OREANDA-NEWS. December 08, 2015. Fitch Ratings has affirmed Silk Road Finance Number Three PLC and the Darrowby RMBS series. A full list of rating actions is at the end of this rating action commentary.

The Silk Road transaction comprises UK prime residential mortgages originated by The Co-operative Bank Plc.

The Darrowby series is a series of securitisations of mortgage loans originated by Skipton Building Society.

KEY RATING DRIVERS
Solid Performance
The affirmations reflect the strong performance of the underlying portfolios across all four transactions. In all deals the volume of loans in arrears by more than three months remains below 60bps of their respective current pool balance. The solid performance is further demonstrated by the low cumulative balance of loans with properties taken into possession, less than 30 bps of their respective original pool balances. Both of these metrics are far below the UK prime average of 0.80% and 0.92%, respectively

Given the low level of late-stage arrears and outstanding balance of loans with properties in possession as of the most recent collection dates, Fitch expects losses to be limited and fully covered by excess spread.

Growing Credit Enhancement (CE)
The notes are currently amortising sequentially with no pro-rata trigger in place in any transaction, which has led to a substantial build-up in CE available to the senior notes. Fitch deems the current CE to be sufficient to withstand the 'AAAsf' rating stresses applied in its analysis.

Unhedged Interest Rate Risk
Darrowby 3 comprises both floating and fixed rate loans, most of which are expected to revert to floating by 2017. Although the fixed rate loans are hedged, the mismatch between the interest received on the SVR loans (presently 40% of the current pool) and the Libor-paying notes is left unhedged. In its analysis, Fitch stressed the excess spread to account for this risk and found the credit enhancement available to the rated notes sufficient to withstand such stresses.

Stressed Pool Characteristics,
Under the mortgage sale agreement, the mortgage loans may be offer product switches subject to certain conditions, Fitch stressed the collateral characteristics to account for this risk and found the credit enhancement available to the rated notes sufficient to withstand the stresses.

Step-up in Margin of the Notes
The notes have optional redemption dates after which, if not redeemed, the margin of the notes will step up. Fitch stressed the margin of the notes to account for this risk and found the credit enhancement available to the rated notes sufficient to withstand the stresses.

Counterparty Exposure
Darrowby 1 has partial exposure to the Royal Bank of Scotland (RBS; BBB+/Negative/F2) as account bank, Fitch is aware that in order to mitigate this exposure remedial actions have been taken: a second account bank provider has been appointed, BNP Paribas (A+/Stable/F1), a contractual agreement to limit the amount held at RBS to GBP35.6m and the investment of the reserve fund in all intra payment date periods with National Australia Bank (AA-/Stable/F1+). Fitch believes these remedial actions mitigate the exposure to RBS.

Data Adequacy
For Silk Road Number 3 Fitch was unable to derive current loan to values and original loan to values from the loan level data provided by the issuer on a loan aggregated basis. As a result, Fitch conducted sensitivity analysis based on the values reported at closing and the maximum values allowed in the legal documentation, Fitch found the credit enhancement available to the rated notes sufficient to withstand the additional stresses.

RATING SENSITIVITIES
The transactions are backed by floating-interest-rate loans. In the current low interest rate environment, borrowers are benefiting from low borrowing costs. An increase in interest rates could lead to performance deterioration of the underlying assets and consequently downgrades of the notes if defaults and associated losses exceed those of Fitch's stresses.

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 the transactions closing of Darrowby 2, Darrowby 3 and Silk Road Number 3, 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.

Prior to Darrowby 1 transaction closing, Fitch did not review the results of a third party assessment conducted on the asset portfolio information.

Prior to the transactions closing, 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.

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 Skipton for all Darrowby deals with a cut-off date of 31 October 2015
-Loan-by-loan data provided by The Co-operative Bank for Silk Road number three with a cut-off date of: 31 August 2015
-Transaction reporting provided by Skipton for all Darrowby deals since close and untilSeptember 2015 for Darrowby 1 and 3 and August 2015 for Darrowby 2
-Transaction reporting provided by The Co-operative Bank for Silk Road Number Three since close and until September 2015
-Fitch analysts visited the offices of Skipton Building Society to discuss origination and servicing practices in October 2015.
-Fitch analysts visited the offices ofThe Co-operative Bank to discuss origination and servicing practices in February 2015.

MODELS
The models below were used in the analysis. Click on the link for a description of the model.

ResiEMEA.

EMEA RMBS Surveillance Model.

The rating actions are as follows:

Silk Road Finance Number Three PLC:
Class A (ISIN XS0811595130): affirmed at 'AAAsf'; Outlook Stable

Darrowby No. 1 plc
Class A2 (ISIN XS0607053641) affirmed at 'AAAsf'; Outlook Stable

Darrowby No. 2 plc
Class A (ISIN XS0765640783) affirmed at 'AAAsf'; Outlook Stable

Darrowby No. 3 plc
Class A (ISIN XS 1042831443) affirmed at 'AAAsf'; Outlook Stable