OREANDA-NEWS. Fitch Ratings has upgraded Sandwell Commercial Finance No. 1 plc's (Sandwell 1) class C notes and Sandwell Commercial Finance No. 2 plc's (Sandwell 2) class A and B notes and affirmed the others, as follows:

Sandwell 1 FRNs due 2039:

GBP12.5m class C (XS0191372522) upgraded to 'BBBsf' from 'BBsf'; Outlook Stable

GBP10m class D (XS0191373686) affirmed at 'CCsf'; Recovery Estimate (RE) 65%

GBP5m class E (XS0191373926) affirmed at 'Csf'; RE0%

Sandwell 2 FRNs due 2037:

GBP20.3m class A (XS0229030126) upgraded to 'BBBsf' from 'BBsf'; Outlook Stable

GBP12.6m class B (XS0229030472) upgraded to 'BBsf' from 'Bsf'; Outlook Stable

GBP11.5m class C (XS0229030712) affirmed at 'CCCsf'; RE90% from RE80%

GBP14.5m class D (XS0229031017) affirmed at 'CCsf'; RE0%

GBP9.4m class E (XS0229031280) affirmed at 'Csf'; RE0%

The transactions are securitisations of commercial mortgage loans originated in the UK by West Bromwich Building Society

KEY RATING DRIVERS

The upgrades reflect reductions in average loan and senior bond leverage as a result of continued scheduled amortisation applied sequentially. There are fewer watch-listed loans, and higher than expected recoveries have been realised on defaulted loans. The most senior bonds for both transactions now have strong debt yields in excess of 25%, reflecting considerable protection from downside risk. While sequential payment mitigates adverse selection risk for senior investors, both transactions (particularly Sandwell 1) are now concentrated.

Most properties have been revalued between 2010 and 2015. Following a market-wide correction in UK secondary quality property values after 2007, loan-to-value ratios (LTVs) increased sharply. Since then amortisation and completed loan workouts have reduced the weighted average (WA) LTV in Sandwell 1 to 84.9% from 89.4% and in Sandwell 2 to 87.8% from 91.8%, in both cases since the last rating actions. With sequential payment, this deleveraging has been magnified for the senior bonds.

The recovery has been aided by low interest rates, which allow the servicer time to work out distressed unhedged floating-rate loans. The WA interest coverage ratio for the Sandwell 1 and 2 portfolios are 4.26x and 3.59x, respectively, up from 4.15x and 2.77x a year earlier.

As of the April/March 2016 reporting cycle, Sandwell 1 had seven of its 20 remaining loans in various stages of enforcement, compared with 10 out of 41 in Sandwell 2. Nevertheless, the credit performance of the Sandwell 2 loans is overall weaker, as highlighted by the material debit balance on the principal deficiency ledger (PDL) on its class E notes.

Losses in Sandwell 1 total GBP5.5m and have so far been largely absorbed by the reserve account, which is now exhausted. However, in the last 12 months a PDL of GBP333,000 has been applied to the class E notes. With Sandwell 2's GBP19.8m loan losses, the reserve fund is also depleted, leaving a GBP8.8m debit balance on the PDL for the class E bonds. While excess spread can be used to replenish principal deficiencies, Fitch expects the class D and E bonds from both issuers to be ultimately written off as more loan losses are realised.

RATING SENSITIVITIES

Given the collateral type and quality, and reporting standards commensurate with a former granular portfolio profile, Fitch is unlikely to upgrade the notes above the 'BBBsf' category. Bonds rated 'CCCsf' or 'CCsf' face the prospect of downgrades unless recoveries are higher than expected.

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 pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction 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.