Fitch Affirms Kensington 2007-1 RMBS
KMS is a securitisation of non-conforming residential mortgage loans originated by Kensington Group Plc.
KEY RATING DRIVERS
Improving Asset Performance
In recent periods, the transaction has continued to report improved performance, driven by the current low interest rate environment positively impacting borrower affordability. In September 2015, loans in arrears by more than three months stood at 16.5%, compared with 19.4% a year ago.
The portion of second-lien loans has reduced to 6.1% of the current outstanding balance, having fallen from 11.4% at transaction close. The presence of second-lien borrowers in the portfolio, who tend to pay higher margins than first-lien borrowers (currently 883bps compared with 481bps), has been the driver of KMS's weaker performance compared with peers. The second-lien loans also continue to be associated with much higher cumulative weighted average loss severities compared with first-lien loans. In its analysis, Fitch has applied more conservative recovery assumptions and concluded that the rated tranches have sufficient credit enhancement to withstand their respective stresses.
Pro-rata Amortisation
KMS is currently amortising pro-rata, due to loans in arrears by more than three months being below the trigger of 22.5% of the current portfolio balance. Pro-rata amortisation will be beneficial for the mezzanine and junior notes, but will slow down the pace of credit enhancement build-up. Given the transaction's seasoning, the portfolio has amortised substantially, leading to a significant increase in credit enhancement across the structure.
Unhedged Interest Rate Risk
KMS comprises loans linked to the Kensington Variable Rate (KVR) and Money Partners Variable Rate (MVR). The mismatch between the KVR/MVR received on the loans and the Libor-paying notes is left unhedged.
Fitch believes that the KVR/MVR margin over Libor will be compressed in a rising interest rate scenario, as the servicer may not be able to increase the KVR/MVR at the pace at which Libor is expected to rise. In its analysis, Fitch has stressed the excess spread to account for this risk and found the credit enhancement available to the rated notes is sufficient to withstand such stresses, as reflected in the notes' affirmation.
RATING SENSITIVITIES
In Fitch's view, an expected increase in interest rates before end-2016 will put a strain on borrower affordability, particularly given the weaker profile of non-conforming borrowers. If defaults and associated losses increase beyond the agency's stressed assumptions, the junior tranches may be downgraded.
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 covered bond 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 pool and the transaction. 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 pool ahead of the transaction's initial closing. The subsequent performance of the transaction 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 and together with the assumptions referred to above, 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 Mortgage Company, as at 31 August 2015
-Transaction reporting provided by Kensington Mortgage Company, up to and as at 31 August 2015
The rating actions are as follows:
Class A3a (ISIN XS0292638920): affirmed at 'AAAsf', Outlook Stable
Class A3b (ISIN XS0292652756): affirmed at 'AAAsf', Outlook Stable
Class A3c (ISIN XS0292640660): affirmed at 'AAAsf', Outlook Stable
Class M1a (ISIN XS0292639225): affirmed at 'Asf', Outlook Stable
Class M1b (ISIN XS0292651196): affirmed at 'Asf', Outlook Stable
Class M2b (ISIN XS0292639654): affirmed at 'BBB-sf', Outlook Stable
Class B1a (ISIN XS0292639902): affirmed at 'Bsf', Outlook Stable
Class B1b (ISIN XS0292651436): affirmed at 'Bsf', Outlook Stable
Class B2 (ISIN XS0292640157): affirmed at 'CCCsf', Recovery Estimate 100%.
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