Oncilla Mortgage Funding PLC

Transcription

1 Presale: Oncilla Mortgage Funding PLC Primary Credit Analyst: Arnaud Checconi, London (44) ; Secondary Contacts: James Page, London ; Enrico Pedretti, London; Table Of Contents Million Sterling-Denominated Residential Mortgage-Backed Fixed- And Floating-Rate Notes (Including Unrated Notes) Transaction Summary Notable Features Strengths, Concerns, And Mitigating Factors Transaction Structure Notes Terms And Conditions Collateral Description Representations And Warranties Credit Structure Originator Insolvency Risk Credit And Cash Flow Analysis Scenario Analysis MAY 13,

2 Table Of Contents (cont.) Sectoral Credit Highlights Surveillance Related Criteria And Research MAY 13,

3 Presale: Oncilla Mortgage Funding PLC Million Sterling-Denominated Residential Mortgage-Backed Fixed- And Floating-Rate Notes (Including Unrated Notes) This presale report is based on information as of May 13, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings AS Of May 13, 2016 Class Prelim. rating* Class size (%) Available credit enhancement (%) Interest A AAA (sf) Three-month sterling LIBOR plus a margin B AA- (sf) Three-month sterling LIBOR plus a margin C A (sf) Three-month sterling LIBOR plus a margin D BBB+ (sf) Three-month sterling LIBOR plus a margin E BB (sf) Three-month sterling LIBOR plus a margin ET BB (sf) Three-month sterling LIBOR plus a margin Step-up margin Three-month sterling LIBOR plus a margin Additional Note Payment (accrues from and including optional redemption date) Optional Redemption Date Legal final maturity N/A June 2021 December 2043 None Percentage per year June 2021 December 2043 None Percentage per year June 2021 December 2043 None Percentage per year June 2021 December 2043 None Percentage per year June 2021 December 2043 N/A Percentage per year June 2021 December 2043 Z NR N/A N/A N/A June 2021 December 2043 AXS NR Fixed rate N/A N/A June 2021 December 2043 BXS NR Fixed Rate N/A N/A June 2021 December 2043 *The rating on each class of securities is preliminary as of May 13, 2016, and subject to change at any time. We expect to assign final credit ratings on the closing date subject to a satisfactory review of the transaction documents and legal opinion. Our ratings address timely receipt of interest and ultimate repayment of principal. This is the initial credit enhancement (see "Credit Structure"). The class B, C, D, E, and ET notes feature an interest rate cap on their index. N/A--Not applicable. NR--Not rated. Transaction Participants Originators Arranger Seller Servicer Paratus AMC Ltd. (formerly known as GMAC-RFC Ltd.) Natixis S.A. Ertow Holdings II DAC Capita Mortgage Services Ltd. MAY 13,

4 Transaction Participants (cont.) Cash manager Security and note trustee Issuer bank account provider Collection bank account provider Citibank N.A., London branch Citicorp Trustee Company Ltd. Citibank, N.A., London branch Barclays Bank PLC Supporting Ratings Institution/role Citibank N.A. as parent bank of the issuer bank account provider The United Kingdom, as the host sovereign of the bank account provider (unsolicited rating) Barclays Bank PLC as collection bank account provider Ratings A/Watch Pos/A-1 AAA/Negative/A-1+ A-/Stable/A-2 Transaction Key Features* Expected closing date June 2016 Collateral U.K. nonconforming owner-occupied and buy-to-let mortgage loans Principal outstanding of the provisional pool ( ) 259,080,789 Country of origination England, Scotland, and Wales Concentration Southeast and London: 30.21% Property occupancy Owner-occupied 99.78% and buy-to-let 0.22% Weighted-average current indexed LTV ratio (%) Weighted-average original LTV ratio (%) Average loan size balance ( ) 124, Largest loan-size ( ) 586, Jumbo valuations (valuations that exceed 312,500 in North U.K., or 500,000 in South U.K.; %) Standard & Poor's weighted-average seasoning of the performing portfolio (months) Weighted-average remaining term (months) Fixed-rate loans (%) - Arrears exceeding one-month (%) Projected arrears (%) 5.10 Redemption profile Interest-only (77.93%), repayment (20.52%), and part and part (1.53%) Class A notes' liquidity reserve fund (%) 0.50 Rated notes' reserve fund (%) 2.50 Mortgage loan priority First-ranking *Data is based on a provisional pool as of March 31, Based on our methodology, including valuation haircuts with respect to current LTV ratio. This is expressed as a percentage of the class A notes' closing balance. This is expressed as a percentage of the collateral balance. Both will be funded at closing. LTV--Loan-to-value. Transaction Summary S&P Global Ratings has assigned preliminary credit ratings to Oncilla Mortgage Funding PLC (Oncilla )'s class A to ET notes. At closing, Oncilla will also issue unrated class Z, AXS, and BXS notes. MAY 13,

