OREANDA-NEWS. January 19, 2016. Fitch Ratings has assigned Friary No.3 plc's notes expected ratings as follows:

Class A: 'AAA(EXP)sf', Outlook Stable
Class B: not rated

This transaction will be a securitisation of prime residential owner-occupied mortgages, originated in the UK by Principality Building Society (PBS). This will be the third residential owner-occupied pass-through RMBS transaction from PBS.

The ratings will be based on Fitch's assessment of the underlying collateral, available credit enhancement, PBS' origination and underwriting procedures, the servicing capabilities of PBS, and the transaction's financial and legal structure.

KEY RATING DRIVERS
Portfolio of Prime Mortgages
The pool is a static 21-month seasoned portfolio consisting of fully income verified loans originated predominantly (88.3%) in 2013 and later, with a weighted average (WA) current loan-to-value (CLTV) of 64.5%, WA sustainable loan-to-value (sLTV) of 80.6% and WA debt-to-income (DTI) of 42.1%; which are all in line with prime UK transactions rated by Fitch.

Geographical Concentration in Wales
PBS is the largest building society in Wales and, given its Welsh focus, there is a high proportion of the portfolio contained in Wales (21.7%). This introduces concentration risk into the transaction. The portfolio is also more exposed to regional economic declines and natural disasters, such as flooding. Fitch has increased the default probability for this proportion of loans.

Authorised Investments
The issuer will be able to invest in reverse repos, with an 'A'/'F1' counterparty. However, where the underlying securities in the reverse repo are sterling gilt-edged securities and/or sterling treasury bills (T-bills) that are rated at least 'AA-' and mature within 10 years of the next interest payment date (IPD), the counterparty must be rated at least 'BBB-'. While the counterparty rating can be lower than the rating for direct support counterparties under Fitch's counterparty criteria, Fitch has reviewed the restrictions in the transaction documentation to mitigate against credit risk and avoid undue market risk, and determined that the restrictions are in line with its counterparty criteria.

Interest Rate Risks Partially Hedged
At close, 88.1% of the pool will pay a fixed rate of interest while the notes will pay a floating rate. The issuer will enter into a swap to hedge the interest rate risk to hedge this mismatch. The remaining portion of the portfolio will comprise loans that pay an interest rate linked to the lender's standard variable rate (SVR), which will remain unhedged.

Satisfactory Historical Performance
Friary No.1 & No.2, originated by PBS, have generally performed in line with comparable prime UK transactions rated by Fitch, with arrears at 0.82% for Friary No.1 and 0.41% for Friary No.2, compared with 0.8% for Fitch's UK all-prime index.

RATING SENSITIVITIES
Material increases in the frequency of defaults and loss severity on defaulted receivables producing losses greater than Fitch's base case expectations may result in negative rating actions on the notes. Fitch's analysis revealed that a 30% increase in the 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'.

More detailed model implied ratings sensitivity can be found in the presale 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
PBS provided Fitch with a loan-by-loan data template and all relevant fields were provided in the data tape except for data on prior mortgage arrears. Fitch was also provided static vintage default data for PBS's residential mortgage book, and static three month-plus arrears data by vintage. Fitch considers the data available for the analysis to be of good quality.
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.

During the previous 12 months, Fitch completed a review of the origination policies and practices of PBS as part of the rating process for Friary. This included a file review of a sample of the provisional mortgage portfolio. These cases were chosen based on specific borrower and loan characteristics and the loan records were checked against the prevailing lending criteria at the time the mortgage application was considered. Fitch is satisfied that the loans were underwritten as per PBS lending criteria.

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.

SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by PBS as at 31 October 2015
- Loan enforcement details provided by PBS as at 31 October 2015
- Loan performance data provided by PBS as at 31 October 2015

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

ResiEMEA:
https://www.fitchratings.com/rmbs/resiemea

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 the asset class is available by accessing the appendix that accompanies the initial new issue report (see "Friary No. 3 plc - Appendix", dated 6 January 2015 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.