level is 100%, minus the WALS for that rating level. We base the WALS we use in the cash flow model on principal loss, including foreclosure costs. We do not give credit for the recovery of any interest accrued on the mortgage loans during the foreclosure period. After we apply the WAFF to the balance of the mortgage loans, we find that the asset balance is likely to be lower than that of the liabilities. Our test shows that the transaction's other structural mechanisms mitigate the interest reduction caused by the defaulted mortgage loans during the foreclosure period. Delinquencies We model the liquidity stress that results from short-term delinquencies (those mortgage loans that cease to pay for a period of time, but then recover and become current with respect to both interest and principal). To simulate the effect of delinquencies, we model a proportion of scheduled collections equal to the greater of one-third of the WAFF or actual observed arrears to be delayed. We apply this in each of the first 18 months of the recession, and model full recovery of these delinquencies to occur 36 months after they arise. Therefore, if the total scheduled collateral collections expected to be received is 1 million and the WAFF is 30% in month five of the recession, 100,000 (one-third of the WAFF) is delayed until month 41. Interest and prepayment rates We model five different interest rate scenarios: Up, down, up-down, down-up, and forward curve. We model three prepayment scenarios at all rating levels: High, low, and forecast. For this transaction, we modeled the MARCH 11,

20 forecast constant payment rate (CPR) as 5.51%. During the recessionary period, we model the prepayment rate at 3%, before gradually reverting to a high prepayment rate under both scenarios. At the 'AA' level and above, we model an additional low prepayment scenario, which also reverts to a low prepayment rate after the recession period. In combination, the default timings, recession timings, interest rates, and prepayment rates described above give rise to 60 different scenarios at a 'AA' rating level and above (see table 7). The ratings we assign mean that the notes have all paid timely interest and ultimate principal under each of the scenarios at the assigned rating level. Table 7 RMBS Stress Scenarios Rating level Total number of scenarios Prepayment rate Recession start Interest rate Default timing 'AAA' 60 High, expected, and low 'AA-' and below Closing and year 3 40 High and low Closing and year 3 Up, down, up-down, down-up, forward for standard run Up, down, up-down, down-up, forward for standard run Front-loaded and back-loaded Front-loaded and back-loaded Scenario Analysis Various factors could lead us to lower our ratings on the notes, such as increasing foreclosure rates in the underlying pool, and changes in the pool composition. We have analyzed the effect of increased delinquencies by testing the sensitivity of the ratings to two different levels of movements. Increasing levels of delinquencies will likely cause more stress to a transaction, and would likely be a contributing factor in the downgrade of rated notes. In our analysis, our assumptions for the increase in delinquencies are specific to a transaction, although these levels may be similar (or the same) across different transactions. The levels do not reflect any views as to whether these deteriorations will materialize in the future; however, our analysis already incorporates additional adjustments to the default probability of the pool by projecting buckets of expected arrears. Note that even under these scenarios, structural features in securitizations may mitigate these deteriorations in performance. Further delinquencies of 8% In the first scenario, in addition to the rating-dependent stress assumptions, we apply a further 8% increase in nonperforming loans. These are split equally between the one-month and three-month buckets. In the second scenario, we apply an increase of 9.92%, but we deem all of the loans to have missed three monthly payments. The default probability we assign to a loan increases in tandem with the monthly payments missed. Consequently, assuming that all loans have missed three monthly payments, the increase in the WAFF would be greater in the second scenario. Tables 8 and 9 summarize the results of assuming increasing levels of delinquencies. MARCH 11,

21 Table 8 Assuming An Additional 8% Of Arrears, Split Equally Between One Monthly Payment And Three Monthly Payments Missed Preliminary rating WAFF (%) WALS (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) B (sf) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Table 9 Assuming An Additional 9.92% Of Arrears, All Of Which Have Missed Three Monthly Payments Preliminary rating WAFF (%) WALS (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) B (sf) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Under the first scenario, the ratings on the notes in the transaction would not suffer a ratings transition of more than one rating category (for example, the 'AA (sf)' rated notes would achieve a rating of at least 'A (sf)'). Under the second scenario, the ratings on the notes would not suffer a rating transition of more than three rating categories (for example, the 'AA (sf)' rated notes would achieve a rating of at least 'BB (sf)'). We based the analysis above on a simplified assumption, i.e., that the increase in arrears materializes immediately on the day after closing. In reality, these are likely to occur over a period of time. Therefore, other factors, such as seasoning or repayments of some loans, could partially mitigate the effect of deteriorating performance of other loans. Sector Credit Highlights In third-quarter 2014, the U.K.'s GDP increased by 0.7% quarter-on-quarter, while unemployment decreased to 6.0%. We expect the U.K. economy's growth to continue in 2015, declining modestly over the next few years, but still remaining well above the 2% mark. We forecast GDP growth of 2.5% in 2015 (from 2.9% in 2013), primarily driven by household consumption and increasing corporate investment and exports. We expect the housing market to continue to strengthen going forward, albeit more moderately. The Financial Policy Committee introduced further limitations on mortgage lending to the Mortgage Market Review in June These included limits on the proportion of loan-to-income multiples of 4.5x and above to no more than 15% of a lender's mortgage book. These combined measures will, at least temporarily, weigh on house price growth. We expect U.K. MARCH 11,

22 house prices to grow more gradually, reaching 4.5% in House prices have now recovered more than half of what they lost during the global financial crisis (a 22% decline from peak to trough). Indicators have shown a mixed picture of the housing market. While Halifax, Nationwide, and the Royal Institution of Chartered Surveyors (RICS) point to a stable U.K. market, the Office for National Statistics (albeit a lagging indicator) points to continued growth. Halifax and Nationwide have reported decreasing house prices in recent months. According to the Bank of England's figures, mortgage approvals have fell to a 14-month low in September The annual house price growth rate is back in the single digit percentage range. We expect collateral performance to strengthen further in 2015, based on the solid macroeconomic fundamentals. Surveillance We will maintain surveillance on the transaction until the notes mature or are otherwise retired. To do this, we will analyze regular servicer reports detailing the performance of the underlying collateral, monitor supporting ratings, and make regular contact with the servicer to ensure that it maintains minimum servicing standards and that any material changes in the servicer's operations are communicated and assessed. The key performance indicators in the surveillance of this transaction are: Increases in credit enhancement for the notes; Total and 90-day delinquencies; Cumulative realized losses; LTV ratios; Constant prepayment rates; and Increases in the collateral pool's seasoning. Standard & Poor's 17g-7 Disclosure Report SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at Related Criteria And Research Related criteria Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, MARCH 11,

23 Multiple-Use Special-Purpose Entity Criteria--Structured Finance, May 7, 2013 Updated Outlook Assumptions For The U.K. Residential Mortgage Market, Aug. 17, 2012 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 U.K. RMBS Methodology And Assumptions, Dec. 9, 2011 Methodology: Credit Stability Criteria, May 3, 2010 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Related research Low Interest Rates Are Only Slowly Reviving Europe's Housing Markets, Feb. 5, 2015 The Eurozone Crawls Into 2015 With Weak Momentum, Dec. 4, 2014 U.K. RMBS Index Report Q3 2014: Nonconforming Arrears Fall To The Lowest Level Since 2008 As The Economy Strengthens, Nov. 24, 2014 European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic Factors, July 8, 2014 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Additional Contact: Structured Finance Europe; MARCH 11,

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