Fitch Upgrades 7 Tranches of Landmark Series; Affirms 9 Others
The affected transactions are Landmark Mortgages Securities No.1 Plc (LMS 1), No.2 (LMS 2) and No.3 (LMS 3), three UK non-conforming transactions backed by mixed pools originated by Amber Home Loans, Infinity Mortgages and Unity Homeloans. A full list of rating actions follows at the end of this rating action commentary.
KEY RATING DRIVERS
Strong Credit Enhancement (CE)
These transactions closed in 2006 (LMS 1) and 2007 (LMS 2 and 3) and are now well-seasoned. As a result CE has built up through note amortisation, resulting in today's upgrades. In addition, each transaction has a non-amortising and fully funded reserve fund (RF), providing 5.7%, 1.7 and 4.1% of CE for LMS 1, 2 and 3 respectively. For LMS 3, the RF is only back at target since July 2015, for the first time in seven years. Note amortisation switched to pro rata for LMS 2, which has accelerated CE growth for the non-senior notes.
In addition, each transaction has a liquidity facility (LF) that can no longer amortise following a breach in cumulative loss triggers. Although the LF no longer provides CE, it still boosts liquidity across the structures.
Decreasing Arrears Supported by Repossessions
Delinquent loans have been falling in all three transactions with the portion of loans in arrears by more than three months down at 14.7%, 13% and 6.7% for LMS 1, 2 and 3 respectively as of end-June 2015, from 19.6%, 17.8% and 9.2% a year ago. However, this drop is mostly due to an increase in repossession rather than loans returning to performing status. Cumulative repossessions are above the Fitch Non-Conforming (NC) index (10.48%) at 15.6%, 19.4% and 14.3% respectively in LMS 1, 2 and 3. Combined with fairly high loan-to-values (LTVs), this results in larger-than-average cumulative realised losses at 4.3%, 7.1% and 5.8% for each of the deals. However, the weighted average loss severities across all three transactions are stable, ranging from 28.2% (LMS 1) to 41% (LMS 3).
Interest-only Loan Concentration
The transactions all have a large portion of interest-only (IO) loans (82.4% for LMS 1, 86.7% for LMS 2 and 90.7% for LMS 3) and a concentration of more than 20% of IO loans maturing within a three-year period. As per criteria, Fitch carried out a sensitivity analysis assuming a 50% increase in default probability for these loans and found that such stresses do not result in sharp downgrades, due to the protection provided by current CE levels.
LMS 3 Capped
Following the downgrade of Royal Bank of Scotland (RBS) on 19 May 2015, the bank can only support a 'Asf'-rating as a direct support counterparty, as is the case in LMS 3. The highest rating across LMS 3 is currently 'Asf', and the cap has no rating impact on any of the rated tranches.
RATING SENSITIVITIES
As most of the performance indicators remain worse than the Fitch NC index, further deterioration could impact weighted average foreclosure frequency and weighted average recovery rate numbers and trigger negative rating actions.
In the case of LMS 3, further downgrade in RBS's rating would lower the current 'Asf' cap and trigger negative rating actions.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.
Overall, Fitch's assessment of the 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 provided by Kensington as at 31 May 2015.
-Transaction reporting provided by BNY Mellon (LMS1) and Law Debenture Agency Solutions (LMS 2 and 3) as at 17 June 2015 (LMS 2) and 17 July 2015 (LMS 1 and 3).
-Swap and counterparty information provided by Kensington as at 7 August 2015.
MODELS
The model below was used in the analysis. Click on the link for a description of the model.
Landmark Mortgage Securities No.1 plc:
Class Aa (XS0258051191): affirmed at 'AAAsf'; Outlook Stable;
Class Ac (XS0260674725): affirmed at 'AAAsf'; Outlook Stable;
Class B (XS0260675888): upgraded to 'AAsf' from 'Asf'; Outlook Stable;
Class Ca (XS0258052165): upgraded to 'BBBsf' from 'BBsf'; Outlook Stable;
Class Cc (XS0261199284): upgraded to 'BBBsf' from 'BBsf'; Outlook Stable;
Class D (XS0258052751): upgraded to 'B+sf' from 'Bsf'; Outlook Stable.
Landmark Mortgage Securities No.2 Plc:
Class Aa (XS0287189004): affirmed at 'Asf'; Outlook Stable;
Class Ac (XS0287192727): affirmed at 'Asf'; Outlook Stable;
Class Ba (XS0287192131): affirmed at 'BBsf'; Outlook Stable;
Class Bc (XS0287193451): affirmed at 'BBsf'; Outlook Stable;
Class C (XS02871922141): affirmed at 'Bsf'; Outlook Stable;
Class D (XS0287192644): affirmed at 'CCC'; Recovery Estimate (RE) 0%.
Landmark Mortgage Securities No.3 Plc:
Class A (XS1110731806): affirmed at 'Asf'; Outlook Stable;
Class B (XS1110738132): upgraded to 'BBBsf' from 'BBsf'; Outlook Stable;
Class C (XS1110745004): upgraded to 'Bsf' from 'CCCsf'; Outlook Stable;
Class D (XS1110750699): upgraded to 'CCCsf' from 'CCsf'; Recovery Estimate (RE) 60%.
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