OREANDA-NEWS. Fitch Ratings has upgraded nine and affirmed 21 tranches of the Business Mortgage Finance (BMF) series. A full list of rating actions is at the end of this commentary.

The BMF transactions are securitisations of mortgages to small and medium-sized enterprises and the owner-managed business community, originated by Commercial First Mortgages Limited (CFML).

KEY RATING DRIVERS
Decreasing Arrears, Increasing Losses
The decreasing trend of late stage arrears continued in 2015. As of November 2015, loans in arrears by three months or more, as a percentage of the current portfolio balance, were down between 3.0pp (BMF 7) and 5.5pp (BMF 3) compared with 12 months ago. This improving trend in late-stage arrears is reflected in the Stable Outlooks across the series. However, Fitch recognises that a significant portion of the reduction is due to the sale of properties taken into possession by CFML.

Over the same period, the cumulative balance of foreclosed mortgages and cumulative loss values as a percentage of the original portfolio balance, increased between 0.8pp (BMF 5) and 3.1pp (BMF4) and between 0.4pp (BMF 3) and 4.2pp (BMF 5), respectively.

Stressed QSA Assumptions
Recovery rates across the series are lower than we would expect from the application of our standard criteria for typical non-conforming RMBS. The weighted average recovery rates on possession cases, where sales of underlying properties have resulted in a loss for the issuer, span 35.0% (BMF 5) to 53.6% (BMF 3). These observations imply a quick sale adjustment (QSA) between 55% and 65%, compared with Fitch's criteria-defined QSA assumptions of 25% for owner-occupied and 35% for buy-to-let loans.

The agency believes that low recoveries are due to a combination of originally overvalued properties, high foreclosure costs incurred to prepare the property for sale and accrued interest due at the time of sale. In its analysis, Fitch has increased its QSA assumptions to reflect the level of actual recoveries across the transactions.

Credit Enhancement Improves as Structures Deleverage
The five deals have deleveraged substantially and their current notes' balance represent between 17% (BMF 3) and 55% (BMF 7) of the total issuances. The resulting increase in credit enhancement is the main driver of the upgrades of BFM 3 and the senior notes in the rest of the series.

Weaker Performance of Later Vintages
The combination of high period losses and insufficient excess spread has led to the full depletion of the reserve funds and to increasing principal deficiency ledgers (PDL) in BMF 4, 5, 6 and 7. In particular, the outstanding PDLs exceed the balance of the class C notes in BMF 5, 6 and 7 and have now reached 20%, 68% and 66% of the respective class B notes' balance.

Timely Interest on Class A Detachable Coupons (DAC)
The payments due on each of the class A DAC in BMF 5, 6 and 7 rank pro rata and pari passu with the standard class A interest payments (excluding step-up amounts). In Fitch's view, the fully-funded and amortising liquidity facility in each transaction is adequate to cover potential shortfalls in senior fees and class A and A DAC interest. For this reason, the DACs in the series have been affirmed at 'AAAsf'.

RATING SENSITIVITIES
Lending standards for new SMEs loans have tightened since 2009, reducing the possibility for financially distressed borrowers to refinance at better terms. The easing of these rather conservative lending policies could have a favourable effect on the performance of the collateral as financially distressed borrowers would have a better chance of refinancing out of the portfolio at better economic conditions.

An increase in losses and increases in PDLs beyond Fitch's stresses could lead to negative rating action, particularly on the bottom end of the structures.

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. Information related to previous county court judgment, residential properties for investment purpose (buy-to-let) and re-mortgage loans was not included in the loan by loan data received from CFML. The agency used the information provided in the investor reports and applied the foreclosure frequency adjustments as per criteria on an aggregate basis. Fitch assumed that 50% of the re-mortgage loans were used for debt-consolidation purpose. 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 and together with the assumptions referred to above, 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 CFML as at November 2015
- Transaction reporting provided by CFML as at November 2015

The rating actions are as follows:

BMF3:
Class M notes (XS0223481838): upgraded to 'AAAsf' from 'AAsf'; off Rating Watch Positive (RWP); Outlook Stable
Class B1 notes (XS0223482307): upgraded to 'BBBsf' from 'BBsf'; off RWP; Outlook Stable
Class B2 notes (XS0223482729): upgraded to 'BBBsf' from 'BBsf'; off RWP; Outlook Stable
Class C notes (XS0223483024): upgraded to 'BBsf' from 'Bsf'; off RWP; Outlook Stable

BMF4:
Class M (XS0249508242): upgraded to 'BBBsf' from 'BBsf'; off RWP; Outlook Stable
Class B (XS0249508754): affirmed at 'CCCsf'; off RWP; Recovery Estimate (RE) revised to 100% from 95%
Class C (XS0249509133): affirmed at 'CCsf'; off RWP; RE revised to 80% from 0%

BMF5:
Class A1 notes (XS0271320060): upgraded to 'AAsf' from 'A+sf'; off RWP; Outlook Stable
Detachable A1 coupon (XS0271321035): affirmed at 'AAAsf'; Outlook Stable
Class A2 notes (XS0271323163): upgraded to 'AAsf' from 'A+sf'; off RWP; Outlook Stable
Detachable A2 coupon (XS0271323676): affirmed at 'AAAsf'; Outlook Stable
Class M1 notes (XS0271324724): affirmed at 'CCCsf'; off RWP; RE revised to 100% from 85%
Class M2 notes (XS0271324997): affirmed at 'CCCsf'; off RWP; RE revised to 100% from 85%
Class B1 notes (XS0271325291): affirmed at 'CCsf'; off RWP; RE revised to 70% from 0%
Class B2 notes (XS0271325614): affirmed at 'CCsf'; off RWP; RE revised to 70% from 0%
Class C notes (XS0271326000): affirmed at 'Csf'; off RWP; RE 0%

BMF6:
Class A1 notes (XS0299445808): upgraded to 'Asf' from ' BBBsf'; off RWP; Outlook Stable
Detachable A1 coupon (XS0299535384): affirmed at 'AAAsf'; Outlook Stable
Class A2 notes (XS0299446103): upgraded to 'Asf' from ' BBBsf'; off RWP; Outlook Stable
Detachable A2 coupon (XS0299536515): affirmed at 'AAAsf': Outlook Stable
Class M1 notes (XS0299446442): affirmed at 'CCCsf'; off RWP; RE revised to 100% from 75%
Class M2 notes (XS0299446798): affirmed at 'CCCsf'; off RWP; RE revised to 100% from 75%
Class B2 notes (XS0299447507): affirmed at 'CCsf'; off RWP; RE revised to 10% from 0%
Class C notes (XS0299447846): affirmed at 'Csf'; off RWP; RE 0%

BMF7:
Class A1 notes (XS0330211359): affirmed at 'BBBsf'; off RWP; Outlook Stable
Detachable A1 coupon (XS0330212597): affirmed at 'AAAsf'; Outlook Stable
Class M1 notes (XS0330220855): affirmed at 'CCCsf'; off RWP; RE revised to 90% from 65%
Class M2 notes (XS0330222638): affirmed at 'CCCsf'; off RWP; RE revised to 90% from 65%
Class B1 notes (XS0330228320): affirmed at 'CCsf'; off RWP; RE 0%
Class C notes (XS0330229138): affirmed at 'Csf'; off RWP; RE 0%