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May 21 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Cape Funding No.1 PLC notes a final rating, as follows:
- Up to GBP2,500,000,000 class A1P variable funding notes (VFN) 'AAAsf', Stable Outlook
- Upon the occurrence of a class A1 put option event, the rating applicable to the A1P note will be assigned to the class A1R notes
- Up to GBP2,500,000,000 class A2 VFN: not rated
- GBP425,000,000 class Z VFN at close: not rated
The transaction is a securitisation of UK prime residential owner-occupied mortgages, originated by TSB Bank PLC (TSB) and also Lloyds Bank PLC (Lloyds ; A/Negative/F1) and Cheltenham & Gloucester plc (C&G), all members of the Lloyds Banking Group PLC (A/Negative/F1). The non-TSB originated loans were transferred to TSB in July 2013. TSB is expected to be divested later this year.
At closing, credit enhancement for the class A1P notes (17.0%) is provided by subordination, through the issuance of the class Z notes (14.5%), and a non-amortising reserve fund of 2.5% of the total outstanding notes at closing.
KEY RATING DRIVERS
Pool Composition
The pool is a six-year seasoned revolving portfolio. The revolving period is a maximum of 4.5 years, and is subject to strict portfolio composition conditions. At closing the weighted average original loan-to-value ratio was 69.3%, and the Fitch-calculated WA debt-to-income ratio was 40%. The portfolio has a higher concentration of interest-only loans (44.4%) and properties located in Scotland (28.3%) than typically seen in UK prime RMBS transactions.
Oldbury Portfolio
The class A1P/A1R maximum facility amount is limited to the size of a static portfolio held by TSB outside of this transaction, the Oldbury portfolio. The maximum facility amount will therefore amortise in line with the Oldbury portfolio. Upon a sale of this portfolio by TSB, the outstanding class A1P/A1R notes need to be repaid in full.
Collection Structure
The collection account bank and account bank will be Lloyds, satisfying Fitch's minimum counterparty requirement. The collection account will be in the name of TSB, whose rating as a standalone entity post divesture is uncertain. Therefore the agency has assumed a loss of principal and interest due to commingling. Additionally, Fitch has sized for deposit set of upon a post divesture bankruptcy of TSB.
No Swap
There is no swap in place, but the absence of fixed rate loans provides a natural hedge. Of the loans, 82.3% pay a standard variable rate (SVR) set by TSB, while the remaining 17.2% are floating Bank of England Bank Rate linked loans. The vast majority of the SVR loans are guaranteed to be no more than 2% above the Bank of England Bank Rate. As a result, the current weighted average interest rate payable on the portfolio is lower than usual in UK RMBS transactions (2.44%).
RATING SENSITIVITIES
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case expectations, which in turn may result in potential rating actions on the notes. Fitch's analysis revealed that a 30% increase in the weighted average foreclosure frequency along with a 30% decrease in the weighted average recovery rate would result in a downgrade of the class A1P/A1R notes to 'A+sf'.
TSB bank provided Fitch with a loan-by-loan data template and all relevant fields were provided in the data tape. Performance data on historical static arrears was provided for Lloyds's mortgage book, from which the transferred portfolio was selected, covering 2000 to 2013, and the performance is in line with other UK prime lenders.
Fitch also reviewed the results of an agreed-upon procedures report conducted on the portfolio. This report checked the accuracy of the data file provided to Fitch for its rating analysis and while some errors were reported they did not impact Fitch's rating analysis. Additionally Fitch performed its own file review, and found the loan files to be in accordance with the portfolio and the lending policies.
It is Fitch's opinion that the data available for the rating analysis is of good quality.
To analyse CE, Fitch evaluated the collateral using its default model ResiEMEA. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. The cash flow tests showed that the rated notes could withstand loan losses at a level corresponding to the related stress scenario without incurring any principal loss or interest shortfall and can retire principal by the legal final maturity.
Fitch compared the transaction's Representations, Warranties & Enforcement Mechanisms with those typical for that asset class, and found them to be in line.
