OREANDA-NEWS. Fitch Ratings has assigned Paragon Mortgages (No.22) plc's notes final ratings, as follows:

EUR164,000,000 Class A1: 'AAAsf', Outlook Stable
GBP151,700,000 Class A2: 'AAAsf', Outlook Stable
GBP12,000,000 Class B: 'AAsf', Outlook Stable
GBP12,000,000 Class C: 'A+sf', Outlook Stable
GBP7,500,000 Class E: Not rated

The transaction is a securitisation of 100% UK prime buy-to-let (BTL) loans originated by Paragon Mortgages (2010) Limited (Paragon).

Credit enhancement for the class A notes at 10.5% is provided by the subordination of the class B to E notes.

The issuer has established a non-amortising first loss fund at closing of 2.5% of the initial total collateral balance to provide cover for interest shortfalls and principal losses. This can step up to 4% of the initial total collateral balance if 60+ days arrears exceed 3% of the outstanding note balance or if cumulative losses exceed 2%.

Fitch has analysed a portfolio of GBP244.2m at close, whereby an additional GBP53.2m is expected to be acquired during the pre-funding period up to the second principal determination date (IDP) during which the issuer is entitled to purchase additional mortgages. The agency expects to review an updated pool before the first and second IPDs when additional loans are likely to be purchased.

Any balance remaining to the credit of the pre-funding ledger after the second IPD not used to purchase additional mortgage loans will be used to pay down the notes sequentially.

KEY RATING DRIVERS

Buy-to-Let (BTL) Portfolio
The portfolio consists entirely of BTL loans and Fitch continues to stress the portfolio's default rates beyond those of a prime owner-occupier portfolio, despite the historically lower arrears of past Paragon deals. All loans in the pool are recent originations, between November 2014 and March 2015, fully underwritten by Paragon. Paragon changed its lending guidelines to allow loans up to 85% LTV (incl. fees), which is reflected in the larger portion of loans with an LTV over 80% (11.8%) compared with previous transactions.

High Prepayments Modelled
Some Paragon transactions have had a high conditional prepayment rate (CPR), above Fitch's typical high CPR stress. The potential switch of interest-only loans to amortising loans could incentivise borrowers to refinance their mortgage. The high CPR scenario is the most stressful, and is therefore a key rating driver. Fitch has modelled the transaction to withstand a stressed CPR from year 3 to year 5, both inclusive.

Prime Underwriting, Strong Performance
Fitch received additional loan-by-loan arrears history including 90+ static cumulative arrears for the first time. Paragon-originated RMBS transactions have historically performed strongly, with low arrears and defaults. Fitch has given credit to Paragon's robust underwriting practices, supported by strong historical outperformance versus the UK index.

Unrated Originator and Seller
The originator and seller are not rated entities and as such may have limited resources available to repurchase any mortgages in the event of a breach of Reps and Warranties (RW) given to the issuer. Fitch considers this a weakness, but there are a number of mitigating factors that make the likelihood of a RW breach remote.

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 (WA) foreclosure frequency, along with a 30% decrease in the WA recovery rate, would result in a model-implied downgrade of the class A notes to 'AA-sf'.

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

Paragon provided Fitch with a loan-by-loan data template, cumulative loan book losses, arrears strings on all originations of Paragon Mortgages (2010) Limited and 90+ days cumulative static arrears data. Fitch considers that the data available for the analysis is of sound quality.

The final asset composition after the pre-funding period is not expected to change materially from the closing pool. However, any deterioration due to negative selection, such as the inclusion of a larger amount of higher LTV loans, may affect the default and recovery levels.

Fitch was provided with data on loans repossessed by Paragon between 2001 and 2013 to determine the originator's experienced loss severity rate and quick sale adjustment (QSA). The QSA, calculated using the repossession data provided by the originators, was 32.5% for the Paragon loans. As the QSA figures are higher than Fitch's criteria assumption of 30%, Fitch has increased the assumptions for the QSA.

Fitch reviewed the results of an agreed-upon procedures report, which was conducted by an international accounting firm. Fitch did not make any additional adjustments to its analysis as a result of this report.

The rating triggers for the issuer account bank, qualified investments, collection account bank and derivative counterparties in the transaction documents have specific reference to Fitch's criteria, which creates a degree of uncertainty regarding future counterparty arrangements.

To analyse the credit enhancement 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 to those typical for that asset class is available by accessing the appendix that accompanies the new issue report (see "Paragon Mortgages (No.22) Plc - Appendix", at www.fitchratings.com).