OREANDA-NEWS. Fitch Ratings has assigned Gemgarto 2015-2 plc's notes final ratings, as follows:

GBP226,100,000 Class A: 'AAAsf', Outlook Stable
GBP11,900,000 Class B: 'AAsf', Outlook Stable
GBP12,000,000 Class C: 'Asf', Outlook Stable
GBP8,000,000 Class D: 'BBB+sf', Outlook Stable
GBP4,000,000 Class E1: 'BB+sf', Outlook Stable
GBP4,000,000 Class E2: 'BBsf', Outlook Stable
GBP3,325,000 Class X1: 'BBsf', Outlook Stable
GBP5,320,000 Class Z: not rated
GBP1,330,000 Class X2: not rated
GBP1,918,000 Class Y: not rated

The transaction is an RMBS securitisation by Gemgarto 2015-2, an SPV incorporated in England and Wales. The collateral comprises near-prime owner-occupied residential mortgages originated by Kensington Mortgage Company in the UK.

The final ratings are based on the quality of the collateral, the available credit enhancement, the origination and underwriting processes used by Kensington for this collateral, the servicing capabilities of Homeloan Management Limited (HML), and the financial and legal structure.

KEY RATING DRIVERS
Post-Crisis, Near-Prime
The first transaction in the series, Gemgarto 2012-1, has performed strongly, with three-month plus arrears at 1.6%, compared with the Fitch prime index of 0.8% and non-conforming index of 9.8%. Kensington has a manual approach to underwriting, focusing on borrowers with some form of adverse credit and/or complex income.

Underwriting practices are robust and the lending criteria do not allow for any adverse credit 24 months before application. Fitch applied an underwriter adjustment of more than 1 while assigning base default probabilities using its prime default matrix.

Adverse Credit
The pool has a higher proportion of adverse credit than Gemgarto 2015-1 but lower than Gemgarto 2012-1. The number of county court judgments was 10.7%, compared with 2.2% in Gemgarto 2015-1, but is lower than non-conforming transactions. Fitch has applied an upward adjustment to the default probability for these characteristics in line with its criteria.

Unrated Originator and Seller
The originator and seller are unrated entities and so may have limited resources to repurchase mortgages if there is a breach of the representations and warranties (RW). This is a risk, but there are a number of mitigating factors, such as the low occurrence of previous breaches of the RW and an extended file review.

Combined Liquidity, General Reserve
The transaction is supported by a non-amortising rated note reserve fund (RNRF) set at 2% of the collateral balance at closing. Initially, most of the RNRF provides liquidity only to the class A and B notes, but as these notes amortise, the amount allocated for liquidity will fall in line with the note balances (2.5% of class A and B outstanding), and the rest will become available to absorb credit losses.

RATING SENSITIVITIES
The ratings and the related analysis performed are based on the assumptions in the existing criteria - Criteria Addendum: UK, dated 11 June 2015. Fitch's exposure draft report - Exposure Draft - Criteria Addendum: UK, dated 22 September 2015 has not been adopted (and the related model has not been through the full validation process), and these were not used in the rating analysis. Fitch has performed a sensitivity analysis which shows that if the criteria in that Exposure Draft (and the related model) are used, the assigned ratings would be:

Class A 'AAAsf'
Class B 'AA+sf'
Class C 'A+sf'
Class D 'BBB+sf'
Class E1 'BB+sf'
Class E2 'BB+sf'
Class X1 'BB+sf'

Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels greater 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 imply a downgrade of the class A notes to 'AA-sf' from 'AAAsf' and the class B notes to 'Asf' from 'AAsf'.

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
Kensington provided Fitch with a loan-by-loan data template. All relevant fields were provided in the data tape, with the exception of prior mortgage arrears. Performance data on historical static arrears were provided for all loans originated by Kensington, but the scope of the data was limited due to rather low origination volumes, especially from 2010 to 2012, and the length of available history (Kensington restarted with its new lending programme in 2010).

Due to its limited origination history, only four cases of sold repossessions have been experienced to date. When assessing the relevant assumptions to apply for the quick sale adjustment (QSA) Fitch considers the robustness of the initial valuations as the key driver together with the special servicing arrangements in place.

Considering the QSA assumptions are based on a comparison between sale price and an indexed original valuation, it is important for Fitch to have comfort that the original valuations obtained were robust and that sufficient controls and processes were in place to help ensure the veracity of the valuations received. In Fitch's view, Kensington has a robust approach to obtaining property valuations - with full valuations always required with additional desktop valuation checks and audits in cases when the valuation differs substantially.

Furthermore, it is Fitch's view that the special servicing, which is performed by Kensington, demonstrates a strong performance in overall servicing ability. Given this, the agency has applied QSA assumptions as per its standard criteria and has not applied any upward adjustments.

During the previous 12 months, Fitch conducted a site visit to Kensington's offices and conducted a file review to check the quality of Kensington's originations. During the site visit, Fitch conducted a review of a small targeted sample of the originator'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.

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

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.

To analyse the credit enhancement levels, Fitch evaluated the collateral using its default model ResiEMEA. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. Fitch rates the notes to the terms and conditions of the notes, which states that interest can be deferred for the class B, class C, class D and class X1 notes given any such note is not the most senior class outstanding, and at all times for the class E1 and class E2 notes. However, Fitch always rates notes 'AAsf' or above for timely interest. Fitch's ratings scenarios indicate that the class A to D notes receive interest payments in our modelling scenarios without incurring any interest shortfall at any time.

SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by Kensington as at 12 November 2015
- Transaction reporting provided by Wells Fargo for Gemgarto 2012-1 plc as at 28 August 2015
- Loan enforcement details provided by Kensington as at 22 July 2015
- Loan performance data provided by Kensington as at 22 July 2015

MODELS
The models below were used in the analysis. Click on the link for a description of the model.
ResiEMEA
http://www.fitchratings.com/jsp/creditdesk/ToolsAndModels.faces?context=2&detail=135

EMEA Cash Flow Model
http://www.fitchratings.com/web_content/pages/sf/emea-cash-flow-model.htm

REPRESENTATIONS AND WARRANTIES
A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for that asset class is available by accessing the appendix that accompanies the new issue report (see " Gemgarto 2015-2 plc - Appendix ", 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.