Fitch Rates Lanark 2016-1 plc 'AAAsf'; Outlook Stable
The notes represent the eighth public issuance from the Lanark master trust programme. The master trust property consists of prime residential owner-occupied mortgage loans originated in the UK by Clydesdale Bank PLC (Clydesdale) and Yorkshire Bank Home Loans Limited. Clydesdale was demerged from National Australia Bank Group on 8 February 2016, which resulted in a downgrade to 'BBB+'/'F2' from 'A'/'F1'.
The trust property was approximately GBP4.4bn at closing. The final rating is based on Fitch's assessment of the underlying collateral, available credit enhancement, the origination and underwriting procedures used by the originators, the servicing capabilities of Clydesdale and the transaction's financial and legal structure.
KEY RATING DRIVERS
Portfolio Characteristics
The portfolio has a weighted average (WA) seasoning of 50 months, a WA original loan-to-value ratio (OLTV) of 71.3% and WA debt-to-income ratio (DTI) of 40.5% at close. The WA OLTV and WA DTI are in line with the average for UK prime transactions rated by Fitch.
Geographical Concentration
Twenty-eight percent of the loans in the trust pool (by loan count %) is concentrated in Scotland, 28.2% in York and Humber, and 8.8% in the North of England, which is higher than the proportion of the population in these regions. This means the portfolio is more likely to be exposed to regional economic declines or natural disasters such as flooding. Therefore, Fitch has increased the foreclosure frequency (FF) by 15% for all loans in these regions.
Loans Added to Portfolio
Approximately GBP770m of new loans have been added to the trust pool, taking the collateral balance to GBP4.4bn from GBP3.7bn. As Clydesdale's rating is now below 'A-', the transaction documentation states that Clydesdale must provide a solvency certificate in order to include new loans into the trust pool.
In addition, the compliance of new loans with the representations and warranties in the mortgage sale agreement must now be reviewed by an independent auditor. Fitch has factored the impact of the new loans into its analysis when calculating the WA FF and recovery rates (RR).
Illiquid Property Adjustment
Around 31.8% of the portfolio falls in the high value bracket (ie the top five percentile of the property region), which is at the higher end of UK RMBS transactions rated by Fitch. We applied additional haircuts to the valuations to account for the lower liquidity and demand for such properties in an economic downturn.
RATING SENSITIVITIES
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels greater than Fitch's base case expectations, which in turn may result in negative rating actions on the notes. Fitch's analysis revealed that a 30% increase in the WAFF, along with a 30% decrease in the WARR, would imply a downgrade of the class 1A notes to 'AA+sf' from 'AAAsf'.
More detailed model implied ratings sensitivity can be found in the new issue report which is available at www. fitchratings. com.
DUE DILIGENCE USAGE
Fitch was provided with due diligence information from Deloitte LLP. The due diligence focused on compliance, credit, valuation, the presence of key documents in the loan file and data integrity. The review was conducted on a sample of 457 mortgages. Fitch considered this information in its analysis and the findings did not have an adverse impact on the agency's analysis.
Form 15E has been received from Deloitte LLP with regard to the work performed for this transaction.
DATA ADEQUACY
Clydesdale provided Fitch with a loan-by-loan data template with all of the key data fields completed. The agency typically calculates the sustainable LTV using the current balance (plus the maximum re-draw amount available to each loan) at the time of the portfolio cut-off date, and the valuation corresponding to the date of the most recent advance.
Clydesdale was able to provide details on any form of missed payment a borrower may have made in the 12 months prior to origination based on a borrower's Experian credit score (eg missed bills or loan payments on unsecured or secured debt). However, Clydesdale was unable to provide loan level data on the percentage of borrowers that may have had prior mortgage arrears. Fitch has therefore assumed 5% of the borrowers in the pool have had some form of prior mortgage arrears based on Clydesdale's origination policy, and applying a conservative uplift on a comparison of transactions where this data has been provided; it has been assumed this occurred in the six months prior to origination.
Fitch received repossession information for 619 loans originated by Clydesdale. The data had an overall average quick sale adjustment (QSA) of 27.5%, higher than Fitch's criteria average of around 21%. At a more detailed level, the observed QSA was higher for both houses (25.9%) and flats (37.5%) than the criteria average for those property types. To account for this, the agency applied the higher QSA observed in the data sample to those property types.
Fitch conducted a review of a targeted sample of Clydesdale's origination files. Some errors were found on the classification of employment type for a small number of loans (subsequently explained by a keying error at origination), and the information contained on borrower income verification for pre-crisis loans (around 15% of the pool) was found to be less than that typically observed at peers. Neither finding was considered material enough to warrant any further adjustment. Overall Fitch found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices, and other information provided to the agency on the asset portfolio.
Overall and together with the assumptions referred to above, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is reliable.
To determine the levels of credit enhancement needed to support Fitch's ratings, the agency simulated the transaction's cash flows using a cash flow model incorporating Fitch's cash flow stresses. The cash flow model was provided by Citigroup Global Markets Limited. The cash flow model was reviewed and tested to ensure that key structural features and cash flow mechanisms were correctly incorporated.
At closing, Fitch also affirmed the ratings of the outstanding notes from the prior issuance under Lanark Master Issuer plc, as detailed below:
Lanark Master Issuer plc - Issue 2012-2:
Class 2A: affirmed at 'AAAsf'; Outlook Stable
Lanark Master Issuer plc - Issue 2013-1:
Class 1A1: affirmed at 'AAAsf'; Outlook Stable
Class 1A2: affirmed at 'AAAsf'; Outlook Stable
Lanark Master Issuer plc - Issue 2014-1:
Class A1: affirmed at 'AAAsf'; Outlook Stable
Class A2: affirmed at 'AAAsf'; Outlook Stable
Lanark Master Issuer plc - Issue 2014-2:
Class 1A: affirmed at 'AAAsf'; Outlook Stable
Class 2A: affirmed at 'AAAsf'; Outlook Stable
Lanark Master Issuer plc - Issue 2015-1:
Class 1A: affirmed at 'AAAsf'; Outlook Stable
Class 2A: affirmed at 'AAAsf'; Outlook Stable
SOURCES OF INFORMATION
The information below was used in the analysis:
- Loan-by-loan data provided by Clydesdale as at 29 April 2016
- Transaction reporting provided by Clydesdale as at 22 May 2016
- Loan enforcement details provided by Clydesdale as at 29 April 2016
- Loan performance data provided by Clydesdale as at 29 April 2016
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