5 Oncilla is a securitization of first-lien U.K. nonconforming residential mortgage loans. Paratus AMC Ltd. (formerly known as GMAC-RFC Ltd.) originated the provisional pool's underlying collateral, which consists of first-lien U.K. owner-occupied and buy-to-let nonconforming residential mortgage loans. At closing, the issuer will purchase an initial portfolio of U.K. residential mortgages from the seller (Ertow Holdings II DAC), using the note issuance proceeds to purchase the rights to the mortgage pool. Our preliminary ratings reflect our assessment of the transaction's payment structure, cash flow mechanics, and the results of our cash flow analysis to assess whether the notes would be repaid under stress test scenarios. Subordination, overcollateralization, and the rated note reserve fund provide credit enhancement to the notes that are senior to the unrated class Z notes. Taking these factors into account, we consider the available credit enhancement for the rated notes to be commensurate with the preliminary ratings that we have assigned. Notable Features The collateral pool consists of loans previously securitized in ALBA PLC, and is composed of first-lien U.K. nonconforming residential mortgage loans, mostly originated in All of the loans will pay a floating rate of interest throughout the transaction's life. The portfolio's weighted-average current loan-to-value (LTV) ratio is 83.10% (based on our methodology). The notes' interest will be based on an index of three-month sterling LIBOR, while the underlying collateral contains loans that are linked to the Bank of England Base Rate (BBR), three-month British pound sterling LIBOR, or to a standard variable rate (SVR). The transaction will not benefit from a swap. Any excess spread in this transaction is used to redeem the rated class ET notes until redeemed in full up to the optional redemption date. Under a scenario where excess spread is generated and applied to redeem the class ET notes, overcollateralization would increase. After the optional redemption date, the excess spread would be used to redeem all of the rated notes. The class B, C, D, E, and ET notes feature an interest rate cap on their index. Strengths, Concerns, And Mitigating Factors Strengths All of the mortgages in the portfolio are first-lien residential mortgage loans. The issuer will provide liquidity support by using principal receipts to pay interest shortfalls on the class A to ET notes and to pay senior expenses. The provisional pool is more seasoned than we usually see in nonconforming transactions (the weighted-average seasoning of the total portfolio is months). In our view, more seasoned performing loans exhibit lower risk profiles than less seasoned loans. Excess spread will be available to pay the class ET notes before the optional redemption date and the rated notes' outstanding principal afterward. MAY 13,

