OREANDA-NEWS. February 16, 2015. Fitch Ratings has assigned Guildford No.1 PLC's RMBS final ratings as follows:

EUR 400,000,000 Class A1 fixed rate notes; 'AAAsf'; Outlook Stable
GBP 480,000,000 Class A1 fixed rate notes; 'AAAsf'; Outlook Stable
*GBP 111,340,000 Class Z VFN floating rate notes: not rated

* The class Z (VFN) is funded to GBP111.3m of which GBP17.8m is used to fund the reserve fund. The class Z (VFN) note can be increased to GBP500m.

The transaction is a securitisation of residential owner-occupied and buy-to-let mortgages, originated in England and Wales by Leeds Building Society (LBS; A-/Stable/F1). This is the third standalone pass-through UK RMBS transaction from LBS.

Credit enhancement for the class A notes at 12.5% is provided by the subordination of the class Z VFN notes and an amortising reserve fund of 2%, which was fully funded at closing.

KEY RATING DRIVERS
Below Average Performance History
The lender's mortgage book performance was below average for pre-crisis loans but in line with the UK market for newer originations (74.8 % of the pool was originated after 2011). In addition, LBS was unable to provide dynamic arrears data to Fitch. To account for both, Fitch has increased the foreclosure frequency of the loans in the pool (other than those analysed using the non-conforming matrix) by 15%.

Buy-to-Let Adjustment Required
This is the first securitisation from LBS that contains BTL properties. Although not a large portion of the pool (5.29%), Fitch used the non-conforming matrix for pre-2011 BTL loans because the performance data and underwriting guidelines for this subset were not in line with Fitch's expectations for prime transactions.

Pro Rata Trigger Risk Contained
Upon the satisfaction of certain conditions, the structure can switch to pro-rata payment between the class A notes and the class Z variable funding note (VFN). Fitch considers the conditions to be sufficient, as they include a 90+ arrears test of 2%, cannot be triggered until a year after close, and only then if the class A credit enhancement has doubled.

SVR Switch Raises Risks
While 80.58% of the loans in the pool are fixed rate, all of the loans eventually revert to LBS's SVR which is one of the highest in the industry. Since the notes pay a fixed interest rate, this may result in a high amount of excess spread in the transaction, especially under a high interest rate scenario. However, the SVR also increases the potential payment shock for borrowers currently paying the fixed rate, which Fitch has accounted for by raising its frequency of foreclosure assumptions by a further 10%.

Counterparty Risk Adjusted For
LBS is the account bank and guaranteed investment contract provider, and the transaction documents stipulate a minimum account bank rating of 'BBB-'/'F2'. This is below the minimum counterparty rating in Fitch's criteria of 'A'/'F1'. Based on the monthly interest payment dates, the agency has assumed two months of principal and interest receipts would be lost due to commingling. A separate reserve fund account is held with Lloyds Banking Group PLC, which meets the minimum rating in Fitch's criteria.

RATING SENSITIVITIES
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels larger 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 weighted average foreclosure frequency along with a 30% decrease in the weighted average recovery rate would result in a downgrade of the class A notes to 'A+sf'.

More detailed model implied ratings sensitivity can be found in the new issue report, which will shortly be available at www.fitchratings.com.

LBS 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 on LBS's prime mortgage book, covering 2006 to 2014. However, dynamic arrears data was not provided as requested.

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, which resulted in adjustments to Fitch's assumptions.

To analyse the CE levels, 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 each class of 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.

A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms with those typical for that asset class is available in the appendix that accompanies the new issue report (see "Guildford No.1 Plc - Appendix", at www.fitchratings.com).