Fitch Upgrades Junior Notes of Ludgate RMBS Series, Affirms Others
The Ludgate series are securitisations of near-prime and non-conforming residential mortgages originated by Freedom Funding Ltd (LG 2006 and 2007) and Wave Lending Limited (LG 2008); the mortgages were purchased by Merrill Lynch International Bank Limited.
A full list of rating actions is at the end of this rating action commentary
KEY RATING DRIVERS
Asset Performance
Late stage arrears (loans with more than three monthly payments overdue) range from 2.3% of the outstanding portfolio balance (LF 2006-1) to 5.4% (LF 2008-1), well below Fitch's UK Non-Conforming RMBS Index, currently at just over 9%.
The cumulative balance of mortgage loans where the collateral has been repossessed is reported at between 3.8% (LF 2006-1) of the original portfolio balance and 10.5% (LF 2008-1), below the sector average of 10.6%. This has materialised into cumulative loss severities for LF 2006-1 of 29.6%, which is lower than LF 2007-1 (33.7%) and LF 2008-1 (36.2%). During the past 12 months, realised cumulative losses have been stable in LF 2006-1 and LF 2007-1, accounting for 1% and 2% of the original pool balance, respectively. Fitch notes that realised losses in LF 2008-1 remain above the sector average (3.1%) and have increased to 3.9%.
In Fitch's view, the difference in performance is due to the 2006 transaction's lower sLTV (86.6%) compared with those in the 2007/8 vintage deals (99.1% and 105.9%), reflecting the fact they were originated at the peak of the housing market.
Pro-rata Amortisation LF 2006-1
The notes in LF 2006-1 are currently amortising on a pro-rata basis and are expected to continue until the notes reach 10% of their initial balance, barring any significant deterioration in performance. The other transactions are still paying sequentially but are likely to switch to pro-rata amortisation in the near future.
Non-Amortising Reserves
All the transactions have fully funded amortising reserve funds and liquidity facilities (LF) in place. These reserves are no longer able to amortise due to an irreversible breach in one of the performance trigger on total losses (e.g. over 1.0% of the original balance).
The LF are only available to cover senior fees and interest shortfalls for the class A notes on an unrestricted basis. The junior notes have principal deficiency ledger triggers that could restrict their use of the LF.
Unhedged Basis Risk
LF 2006-1 is exposed to unhedged basis risk as 100% of the portfolio is paying a margin over the Bank of England base rate (BBR) linked while the notes are referenced to the 3m Libor/Euribor. Haircuts have been applied to the excess spread to account for this risk.
LF 2007-1 and 2008-1 have basis swaps in place, and all the transactions have currency hedges in place.
RATING SENSITIVITIES
With 100% of borrowers on BBR linked mortgages in all three transactions, an increase in BBR could lead to performance deterioration of the underlying assets given the weaker profile of non-conforming borrowers in these pools. Should defaults and subsequent losses increase beyond Fitch's standard assumptions, this could lead to downgrades.
There is no basis rate swap in Ludgate 2006. If the BBR-LIBOR spread differential increases beyond Fitch's assumptions, there could be a reduction in cash flows, which could contribute to reserve fund draws and reduce credit enhancement, leaving the structure exposed to potential downgrades.
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 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 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 HML as at January 2015 (LG 2008), March 2015 (LG 2007) and June 2015 (LG 2006)
- Transaction reporting provided by US Bank as at June 2015 (LG 2006) and July 2015 (LG 2007 and LG 2008)
Models
The models below were used in the analysis. Click on the link for a description of the model.
EMEA Cash Flow Model
Emea Cash Flow Model.
The rating actions are as follows:
Ludgate Funding Plc Series 2006 FF1 (LF 2006-1):
Class A2a (ISIN XS0274267862): affirmed at 'AAAsf'; Outlook Stable
Class A2b (ISIN XS0274271203): affirmed at 'AAAsf'; Outlook Stable
Class Ba (ISIN XS0274268241): affirmed at 'Asf'; Outlook Stable
Class Bb (ISIN XS0274271898): affirmed at 'Asf'; Outlook Stable
Class C (ISIN XS0274272359): upgraded to 'BB+sf' from 'BBsf'; Outlook Stable
Class D (ISIN XS0274272862): upgraded to 'Bsf' from 'CCCsf'; assigned Outlook Stable
Class E (ISIN XS0274269645): affirmed at 'CCCsf'; Recovery Estimate (RE) 100%
Ludgate Funding Plc Series 2007 FF1 (LF 2007-1):
Class A2a (ISIN XS0304503534): affirmed at 'AAAsf'; Outlook Stable
Class A2b (ISIN XS0304504003): affirmed at 'AAAsf'; Outlook Stable
Class Ma (ISIN XS0304504698): affirmed at 'Asf'; Outlook Stable
Class Mb (ISIN XS0304505232): affirmed at 'Asf'; Outlook Stable
Class Bb (ISIN XS0304508681): affirmed at 'BBBsf'; Outlook Stable
Class Cb (ISIN XS0304509739): affirmed at 'BBsf'; Outlook Stable
Class Da (ISIN XS0304510158): upgraded to 'Bsf' from 'CCCsf'; assigned Outlook Stable
Class Db (ISIN XS0304512105): upgraded to 'Bsf' from 'CCCsf'; assigned Outlook Stable
Class E (ISIN XS0304515546): upgraded to 'CCCsf' from 'CCsf'; RE 40%
Ludgate Funding Plc Series 2008-W1 (LG 2008)
Class A1 (ISIN XS0353588386): affirmed at 'AAAsf'; Outlook Stable
Class A2b (ISIN XS0353589608): affirmed at 'Asf'; Outlook Stable
Class Bb (ISIN XS0353591505): affirmed at 'BBBsf'; Outlook Stable
Class Cb (ISIN XS0353594434): affirmed at 'BBsf'; Outlook Stable
Class D (ISIN XS0353595597): upgraded to 'Bsf' from 'CCCsf'; assigned Outlook Stable
Class E (ISIN XS0353600348): upgraded to 'CCCsf' from 'CCsf'; RE 100%
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