6 Concerns and mitigating factors The general reserve fund may only repay principal outstanding subject to various conditions. Excess spread may repay principal on the class ET notes before the optional redemption date and all of the rated notes thereafter. Of the provisional pool, 22.8% comprises self-certified loans. Self-certified loans have historically exhibited poorer performance than otherwise similar loans. We have addressed this factor in our credit analysis. Of the provisional pool, 11.8% is currently at least one month in arrears. Nonconforming loans are often characterized by intermittent payment profiles and we have addressed this in our credit analysis. Furthermore, we have reflected the effect of delinquencies in our cash flow analysis. Of the provisional pool, 0.18% comprises buy-to-let mortgage loans. We consider buy-to-let loans to represent greater risk than loans on owner-occupied properties, as borrowers are likely to rely on rental income. Given that rental income is likely to be fixed for a period of time, we believe that buy-to-let loans are particularly sensitive to interest-rate increases where the loan pays floating-rate interest. We considered this factor in our credit analysis. If the originator becomes insolvent, mortgage collection amounts that have not yet been transferred to the issuer bank account may become part of its bankruptcy estate. In order to mitigate this credit risk, collections are transferred daily and a declaration of trust is in place for the collection account, which benefits the issuer. In our opinion, up to one month of collections could be disrupted, and we have therefore applied a liquidity stress to address this risk. Most of the loans' interest is typically linked to the BBR. Other loans pay an interest rate linked to three-month sterling LIBOR, or to an SVR. We understand that the notes' interest is indexed to three-month LIBOR. The transaction does not have a basis swap. We have stressed interest-rate mismatches in our cash flow analysis. The pool is static. Therefore, the asset yield will not compress due to substitution. However, the asset yield can still decrease if higher-paying assets default or prepay. We have taken this into account in our cash flow analysis. The beneficial title seller, Ertow Holdings II DAC, sold its beneficial interest in the mortgage loans to the issuer. The seller is not the originator of the mortgages, and in our view the representations and warranty package provided by the seller is weaker than what we normally see in similar transactions. We consider the package of representations and warranties to be nonstandard and have therefore increased our weighted-average foreclosure frequency (WAFF) assumptions to address this risk. Transaction Structure At closing, Oncilla will issue seven classes of collateralized notes. It will use part of the issuance proceeds to purchase the beneficial title of the initial mortgage pool from the seller. The issuer will grant security over all of its assets for the security trustee's benefit (see chart 1). MAY 13,

7 Servicer Capita Mortgage Services Ltd. (Capita) conducts all mortgage loan servicing and provides arrears servicing to a number of different lenders. It is the servicer for all of the loans in the securitized portfolio. We reviewed Capita's collections and default management processes and are satisfied that it is capable of performing its functions in the transaction. Our operational risk criteria focuses on key transaction parties (KTPs) and the potential effect of a disruption in the KTP's services on the issuer's cash flows, as well as the ease with which the KTP could be replaced if needed (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published on Oct. 9, 2014). In this transaction the servicer is the only KTP we have assessed under this framework. Our operational risk criteria do not constrain our preliminary ratings in this transaction based on our view of the servicer's capabilities. Notes Terms And Conditions Oncilla will pay interest quarterly beginning in September The rated notes pay interest equal to three-month sterling LIBOR plus a class-specific margin. Following the optional redemption date, the class A notes will MAY 13,

8 pay a step-up margin plus three-month sterling LIBOR, while other rated notes will pay three-month sterling LIBOR and their original margins plus additional amounts subject to the availability of funds. All of the notes reach legal final maturity in December The class Z notes are a zero coupon bond and the class AXS and BXS notes are excess spread notes. None of these notes is rated. Our preliminary ratings address the timely payment of interest and the ultimate payment of principal on the notes. Optional redemption of the notes The issuer may redeem the rated notes at their outstanding principal amount, with any accrued interest, if: No note enforcement notice has been served; The issuer has certified to the note trustee that it will have necessary funds to pay all principal and interest due on the notes, as well as any items either senior or pari passu to them, in the priority of payments; and The notes' redemption date falls either (i) on the interest payment date (IPD) from June 2021 onward, or (ii) on an IPD where the aggregate current balance of the loans (excluding loans that have been enforced and where the proceeds from the security have been realized) is equal to or less than 10% of the principal amount outstanding of the notes at closing. Mandatory redemption of the notes The issuer will apply available principal receipts to redeem the notes on each IPD, subject to the principal priority of payments. Collateral Description As of the pool cut-off date on March 31, 2016, the provisional pool of 259,080,789 comprised 2,081 borrowers secured on owner-occupied (99.78%) and buy-to-let (0.22%) properties in the U.K. MAY 13,

9 Chart 2 The pool's seasoning is aligned with comparable transactions (see chart 2). The performing pool's weighted-average seasoning is months. We view performing loans with high seasoning as exhibiting lower risk profiles than loans with otherwise identical characteristics. MAY 13,

10 Chart 3 About 22.85% of the pool comprises self-certified loans. Self-certified loans have generally exhibited a higher historical default probability than otherwise similar loans. We have addressed this factor in our credit analysis. MAY 13,

11 Chart 4 MAY 13,

12 Chart 5 The pool is mainly concentrated in southeast England and London (30.21%; see chart 5). However, this concentration is below the level that we consider to be excessive, and we have therefore not made further adjustments for this in our analysis. MAY 13,

