OREANDA-NEWS. Fitch Ratings has assigned Paragon Mortgages (No.23) plc's notes expected ratings, as follows:

Class A1: 'AAA(EXP)sf', Outlook Stable
Class A2: 'AAA(EXP)sf', Outlook Stable
Class B: 'AA(EXP)sf', Outlook Stable
Class C: 'A+(EXP)sf', Outlook Stable
Class E: not rated

The final ratings are subject to the receipt of final documents conforming to information already received and no deviation in the default and recovery levels of the final closing pool.

The transaction is a securitisation of 100% UK prime buy-to-let (BTL) loans originated by Paragon Mortgages (2010) Limited (Paragon). The mortgages will be serviced by Paragon with Homeloan Management Limited acting as a back-up servicer.

Credit enhancement for the class A notes at 11.76% will be provided by the subordination of the class B to E notes and the initial portion of the first loss fund available to cover for losses.

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

KEY RATING DRIVERS

Buy-to-Let Portfolio
The portfolio consists entirely of BTL loans for which Fitch applies an increase to the frequency of foreclosure based on its criteria. This is because while BTL loans have performed well in the current environment, they performed worse than owner-occupied properties immediately following the last housing crisis.

Higher LTVs
Paragon changed its lending guidelines about a year ago to allow for loans up to 85% LTV (including fees), which is reflected in the larger portion of loans with an LTV over 80% (16.2%) compared with previous transactions. Nearly all the loans in this portfolio are recent originations since March 2015.

High London Concentration
Within the portfolio 32.5% of properties are located in Greater London. While this is typical of buy-to-let pools, it is still much higher than the proportion of the UK population in this region. Fitch views properties in this region as overvalued and applies a sustainable price discount of 31.1% in its stressed scenarios. In addition, the agency made an adjustment to the default probability for geographical concentration.

Prime Underwriting, Strong Performance
Fitch has given credit to Paragon's robust underwriting practices, supported by strong historical performance, with low arrears and defaults, which outperform the UK index.

Liquidity Support
The first loss fund represents 2.5% of the GBP equivalent initial total note balance. Of this, a liquidity amount equal to 2.5% of the rated notes is only available to pay interest on classes A, B and C together with principal receipts in case of a shortfall. The remaining reserve can be used to cure losses.

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.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

Paragon provided Fitch with a loan-by-loan data template, cumulative loan book losses, cumulative static 90+ delinquency data, dynamic arrears data, loan-by-loan performance history on all originations of Paragon Mortgages (2010) Limited between 2010 and 2015 and mortgage book repossession data. Fitch considers that the data available for the analysis is of sound quality.

Fitch reviewed the preliminary results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.

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.

Overall and together with the assumptions referred to above, Fitch's assessment of the asset pool 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 tape in Fitch's ResiEMEA template provided by Paragon as at 1 June 2015
-Preliminary transaction reporting provided by Paragon as at 10 June 2015
-Static and dynamic performance data on Paragon's mortgage loan book
-Investor reports for the existing Paragon RMBS transactions
-Data on loans repossessed by Paragon between 2001 and 2013 to determine the originator's experienced loss severity rate and quick sale adjustment (QSA).