Fitch Affirms Gosforth Series
KEY RATING DRIVERS
Strong Asset Performance
The transactions in the series have persistently outperformed Fitch's UK Prime RMBS Index, even when the three month plus arrears on Gosforth Funding 2011-1 plc peaked at 0.98% of the outstanding pool balance during 2Q14 (compared with an 1.6 % average at the time). In more recent months, three month plus arrears have declined in line with the market and remain below Fitch's sector average.
Robust Credit Enhancement
Prepayment rates of Gosforth Funding 2011-1 plc, Gosforth Funding 2012-1 plc and Gosforth Funding 2012-2 plc have remained high, averaging 21.6%, 34.9% and 44.1% respectively, per annum. The high level of prepayments is attributable to a large number of borrowers who, at the end of their fixed-rate or tracker-rate periods, are opting to either refinance their mortgages or to switch product types. The latter option has resulted in mandatory repurchases of loans by the seller. With portfolios of these three transactions now ranging between 20.2% and 29.7% of the original pool balance, the levels of credit enhancement available on the notes have built up to levels that are up to 4.9x the levels at close.
Gosforth Funding 2014-1 plc and Gosforth Funding 2015-1 plc remain in their revolving periods which end in October 2019 and June 2020 respectively. The performance of the portfolios has remained within our expectations, with no major shifts in the underlying characteristics. Thus the asset replenishment triggers have not been breached. As a result the ratings of the notes in both transactions have been affirmed.
Standard Variable Rate (SVR) Risks Modelled
All five transactions are hedged against basis risk between LIBOR-linked notes and fixed-rate, SVR- and Bank of England base rate (BBR)-linked mortgages. In Fitch's analysis of SVR-linked portfolios, the agency does not give credit to such hedging arrangements, as they are deemed difficult to replace. For this reason, the transactions were analysed as un-hedged against the ultimate exposure to basis risk between SVR and LIBOR. Fitch reduced the excess spread generated by the five transactions and found it has had no impact on the ratings of the notes.
Counterparty Exposure
The Royal Bank of Scotland Group plc (BBB+/F2) in its role of stand-by basis swap provider on Gosforth Funding 2011-1 plc and Deutsche Bank AG (A-/F1) in its role of stand-by basis swap provider on Gosforth Funding 2012-1 plc and Gosforth Funding 2012-2 plc, were downgraded below the threshold necessary to support 'AAAsf' note ratings. Both have since been posting collateral in line with Fitch's criteria, leading Fitch to affirm the notes at 'AAAsf'.
RATING SENSITIVITIES
In Fitch's view, as fixed-rate and tracker loans in all five transactions ultimately revert to floating-rate, a sudden sharp increase in interest rates would put a strain on borrower affordability and potentially lead to a rise in arrears and subsequent defaults. Should arrears and defaults exceed Fitch's current stresses, the agency may take negative rating actions.
Gosforth Funding 2014-1 plc and Gosforth Funding 2015-1 plc remain in their revolving periods. Scheduled amortisations on the class A1 notes mean credit enhancement build-up will be limited.
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, 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 the transactions closing, Fitch conducted a review of a small targeted sample of Northern Rock/Virgin Money'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 Virgin Money as at 30 September 2015
-Transaction reporting provided by Virgin Money as at 30 September 2015
-Loan enforcement details provided by Virgin Money as at 30 September 2015
-Information regarding collateral postings provided by Virgin Money as at 6 January 2016 for The Royal Bank of Scotland Group plc and as at 11 January 2016 for Deutsche Bank AG
MODELS
The models below were 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 Gosforth Funding 2015-1 plc - Appendix, dated 12 June 2015, Gosforth Funding 2014-1 plc - Appendix, dated 17 September 2014, Gosforth Funding 2012-2 plc - Appendix, dated 14 December 2012 and Gosforth Funding 2012-1 plc - Appendix, dated 6 August 2012 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.
Fitch has affirmed the following ratings:
Gosforth Funding 2011-1 plc
Class A2 (ISIN XS0615975652): affirmed at 'AAAsf'; Outlook Stable
Class M (ISIN XS0615976031): affirmed at 'AAAsf'; Outlook Stable
Gosforth Funding 2012-1 plc
Class A (ISIN XS0800625674): affirmed at 'AAAsf'; Outlook Stable
Class M (ISIN XS0800631649): affirmed at 'AAAsf'; Outlook Stable
Gosforth Funding 2012-2 plc
Class A2 (ISIN XS0851843267): affirmed at 'AAAsf'; Outlook Stable
Class M (ISIN XS0851843341): affirmed at 'AAAsf'; Outlook Stable
Gosforth Funding 2014-1 plc
Class A1 (ISIN XS1107298710): affirmed at 'AAAsf'; Outlook Stable
Class A2 (ISIN XS1107299361): affirmed at 'AAAsf'; Outlook Stable
Class M (ISIN XS1107299791): affirmed at 'AAsf'; Off Rating Watch Positive; Outlook Stable
Gosforth Funding 2015-1 plc
Class A1 (ISIN XS1234349279): affirmed at 'AAAsf'; Outlook Stable
Class A2 (ISIN XS1234353032): affirmed at 'AAAsf'; Outlook Stable
Class M (ISIN XS1234354436): affirmed at 'AAsf'; Off Rating Watch Positive; Outlook Stable
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