OREANDA-NEWS. March 16, 2015. Fitch Ratings has affirmed Holmes Master Issuer plc, a master trust programme consisting of residential mortgages loans originated by Santander UK plc (A/Stable/F1). A full list of rating actions can be found on www.fitchratings.com or by clicking the link above.

KEY RATING DRIVERS
Repurchase of Loans Improves Performance
In February 2014, Santander repurchased most of the non-performing loans in the pool, bringing the portion of loans in arrears by more than three months down to 0%. The repurchase also included loans with properties taken into possession at that time.

Since then, the portion of loans in arrears by more than three months and the number of properties in possession have built up to 0.8% and eight respectively, compared to 2.2% and 45 before the repurchase. The performance of the portfolio should gradually trend to these pre-repurchase levels.

Increasing Credit Enhancement (CE)
Following the repurchase of the non-performing loans, the reserve fund (RF) decreased to GBP465m from GBP515m. The GBP50m was injected into the structure in January 2013 in order to mitigate the breach in the 2% three-months-plus arrears trigger and was subsequently released following the repurchase of loans in February 2014, as this trigger was cured. The CE has built up, regardless, through senior note amortisation and stands at 35.4% for the class A notes and 33.7% for the class B notes.

Commingling Risk
The structure has two different guaranteed interest contract (GIC) accounts, a trustee one and a funding one, both held at Santander. Funds are transferred from the collection account, held with Santander, to the trustee GIC account on a daily basis, while the transfer from the trustee GIC account to the funding GIC account only takes place once a month.

The trigger in place for the GIC account bank does not comply with Fitch's counterparty criteria as Santander's long term rating could be downgraded to 'BBB+' without being replaced in its capacity as a trustee GIC account provider. For this reason, in its analysis of the programme, Fitch assumed the loss of one months' worth of collections. The analysis showed that the high CE levels are sufficient to withstand such losses, resulting in an affirmation of the notes.

Consistent Underlying Asset Characteristics
Fitch did not employ its surveillance model in its analysis of the programme. Instead the agency focused on the key portfolio characteristics, including original loan-to-value ratio and concentrations by regions, repayment and occupancy type. The agency found the pool characteristics were comparable with those 12 months ago and also within the eligibility criteria defined in the transaction documentation.

Fitch also performed a sensitivity analysis to assess the effects of sustainable house prices on loans originated between 2005 and 2007 on the weighted average frequency of foreclosure (WAFF) and the weighted average recovery rate (WARR). In its analysis, Fitch increased the WAFF by up to 50% and reduced the WARR by the same amount for these vintages. The high credit enhancement provides a cushion above these additional stresses, leading to the affirmation of the notes.

RATING SENSITIVITIES
Fitch considers the ratings fairly insensitive to increasing stress factors, given the high levels of CE and the recent repurchase that increased the pool quality. The notes would be able to withstand most adverse scenarios without the ratings coming under pressure.