13 Chart 6 MAY 13,

14 Chart 7 The collateral's weighted-average original LTV ratio is high for a U.K. transaction, at 92.47% (calculated using our U.K. residential mortgage-backed securities [RMBS] criteria; see "U.K. RMBS Methodology And Assumptions," published on Dec. 9, 2011) (see chart 6). We consider that borrowers with minimal equity in their property are less likely to be able to refinance. Additionally, the weighted-average current LTV ratio is 83.10%. We consider borrowers with a high original LTV ratio to be more likely to default on their obligations than borrowers with lower original LTV ratio loans (see chart 7). We considered these factors in our credit analysis. MAY 13,

15 Chart 8 Of the portfolio, 20.52% comprises repayment mortgage loans, and 79.48% comprises interest-only (including "part and part") loans (see chart 8). We view interest-only loans with a term of less than 10 years as exhibiting higher risk than repayment mortgages. Additionally, we consider that portfolios with a high proportion of long-term interest-only loans (more than 50% concentration) exhibit higher risk. The portfolio contains 77.71% of such loans. We incorporated these risks into our analysis. Of the pool, 0.22% comprises interest-only loans with a maturity of less than 10 years. We deem interest-only loans with short maturities to be riskier relative to a long-dated comparable loan, all else being equal. We believe this risk arises from potential insufficient funds in a repayment vehicle to redeem the principal balance, or refinancing options not being available to the borrower. We incorporated this risk into our analysis. Representations And Warranties Ertow Holdings II DAC provides representations and warranties in the mortgage sale agreement, which we consider to be weaker than that for other U.K. RMBS transactions where the originator is connected to the seller. If there is a breach in the representations and warranties that is not remedied within 30 days, then the seller should repurchase the MAY 13,

16 loan from the pool. The seller may make a counter claim against the original beneficial title seller in respect of an equivalent original loan warranty breach. However, the seller's ability to do so may be limited in both amount and time. Credit Structure A combination of subordination, the rated reserve fund, and excess spread on the mortgage loans will provide credit support for the notes (see table 1). Table 1 Credit Enhancement For The Notes Class Preliminary rating Class size (%) Initial credit enhancement (%) A AAA (sf) B AA- (sf) C A (sf) D BBB+ (sf) E BB (sf) ET BB (sf) Z NR NR--Not rated. Oncilla will open the issuer transaction account with Citibank N.A., acting through its London branch. The transaction account will be subject to the terms of the transaction documents. The transaction documents will specify that the issuer must take remedial actions, including the replacement of Citibank as the bank account provider with a suitably rated financial institution, if: At any time, our long-term issuer credit rating (ICR) on the bank account provider falls below 'A', where the short-term rating is at least 'A-1'; or Our long-term ICR on the bank account provider falls below 'A+', if it does not have a short-term rating. Borrowers pay into the collection account--held with Barclays Bank PLC--in the legal title holder's name. Most borrowers in the provisional pool pay by direct debit into the collection account. All of these amounts are transferred to the transaction account at the end of each business day. The transaction documents will establish a declaration of trust over any amounts in the collection account. The transaction documents will specify that the issuer must take remedial actions, including the replacement of Barclays Bank as collection account provider with a suitably rated financial institution, if: Our long-term ICR on the collection bank account provider (Barclays Bank) falls below 'BBB', where the short-term rating is at least 'A-2'; or Our long-term ICR on the collection bank account provider falls below 'BBB+', if it does not have a short-term rating. MAY 13,

