Fitch Affirms Arran Residential Mortgages Funding Series
KEY RATING DRIVERS
Stable Asset Performance
The portions of loans in arrears by more than three months remain below 0.8% for all three transactions. These levels are well below older RBS deals, such as Arran Residential Mortgages Funding No. 1, 2 and 3, with three-months plus arrears above 2.5% prior to being called. This difference can be explained by the tighter lending criteria for Arran 2010-1, 2011-1 and 2011-2 as the assets backing these deals were originated between 2009 and 2011.
As a result of low arrears, the outstanding balance of loans backed by properties in possession is below 0.15% of the current pool balances across all three deals. These levels are well below the sector average represented by Fitch's UK index at 0.9%. Combined with low loan-to-value ratios (LTVs) in the Arran portfolios, the losses on loans following the sale of properties in possession have been negligible or muted. Losses are expected to remain negligible as the transactions have very limited properties in possession.
Liquidity Mitigates Payment Interruption Risk
The liquidity reserve fund proceeds were released in the principal waterfall on the July 2015 payment date for Arran 2010-1 and 2011-1 and June 2015 payment date for Arran 2011-2. The transactions still have non-amortising fully funded reserve funds (RFs), ranging from 3.7% (Arran 2011-1) to 5.3% (Arran 2011-2) of the current note balances. The liquidity provided by the RFs is deemed sufficient to cover for payment interruption risk in the event of a default of the servicer of all three deals.
RBS Downgrade
RBS acts as a counterparty for several roles in these transactions, including collection account bank and swap counterparty. On 19 May 2015 Fitch downgraded RBS to 'BBB+'/'F2'. To mitigate the increased counterparty exposure following the downgrade, in its role as the swap provider, RBS has been posting collateral in an account held at HSBC (AA-/Stable/F1+).
There is a daily sweep from the collection account to the issuer account held at Societe Generale (A/Stable/F1), with payments from borrowers distributed over the month. Given the short commingling exposure, according to Fitch's counterparty criteria for structured finance transactions, a counterparty rated 'BBB+'/'F2', is able to support 'AAAsf' ratings. Consequently, RBS is still deemed an eligible counterparty to perform the role of collection account bank.
Step-up Margin Puts Pressure on Excess Spread
Arran 2010-1, 2011-1 and 2011-2 have step-up dates in November 2015, May 2016 and January 2017, respectively, when the notes will either be called or their margins will double. The increase in margins following the step-up is not covered by the swap arrangements. As a result, Fitch expects the funds received from the swap counterparty to be insufficient to cover the payments due to the noteholders, resulting in negative excess spread. Consequently, the transactions are likely to draw on their RFs and eventually divert principal receipts to meet interest shortfalls, resulting in reduced credit enhancement (CE). Fitch's analysis of the transactions took these factors into consideration and showed that the CE was sufficient to withstand such stresses.
RATING SENSITIVITIES
With 39%, 37% and 24% of the portfolio linked to variable rates for Arran 2010-1, 2011-1 and 2011-2, respectively, the future performance of the loans in the portfolios remains vulnerable to interest rate movements. An abrupt increase in interest rates, beyond Fitch's expectations, would put a strain on borrower affordability and increase delinquencies across transactions. This could result in additional liquidity stresses within the structures, especially following the step-up dates, eventually triggering 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.
Prior to the transactions' closing, Fitch did not review the results of a third party assessment conducted on the asset portfolio information.
For Arran 2010-1 and 2011-1
Prior to the transactions' closing, Fitch conducted a review of a small targeted sample of RBS's origination files and found inconsistencies or missing data related to the valuation of new-build properties. These findings were not considered in this analysis as they are no longer relevant.
For Arran 2011-2
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of RBS's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
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 RBS as at July 2015 for Arran 2010-1 and 2011-1 and as at March 2015 for Arran 2011-2.
- Transaction reporting provided by RBS as at July 2015.
- Counterparty information provided by RBS as at August 2015.
Fitch has affirmed the following ratings:
Arran Residential Mortgages Funding 2010-1 PLC
Class A2b (XS0543398522): affirmed at 'AAAsf'; Outlook Stable
Class A2c (XS0543402068): affirmed at 'AAAsf'; Outlook Stable
Class A3a (XS0543405590): affirmed at 'AAAsf'; Outlook Stable
Class A3b (XS0543408347): affirmed at 'AAAsf'; Outlook Stable
Class Mb (XS0543410160): affirmed at 'AAAsf'; Outlook Stable
Class Mc (XS0543411051): affirmed at 'AAAsf'; Outlook Stable
Class N (XS0543411481): affirmed at 'AAAsf'; Outlook Stable
Arran Residential Mortgages Funding 2011-1 PLC
Class A2a (XS0609431845): affirmed at 'AAAsf'; Outlook Stable
Class A2b (XS0566756127): affirmed at 'AAAsf'; Outlook Stable
Class A2c (US04271GAB41): affirmed at 'AAAsf'; Outlook Stable
Class A3a (XS0609432652): affirmed at 'AAAsf'; Outlook Stable
Class M (XS0566758172): affirmed at 'AAAsf'; Outlook Stable
Arran Residential Mortgages Funding 2011-2 PLC
Class A2a (XS0685394396): affirmed at 'AAAsf'; Outlook Stable
Class A2b (XS0685394479): affirmed at 'AAAsf'; Outlook Stable
Class A2c (XS0685394636): affirmed at 'AAAsf'; Outlook Stable
Class A3a (XS0685394800): affirmed at 'AAAsf'; Outlook Stable
Class A3c (XS0685395286): affirmed at 'AAAsf'; Outlook Stable
Class A4c1 (XS0688842847): affirmed at 'AAAsf'; Outlook Stable
Class A4c2 (XS0691908718): affirmed at 'AAAsf'; Outlook Stable
Class A4c3 (XS0691920507): affirmed at 'AAAsf'; Outlook Stable
Class A4c4 (XS0691926538): affirmed at 'AAAsf'; Outlook Stable
Class A4c5 (XS0691932346): affirmed at 'AAAsf'; Outlook Stable
Class M (XS0685622879): affirmed at 'AAAsf'; Outlook Stable
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