Fitch Affirms the Brass Series at 'AAAsf'; Outlook Stable
Brass No. 1 Plc (Brass 1)
Class A (ISIN XS0615237236): affirmed at 'AAAsf'; Outlook Stable
Brass No. 2 Plc (Brass 2)
Class A2 (ISIN XS 0832874464): affirmed at 'AAAsf'; Outlook Stable
Brass No. 3 Plc (Brass 3)
Class A (ISIN XS 0976123587): affirmed at 'AAAsf'; Outlook Stable
Brass No. 4 Plc (Brass 4)
Class A (ISIN XS1120849754): affirmed at 'AAAsf'; Outlook Stable
The transactions are a series of UK prime RMBS, comprising mortgages originated by Accord Mortgages, a subsidiary company of Yorkshire Building Society (YBS; A-/Stable/F1).
KEY RATING DRIVERS
Strong Credit Enhancement (CE)
The combination of sequential amortisation and reserve funds, which are at their floor levels, has led to a substantial build-up in CE available to the senior notes of Brass 1 (52% of the current portfolio balance), Brass 2 (24.3%), and Brass 3 (21.8%).
This build-up in CE is a result of high prepayments, as borrowers who have reached the end of their fixed-rate terms refinance out of the portfolio. The average monthly constant prepayment rate ranges from 20.1% (Brass 1) to 26.1% (Brass 3). Fitch expects the CE of the class A notes in Brass 4 (13%) to further increase for the same reasons.
As reflected in the affirmation of the current ratings, the agency deems the current CE levels to be sufficient to withstand the 'AAAsf' rating stresses applied in its analysis.
Prime Assets Key Driver
As of end-August 2015, late-stage arrears (mortgages with more than three monthly instalments overdue) are reported between 0% (Brass 4) and 0.8% (Brass 1) of the outstanding portfolio balance, compared with the average of 0.8% for other Fitch-rated prime UK RMBS. As the late-stage arrears of Brass 1 are in line with the Fitch UK prime RMBS Index, in its analysis of the transaction, the agency applied a performance adjustment factor of 1.
The cumulative balance of mortgages with collateral taken into possession, in proportion to the original pool balance, is 8bps in Brass 1 and 4bps in Brass 2. No properties have been taken into possession in Brass 3 and 4. The same measure is reported at 1.2% for the UK Prime Index.
Fitch recognises that the prime nature of the borrowers in the mortgage portfolio (100% first lien loans, no borrowers with prior adverse credit history) as the main driver for this strong asset performance and expects possessions and losses to remain limited in these pools.
Lender Adjustment
In general, Fitch considers Accord's underwriting and servicing practices to be in line with those of a standard prime UK lender. However, the current (5.79%) and historical standard variable rate (SVR) applied by Accord are above average for the UK market. As the fixed-rate loans revert to the higher SVR, borrowers may be exposed to higher-than-average payment shocks; Fitch has therefore included a lender adjustment to account for this risk.
Unhedged Basis Risk
At the end of their teaser period, all the loans in the portfolios will revert to the SVR set by Accord. To hedge the SVR-Libor basis risk, Brass 1 and 2 entered into basis swap agreements with Barclays (A/Stable/F1), while this risk remains unhedged in Brass 3 and 4. Given that Accord's SVR is above the market average, Fitch considers the basis swaps as difficult to replace and therefore does not give credit to them.
In its analysis of the transactions, the agency assumes that in the long term the SVR will be equal to the GBP Libor rate plus 300bps. This was taken into account in the calculation of the excess spread applied in Fitch's EMEA RMBS Surveillance model. The subsequent reduction in excess spread from current levels has had no effect on the current ratings, as reflected in today's affirmation of the notes.
Step Up Margins
The issuer has the option to call the outstanding notes on the dates specified in the transaction documentation. In the event that the notes are not called, the class A notes' margins will step up. In its analysis, Fitch has assumed that the call option is not exercised and has factored in the margin step ups.
Commingling Risk
National Westminster Bank Plc (BBB+/Stable/F2) is the collection account bank for Accord mortgage loans. Payments made by borrowers are credited to the relevant collection account. No trust has been declared over the respective collection accounts in favour of the issuers and for this reason, in its analysis of the transactions, Fitch assumes that these funds will be commingled with funds received from other borrowers that do not form part of the securitised portfolios.
There is a daily transfer of payments from the collection account to the GIC account held by Barclays (Brass 1, 2 and 3) and YBS (Brass 4) in the name of the issuers. Notwithstanding the daily sweeps, most borrowers' monthly payments could be received at the same time, within one or a few business days. To account for this risk, Fitch has conservatively assumed a maximum loss equivalent to two months' collections of scheduled interest and principal payments.
RATING SENSITIVITIES
As fixed-rate and tracker loans ultimately revert to the Accord's SVR, a sudden, sharp increase in interest rates would put a strain on borrowers' affordability. As borrowers refinance out of the portfolios, the notes are increasingly exposed to adverse selection. A subsequent increase in arrears and losses is beyond Fitch's stresses may trigger negative rating actions on the notes.
Fitch published an exposure draft for UK residential mortgage assumptions on 22 September 2015 (https://www.fitchratings.com/creditdesk/reports/report_frame_render.cfm?rpt_id=871376). The proposed criteria, if adopted, will lead to smaller loss expectations for all types of mortgage portfolios. As a result, Fitch expects all outstanding UK RMBS and CVB ratings to either be affirmed or upgraded. If the current criteria are updated after considering market feedback, Fitch will review all existing UK RMBS ratings within six months of the new criteria publication.'
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 Brass 1, 2 and 3 closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated errors or missing data related to the income verification information. The third party assessment conducted on Brass 4 portfolio information indicated no adverse findings material to the rating analysis. As such, prior concerns were not considered in this analysis as they are no longer relevant.
Prior to the transactions closing, Fitch conducted a review of a small targeted sample of Accord'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 YBS as at July 2015 (Brass 1, 2 and 3) and August 2015 (Brass 4)
-Transaction reporting provided by YBS up to and as at September 2015 (Brass 1, 3 and 4) and August 2015 (Brass 2)
MODELS
The model below was used in the analysis. Click on the link for a description of the model.
REPRESENTATIONS AND WARRANTIES
A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for the asset class is available by accessing the appendix that accompanies the initial new issue report (see Brass No. 1 Reps and Warranties - Appendix, dated 21 October 2011; Brass No. 2 - Appendix, dated 01/10/2012; Brass No. 3 Plc - Appendix, dated 07 October 2013; Brass No. 4 Plc - Appendix, dated 23 October 2014 at www.fitchratings.com). In addition refer to the special report "Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions" dated 12 June 2015 available on the Fitch website.
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