17 Reserve fund At closing, part of the issuance of the notes will fully fund the reserve fund to 2.5% of the outstanding collateral balance at closing. The cash reserve amount will not amortize. The reserve fund may be used to cover senior fees, the class A notes' interest, class A liquidity reserve fund replenishment, and the class B to E/ET notes' interest if the respective class principal deficiency ledger (PDL) on that IPD is less than 10% of the current notes balance. Liquidity support In addition to the cash reserve, the class A notes benefits from a liquidity reserve fund, sized at 0.5% of the outstanding relevant class of notes. In addition, principal payments may be used to cover senior fees and interest shortfalls subject to certain conditions. Our cash flow model fully covers stressful scenarios that increase the potential exposure to liquidity risk. Principal deficiency ledger The cash manager will establish and maintain a PDL, comprising five subledgers, one each for the class A to D notes, and one junior PDL for class E, ET, and Z notes. Amounts will be recorded on the PDL if the portfolio suffers any losses. PDL amounts will first be recorded in the junior notes' PDL up to the junior class notes' collateralized outstanding amount. The amounts will then be debited sequentially upward. Revenue priority of payments Senior fees; Class A notes' interest; Class A notes' liquidity reserve fund replenishment; Class A notes' PDL; Class B notes' interest; Class B notes' PDL; Class C notes' interest; Class C notes' PDL; Class D notes' interest; Class D notes' PDL; Class E and ET notes' interest; General reserve fund replenishment; Junior PDL; Class B notes' step-up additional amounts; Class C notes' Step-up additional amounts; Class D notes' Step-up additional amounts; Class E/ET notes' step-up additional amounts; Class AXS and BXS notes' interest; Remaining interest to redeem all rated notes in full (as per principal priority of payment), after the step-up date; Reverse turbo amortization of the class ET notes (until redeemed in full, up to the step-up date); Redeem the class AXS notes in full; Redeem the class BXS notes in full; and Residual payments. MAY 13,

18 After the optional redemption date, the issuer will use excess revenue to redeem the notes. Principal priority of payments To pay senior fees, the class A notes' interest, the class A notes' liquidity reserve fund replenishment, and other rated notes' interest subject to PDL conditions; The class A notes' principal until redeemed in full; The class B notes' principal until redeemed in full; The class C notes' principal until redeemed in full; The class D notes' principal until redeemed in full; The class E and ET notes' principal (pro rata and pari passu) until redeemed in full; The class Z notes' principal until redeemed in full; and Available revenue receipts. Originator Insolvency Risk Commingling risk In this transaction there is a declaration of trust over the account in the issuer's favor at closing. A daily sweep has also been set up. We have stressed a delay of one month of collections, with them returning in month four. Credit And Cash Flow Analysis We stressed the transaction's cash flows to test the credit and liquidity support that the assets, subordinated tranches, the reserve fund, and class A liquidity reserve fund provide. We apply these stresses to the cash flows at all relevant rating levels. For example, this transaction incorporates tranches that we rate 'AAA (sf)' and 'NR' (not rated). We therefore apply one set of cash flow stresses. In our stresses on the 'AAA (sf)' rated notes, all notes must pay full and timely principal and interest. However, this is not necessarily the case for the tranches of unrated notes because they are subordinated in the priority of payments. Credit enhancement The 'B' credit enhancement level for the standard U.K. mortgage loan pool is commensurate with our current assumptions of expected losses in that pool. These expected losses vary according to changes in the outlook for the U.K. mortgage market and cover macroeconomic factors such as unemployment and current mortgage performance, among other factors. The current 'B' level of credit enhancement includes a foreclosure frequency component for the standard U.K. mortgage loan pool, as shown in table 2. We used the assumptions in table 2 as part of our credit analysis of the transaction's underlying assets. Table 2 Assumptions Rating level Base foreclosure frequency component for an archetypical U.K. mortgage loan pool (%) AAA AA 8.00 A 6.00 BBB MAY 13,

19 Table 2 Assumptions (cont.) Rating level Base foreclosure frequency component for an archetypical U.K. mortgage loan pool (%) BB 2.00 B 1.50 Default and recovery amounts We model the foreclosure frequency for each loan in the pool, as well as the loss amounts when the property has been sold (the loss severity, expressed as a percentage of the outstanding loan). We model a default of the total mortgage loan balance. We determine the total amount of the unrecovered defaulted balance for the entire pool by calculating the WAFF and the weighted-average loss severity (WALS). When comparing the minimum available credit enhancement that we consider to be commensurate with each rating level with that for this pool, we also included interest foregone between the point of default and the receipt of recoveries (see table 3). Table 3 Assumptions Rating level Minimum credit enhancement level (%) Credit enhancement modeled for this pool (%)* AAA AA A BBB BB *This is the WAFF multiplied by the WALS including interest. The WAFF and the WALS increase in tandem with the rating level because notes with a higher rating should be able to withstand a higher level of mortgage default and loss severity. We base our credit analysis on the loan and associated borrower characteristics, as well as our subsequent assessment of the WAFF and the WALS for this portfolio. We used our WAFF and WALS assumptions as inputs in our cash flow analysis (see table 4). Table 4 Portfolio WAFF And WALS Rating level WAFF (%) WALS (%) AAA AA A BBB BB For modeling purposes, the repossession market value declines we applied in accordance with our U.K. RMBS criteria to calculate the loss severity incorporate our calculation of the degree of over- or under-valuation for each specific U.K. region. Table 5 shows the resulting market value declines that we used in our analysis of the pool. MAY 13,

