OREANDA-NEWS. Fitch Ratings has assigned Project Salisbury's notes expected ratings as follows:

Class A: 'AAA(EXP)sf'; Outlook Stable
Class B: 'AAA(EXP)sf'; Outlook Stable
Class C: 'AA+(EXP)sf'; Outlook Stable
Class D: 'AA(EXP)sf'; Outlook Stable
Class E: 'AA-(EXP)sf'; Outlook Stable
Class F: 'A+(EXP)sf'; Outlook Stable
Class G: 'A(EXP)sf'; Outlook Stable
Class H: 'A-(EXP)sf'; Outlook Stable
Class I: 'BBB+(EXP)sf'; Outlook Stable
Class J: 'BBB(EXP)sf'; Outlook Stable
Class K: 'BBB-(EXP)sf'; Outlook Stable
Class L: 'BB+(EXP)sf'; Outlook Stable
Class M: 'BB(EXP)sf'; Outlook Stable
Class N: 'BB-(EXP)sf'; Outlook Stable
Class Z: not rated

The transaction is a granular synthetic securitisation of GBP789.4m unfunded credit default swap (CDS), which referenced loans granted to small and medium-sized enterprises (SME) investing in the UK real estate sector. The loans are secured with real estate collateral and were originated by Lloyds Banking Group.

Lloyds Banking Group has bought protection under the CDS contract relating to the equity risk position but has not specified the date of execution of the contracts relating to the rest of the capital structure. The expected ratings are based on the un-executed documents provided to Fitch, which have the same terms as the equity CDS contracts executed so far by Lloyds Banking Group. Fitch understands from Lloyds Banking Group that it has no immediate need to buy protection on the remaining capital structure.

Should the documents not be executed, Fitch will nevertheless monitor the expected ratings using the applicable criteria for as long as the CDS contract exists.

The ratings of the notes address the likelihood of a claim being made by the protection buyer under the unfunded CDS by the end of the 10-year protection period in accordance with the documentation.

KEY RATING DRIVERS
Limited Negative Selection of Portfolio
Fitch determined an annual average probability of default (PD) for the originator's book of 3.5%, which map to a one year expected PD of 4.8% for the originator's real estate book and 4.7% for the transaction. This implies limited negative selection of the securitised portfolio.

Concentration Risk
While the portfolio will compose at closing of around 2,500 obligors and is granular with the largest obligor only representing 25bps of the portfolio, all borrowers are exposed to the UK real estate sector. The application of Fitch's standard corporate correlation assumptions resulted in rating default rate (RDR) levels of approximately 80% at the 'AAA' level. Fitch usually does not expect RDRs to be higher than 75%. Nevertheless the agency assigned 'AAA(EXP)sf' due to the obligor granularity and regional diversity.

Low Loan to Value (LTV) Ratio
Each loan in the securitised portfolio is collateralised with property. The average LTV ratio of the portfolio is 52% and it is capped at 60% during the replenishment period. The LTV could be diluted after the replenishment period given new loans could be issued outside the transaction. Base on the maximum 70% LTV threshold in the originator's credit policy, Fitch applied an average 70% LTV to the portfolio, which leads to a base case 71.4% recovery rate.

Replenishment Period
The transaction features a three-year replenishment period subject to conditions aimed at limiting additional risks. The portfolio limitations are set to be close to the actual portfolio, reducing the scope for portfolio deterioration by Lloyds Banking Group including weaker credits. Fitch has captured the replenishment risk based on a stressed portfolio, taking into account the replenishment triggers and replenishment conditions of the transaction.

RATING SENSITIVITIES
Increasing the default probabilities assigned to the underlying obligors and reducing their assumed recovery rates by 25% each could result in a downgrade of up to three notches to the notes.

Finally a joint stress combining the abovementioned stresses could lead to a downgrade up to four notches.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
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.

SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by Lloyds Bank plc as at 9 December 2015
-Historical performance data provided by Lloyds Bank plc for 2009-2015
-Recovery Data provided by Lloyds Bank plc for 2004-2012