OREANDA-NEWS. Fitch Ratings has upgraded 24 tranches of the Southern Pacific Financing (SPF) and Southern Pacific Securities (SPS) series and affirmed 17 other tranches.

A full list of rating actions is available at www. fitchratings. com or by clicking the link above.

These transactions are a portfolio of non-conforming residential mortgages originated by Southern Pacific Mortgages Limited (SPML) between 2004 and 2006. SPML was a non-conforming lender specialised in first - and second-charge mortgages to borrowers who did not meet scorecard-based underwriting criteria common for prime lending. Impaired borrower credit histories, records of previous arrears, lack of income verification or financing against more volatile property types (e. g. right-to-buy properties) all feature in these portfolios.

The loans are serviced by Acenden Limited (RPS2+) with Homeloans Management Limited (RPS2+) acting as back up servicer.

KEY RATING DRIVERS

Strong Credit Enhancement

The upgrades reflect increasing credit enhancement (CE) and the support provided by fully funded and non-amortising reserve funds. A breach of performance triggers in SPF 06-A and SPS 05-3 means the reserve funds can no longer amortise.

Stable/Improving Asset Performance

Loans in arrears by more than three months are still above the sector average, ranging from 10.6% (SPF05-B) to 27.4% (SPS06-1), above Fitch's UK Non-Conforming RMBS Index of 9.8%; delinquencies span from 10.6% (SPF05-B) to 27.4% (SPS06-1). However, in six of the seven transactions, performance has improved over the past 12 months. The reductions in three months plus arrears were between 5.3% (SPS06-1) and 18.9% (SPS05-B).

Conversely, SPS04-2's three-months plus arrears were up 2.9% during the same period, although this should be viewed in the context of an overall stabilising trend from the peak. The continued build-up of CE in SPS04-2 over the last year also provides a further buffer against future deterioration.

The vast majority of defaults to-date have gone through work-out, as shown by the limited amount of loans currently 'in possession' (SPS05-3 has the highest current 'in possession' balance in the series, at 21bp of the current portfolio balance). Marginal default rates over the past two years have been broadly stable at low levels. Although cumulative possessions for certain transactions are higher than the sector average, they have been stable with a maximum increase of 42bp in SPF06-A. Cumulative balances of properties in possession are currently reported at between 8% (SPS04-2) and 17.2% (SPS05-3) of the original portfolio balance, versus Fitch's UK Non-Conforming RMBS Index of 10.5%.

SPS transactions are performing worse than the SPF series due to asset characteristics. SPS portfolios include a significant portion of second-lien loans, at between 5.2% (SPS05-3) and 8.6% (SPS05-2), and a higher percentage of borrowers with adverse credit history.

Tail Risk

The outstanding pools for SPS04-2, SPS05-1 and SPS05-2 are 5.2%, 7.4% and 9.2% of their original balance, respectively. In its analysis, Fitch has taken into consideration the concentration risk associated with small pools and views the current credit enhancement as sufficient to protect against this risk. This is reflected in today's rating actions.

RATING SENSITIVITIES

As the loans are paying a margin linked to LIBOR an increase in market interest rates could cause additional stress on borrowers' affordability and result in performance deterioration. Fitch models affordability tests that assume LIBOR reverts to long-term averages, thus leaving ample buffer for rates increase over the medium term. An unexpected spike in market rates could, however, result in negative rating actions.

Borrower concentration and potential adverse selection associated with further reductions in collateral balance may cause performance volatility and negative rating action on the notes.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis.

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

SOURCES OF INFORMATION

The information below was used in the analysis.

- Loan-by-loan data provided by Acenden as at March 2016

- Transaction reporting provided by Acenden as at March 2016

MODELS

The models below were used in the analysis. Click on the link for a description of the model.