20 Table 5 Repossession Market Value Declines At 'AAA', 'AA', And 'A' Rating Levels Region AAA (%) AA (%) A (%) BBB (%) BB (%) East Anglia East Midlands North Northwest England Northern Ireland Scotland Southeast including London Southwest England Wales West Midlands Yorkshire and Humberside Weighted-average market value decline Default timings At each rating level, the WAFF specifies the total balance of the mortgage loans that we assume to default over the transaction's life. We model these defaults to occur over a three-year recession. Furthermore, we test the effect of the recession's timing on the potential to repay the liabilities by starting the recessionary period at closing, year one, and year three. We apply the WAFF to the principal balance outstanding at closing. We model defaults to occur periodically, in amounts calculated as a percentage of the WAFF. The timing of defaults follows two paths, referred to as "front-loaded" and "back-loaded" (see table 6). Table 6 Default Timings For Front-Loaded And Back-Loaded Default Curves Recession month Front-loaded defaults (percentage of WAFF per month) Back-loaded defaults (percentage of WAFF per month) Recovery timings We assume that the issuer regains any recoveries 18 months after a payment default for owner-occupied properties, and 12 months for buy-to-let properties. The value of recoveries at each rating level is 100%, minus the WALS for that rating level. The WALS we use in the cash flow model is based on principal loss, including foreclosure costs. We do not give credit for the recovery of any interest accrued on the mortgage loans during the foreclosure period. After we apply the WAFF to the balance of the mortgage loans, we find that the asset balance is likely to be lower than that of the liabilities. Our MAY 13,

21 test shows that the interest reduction caused by the defaulted mortgage loans during the foreclosure period is covered by the transaction's other structural mechanisms. Delinquencies We model the liquidity stress that results from short-term delinquencies (those mortgage loans that cease to pay for a period of time, but then recover and become current with respect to both interest and principal). To simulate the effect of delinquencies, we model a proportion of scheduled collections equal to the greater of one-third of the WAFF or actual observed arrears to be delayed. We apply this in each of the first 18 months of the recession, and model full recovery of these delinquencies to occur 36 months after they arise. Therefore, if the total scheduled collateral collections expected to be received is 1 million and the WAFF is 30% in month five of the recession, 100,000 (one-third of the WAFF) is delayed until month 41. Interest and prepayment rates We model four different interest rate scenarios--up, down, up-down, and down-up. We model three prepayment scenarios at all rating levels--high, low, and forecast. For this transaction, we modeled the forecast constant payment rate (CPR) as 5%. During the recessionary period, we model the prepayment rate at 3%, before gradually reverting to a high prepayment rate under both scenarios. At the 'AA' level and above, we model an additional low prepayment scenario, which also reverts to a low prepayment rate after the recession period. In combination, the default timings, recession timings, interest rates, and prepayment rates described above give rise to 96 different scenarios at a 'AA' rating level and above (see table 7). The ratings we assign mean that the notes have all paid timely interest and ultimate principal under each of the scenarios at the assigned rating level. Table 7 RMBS Stress Scenarios Rating level Total number of scenarios Prepayment rate Recession start Interest rate Default timing 'AAA' 96 High, forecast, and low 'AA-' and below Closing, year one, year two, and year three 64 High and forecast Closing, year one, year two, and year three Up, down, up-down, and down-up Up, down, up-down, and down-up Front-loaded and back-loaded Front-loaded and back-loaded Scenario Analysis Various factors could lead us to lower our ratings on the notes, such as increasing foreclosure rates in the underlying pool, and changes in the pool composition. We have analyzed the effect of increased delinquencies by testing the sensitivity of the ratings to two different levels of movements. Increasing levels of delinquencies will likely cause more stress to a transaction, and would likely contribute to downgrades of rated notes. In our analysis, our assumptions for increased delinquencies are specific to a transaction, although these levels may be similar (or the same) across different transactions. The levels do not reflect any views as to whether these deteriorations will materialize in the future. However, our analysis already incorporates additional adjustments to the MAY 13,

