OREANDA-NEWS. Fitch Ratings has downgraded seven and affirmed 47 tranches of the Newgate Funding Plc (NF) RMBS series. The agency has also revised the outlook on seven tranches to Negative from Stable. A full list of rating actions is available at www.fitchratings.com or by clicking on the link above.

The NF series is a securitisation of UK non-conforming residential mortgages originated by Mortgages PLC, a subsidiary of Bank of America Merrill Lynch. The six transactions have similar portfolio characteristics with high portions of self-certified borrowers, ranging between 56% to 75% of the outstanding portfolio and interest-only loans representing 60% to 65% of the respective pools.

KEY RATING DRIVERS
High Arrears and Insufficient Credit Enhancement
Arrears levels have remained high across the series. The three-months plus arrears continue to exceed 21% in all transactions except NF 2007-3, which has reported levels more in line with Fitch's non-conforming index of 11%.

In contrast to the majority of other non-conforming transactions, there has not been a notable downward trend in arrears across the series. Fitch believes that the settling of arrears at these high levels is driven by the combination of a relatively significant number of delinquent borrowers making no payments and the limited levels of properties being taken into possession. Although loans in possession remain low at below 1%, the current high pipeline of late stage arrears will likely translate into possessions and associated losses in the coming year. In particular, the March 2015 collection rates suggest that at least one in three loans in arrears by more than three months had made no payment at all, which suggests a low propensity for borrowers to clear arrears.

Consequently, the existing large pipeline of late stage arrears will likely put a considerable strain on excess spread when the pace of possession eventually increases, particularly given the relatively high loss severities observed to date (averaging about 30%). Additionally, arrears and the proportion of borrowers unable to make any payments could increase if interest rates rise modestly. In Fitch's view, the junior tranches are comparatively more dependent on the availability of excess spread and thus left more vulnerable to these high levels of arrears and associated losses. Combined with the relatively low levels of credit support, which we do not expect to build up sufficiently given the low portfolio payment rates, the seven junior tranches have been downgraded and the Outlook on seven tranches has been revised to Negative from Stable.

No Impact of Unhedged Basis Risk
There are no hedging agreements in place in any of the transactions to mitigate the basis risk arising from the Libor-linked notes and underlying mortgages linked to standard variable rates or the bank base rates. Consequently, in its analysis, Fitch has applied haircuts to the coupons received to reduce the credit given to the excess spread generated by the structure. While the reduction in revenue has not affected the senior notes, it has further contributed towards potential stresses on the junior tranches.

RATING SENSITIVITIES
Fitch believes that an unexpected increase in interest rates will put a strain on borrower affordability, particularly given the weaker profile of the underlying borrowers in the NF portfolios, as evidenced by the relatively high level of arrears despite prevailing low interest rates. If defaults and associated losses increase beyond the agency's stresses, the junior tranches could be further downgraded.