OREANDA-NEWS. Fitch Ratings has upgraded one and affirmed 14 tranches of Marble Arch Residential Securitisation Ltd No 3 (MARS 3) and Marble Arch Residential Securitisation Ltd No 4 (MARS 4). A full list of rating actions follows at the end of this ratings action commentary.

The two transactions comprise UK non-conforming residential mortgages originated by Matlock Bank for MARS 3 and the London Mortgage Company and London Personal Loans Limited for MARS 4.

KEY RATING DRIVERS
Strong Credit Enhancement
The combination of sequential amortisation and non-amortising reserve funds has led to a substantial build-up in credit enhancement (CE) available to the senior notes; 67% for MARS 3 and 87% for MARS 4 at end-December 2015, compared with 13.5% and 21.5%, respectively at closing.

For the M2 notes of MARS 3 the increased CE and smaller loss expectations as a result of the new Criteria Addendum: UK Residential Mortgage Assumptions (dated 16 December 2015) allow the notes to sustain stresses associated with higher ratings, leading to today's upgrades.

Stable Performance
The transactions have reported stable asset performance since the last review in November 2015. Loans in arrears by more than three months, excluding loans with properties in possession, decreased to 18.7% in December 2015 from 24% in September 2015 for MARS 3 and to 12.8% from 14.5% for MARS 4. The sharp decrease in the proportion of loans in late stage arrears in MARS 3 was mostly driven by a decrease in the number of borrowers in arrears by more than 90 days as they moved to a lower arrears status.

Unhedged Interest Rate Risk
The notes in MARS 4 are exposed to basis risk due to 88% of the collateral paying a variable rate linked to BBR, while the notes pay an interest linked to three month Libor. No swap is in place to hedge this risk. Fitch accounted for the unhedged basis risk by reducing the excess spread generated by the BBR-linked portions of the portfolio.

Currency Swap Obligation
The affirmation of the A1b currency swap rating in MARS 3 is based on Fitch's view that the swap payment obligations rank pro rata and equally with the referenced notes. Consequently, the credit profiles of the currency swap payment obligations are consistent with the long-term rating on the referenced notes.

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. As a result 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.

A change to the rating of the A1b notes on MARS 3 will likely lead to an corresponding change in the rating of the SPV's currency swap obligation. The rating sensitivity will primarily be driven by the rating analysis applicable to the corresponding note. The rating of the SPV's currency swap obligation will be withdrawn if the currency swap agreement is terminated due to non-performance by the swap counterparty or a non-credit related event.

As the reserve fund is the only source of CE for the class B notes of MARS 3, the rating of the notes remains capped at the Long term Issuer Default Rating of the account bank (Barclays Bank plc); at 'A', which is on Stable Outlook.

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.

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

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 Acenden Mortgage Services Solutions with a cut-off date of 30 November 2015 for both deals.

-Transaction reporting provided by Acenden Mortgage Services Solutions since the close of the deals and until 31 December 2015 in both deals.