OREANDA-NEWS. Fitch Ratings has assigned the senior loan facility under the Neptune T&C Warehouse Limited (the warehouse) warehouse transaction expected ratings, as follows:

GBP475m senior facility: 'A(EXP)sf', Outlook Stable
GBP38.5m subordinated note: not rated

This transaction is a non-revolving warehouse facility used by Cerberus European Residential Holdings B.V. (CERH) to finance the purchase of a GBP513.5m residential mortgage portfolio of terms and conditions (T&C) loans from NRAM plc, originated pre-2005 by Northern Rock (NR). The warehouse loan facilities are to be provided to Neptune T&C Warehouse Limited, an SPV incorporated in England and Wales.

Following the nationalisation in 2008, NR was restructured into two separate entities in January 2010: Northern Rock plc and Northern Rock (Asset Management) plc (legally known as NRAM since May 2014) and subsequently transferred to the state holding company UK Asset Resolution Limited (UKAR).

The T&C loans are only named as such because the terms and conditions of the loan agreements do not allow for a silent transfer of the loans into a securitisation, ie. borrowers need to get notified during a sale of the legal title of the loans, but not of the beneficial interest. As a result, over half of the purchased assets which were previously securitised in the Granite Master Trust were repurchased in May 2015, as reported in the Granite investor report of that month. This included GBP315m of T&C loans.

NRAM will declare a bare trust in favour of the seller over the beneficial interest of the mortgage portfolio. As per the Legal Title Holder Trust Deed, CERH has agreed to nominate the borrower as the beneficiary in exchange for the for the purchase price of the assets. The legal title of the mortgage loans is held by NRAM and will continue to be held by NRAM on trust for the warehouse post the closing date. UKAR is also in the process of selling the shares in NRAM entity to CERH, which is expected to be completed by 1H16.

Credit enhancement (CE) on the senior facility at 7.6% is provided by the subordination of the subordinated note. The transaction also contains a non-amortising reserve fund sized at 1.5% of the initial facility balance, which will be fully funded at close through the proceeds of the subordinated note. Of this, 1.5% of the senior facility's outstanding balance consists of the liquidity reserve portion whereby the remaining portion can be used to cure credit losses.

The assignment of the final rating is contingent on the receipt of final documents conforming to information already received.

KEY RATING DRIVERS
Seasoned Portfolio
The T&C loans have a low indexed current loan to value (CLTV) of 47% given their highly seasoned nature (201 months). Over half of these loans were previously securitised in the Granite Master Trust until they were removed in May 2015. The T&C loans generally performed worse than the "Granite" loans and Fitch has stressed its default probabilities to account for the weaker performance. Currently, 4.2% of the portfolio is greater than three months in arrears.

Purchased Portfolio
CERH will acquire the T&C mortgages from NRAM and subsequently nominate the warehouse borrower as the beneficiary of the loans on the closing date. Legal title will remain with NRAM following close and the share sale of NRAM to CERH is expected to be completed by 1H16. Fitch has reviewed the portfolio acquisition history and deems the risk of assets being clawed-back as remote.

Permitted Disposals
CERH has the ability to dispose of the mortgage loans to refinance some or all of the amounts it owes to the lenders. The assets will be selected on a random basis and such sales are subject to certain disposal conditions, including no recording on the principal deficiency ledger (PDL), a minimum pool balance of GBP175m, and arrears not increasing by 1.5x their levels or more at close.

Limited Capacity for Repurchase
CERH is not rated by Fitch and may have limited resources to repurchase any mortgages if there is a breach of the representations and warranties given to the warehouse. Fitch analysed historical losses and warranty breaches on the Granite Master Trust and has made an adjustment over the life of the transaction.

Servicer Sale
Servicing is carried out by Bradford and Bingley plc (B&B) whose servicing platform is in the process of being acquired by Homeloan Management Limited (HML), which is expected to complete this year. Western Mortgage Services (WMS, an entity owned by Capita) is a "warm" back-up servicer to HML, which Fitch has given credit to in its analysis. Fitch has increased its senior fees to 0.3% to account for the specific nature of this portfolio.

RATING SENSITIVITIES
The ratings and the related analysis performed are based on the assumptions in the existing criteria - Criteria Addendum: UK, dated 11 June 2015. Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels larger than Fitch's base case expectations, which in turn may result in negative rating actions on the notes. Fitch's analysis revealed that a 30% increase in the weighted average (WA) foreclosure frequency, along with a 30% decrease in the WA recovery rate, would result in a model-implied downgrade of the senior facility to 'BB+sf'.

More detail on key rating drivers and model implied rating sensitivities can be found in the presale report 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
For its rating analysis, NRAM provided Fitch with a loan-by-loan data template with all of the key data fields completed, other than prior mortgage arrears. The agency typically calculates the sustainable loan-to-value (LTV) using the current balance, and the valuation and corresponding date of the valuation provided (which is indexed against the Halifax house price index). The valuation corresponding to the loan amount at the time of the latest advance for the pool was not provided. However, the original valuations and updated valuations carried out in 2008 by NRAM prior to the loans being placed under UKAR's supervision were provided. Therefore Fitch was not able to calculate an accurate WA CLTV on the loans since the current balance in most instances can only be weighed against the original valuation, which artificially inflates the WA CLTV on the pool.

Fitch conducted an enhanced file review on a targeted sample of NR'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.

Fitch reviewed the draft results of a third party assessment conducted on the asset portfolio information, which indicated errors or missing data mainly related to property type, amount advanced, valuation date and application forms. The majority of findings were reported when the loans migrated to NRAM post NR's insolvency. Fitch has applied a 5% lender adjustment to account for these findings.

To determine the quick sale assumption (QSA), Fitch analysed approximately 11,037 sold repossessions provided by NRAM. The observed QSA was slightly above Fitch's standard assumptions and therefore the QSA assumptions were increased to 26% from 25% for owner-occupied flats.

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.

SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by NRAM based on a 31 December 2015 cut-off date
- Preliminary transaction documentation provided by NRAM as at end-January 2016
- Preliminary tax and legal opinions on the portfolio sale as at end-January 2016
- Loan performance data provided by NRAM as at end-January 2016
- Investor reports for the existing Granite Master Trust
- Report on the portfolio of 11,037 sold properties between 2011 and 2015
- Halifax house price index

MODELS
To analyse the CE levels, Fitch evaluated the collateral using its default model ResiEMEA. The agency also used its EMEA Cash Flow model to assess the transaction cash flows using default and loss severity assumptions under various structure stresses including prepayment speeds and interest rate scenarios. The cash flow tests showed that the senior facility could withstand losses at levels corresponding to the 'A' stress scenario without incurring any principal loss or interest shortfall and can retire principal by the legal final maturity.