22 pool's default probability by projecting buckets of expected arrears. Even under these scenarios, structural features in securitizations may mitigate these deteriorations in performance. Further delinquencies of 16% In the first scenario, in addition to the rating-dependent stress assumptions, we apply a further 16% increase in nonperforming loans. These are split equally between the one-month and three-month buckets. In the second scenario, we apply an increase of 16%, but we assume that all of the loans have missed three-monthly payments. The default probability we assign to a loan increases in tandem with the monthly payments missed. Consequently, assuming that all loans have missed three-monthly payments, the increase in the WAFF would be greater in the second scenario. Tables 8 and 9 summarize the results of assuming increasing delinquencies. Table 8 Assuming An Additional 16% Of Arrears, Split Equally Between One Monthly Payment And Three Monthly Payments Missed Preliminary rating level WAFF (%) WALS (%) AAA AA A BBB BB Table 9 Assuming An Additional 16% Of Arrears, All Of Which Have Missed Three Monthly Payments Preliminary rating level WAFF (%) WALS (%) AAA AA A BBB BB Under our scenario analysis, the ratings on the notes in the transaction would not suffer a ratings transition of more than one rating category. For example, the 'AAA (sf)' rated notes would achieve a rating of at least 'AA (sf)'. We based our analysis above on a simplified assumption, i.e., that the increase in arrears materializes immediately on the day after closing. In reality, arrears are likely to occur over a period of time. Therefore, other factors, such as seasoning or some loan repayments, could partially mitigate the effect of other loans' deteriorating performance. Sectoral Credit Highlights The U.K. economy saw a relatively quick and robust recovery from the 2008/2009 financial crisis, with average annual GDP growth of 2% over the period , compared with only 0.8% for the eurozone. Despite the robust recovery in terms of GDP growth, however, unemployment stayed stubbornly high, at around 8%, until mid-2013, when it MAY 13,

23 started its dramatic decline to 5% in Q4 2015, the lowest since Yet, when it eventually came, the labor market recovery was jobs-rich but cash-poor, with earnings' growth not accelerating in line with tighter labor market conditions. (see "European Housing Markets Continue To Heal As Mortgage Rates Stay Low," published on March 2, 2016). Despite intermittent positive signals, such as when wage growth temporarily accelerated in Q and Q1 2015, the broad picture of an employment-rich but wage-poor labor market appears to still apply. This is at least suggested by more subdued year-on-year wage growth of the regular component of average weekly earnings at the end of last year, which was 2.0%, down from 2.7% in the previous two quarters (total pay slowed even more). At the same time, unemployment, on the claimant count measure, fell to 2.2% in January, the lowest since Yet, rising employment, falling inflation, and the moderate acceleration of wage growth translated into a more robust growth of economy-wide real incomes. This, in combination with the key ingredient of low mortgage rates (both two-year fixed and floating rates remaining just below 2%), as well as the persistent shortage especially in London and the South East, helped U.K. house prices ultimately regain momentum. They rose by 10% in 2014, and a further estimated 7% in 2015, according to mix-adjusted house prices data from the Office for National Statistics (ONS), after a lackluster average of only 2.9% a year in Moreover, the search for yields in a low interest rate environment has boosted the now sizable buy-to-let market (BTL). The Council of Mortgage Lenders (CML) estimates that BTL mortgages now make up 16% of the total stock of all outstanding mortgages. Increased BTL activity is likely to have contributed to the house price recovery. Total delinquencies in the nonconforming and BTL U.K. RMBS transactions in S&P Global Ratings' index continued to fall in Q The collateral performance of prime transactions in our index also improved, with severe arrears decreasing by 0.2%, to 1.0% from 1.2% in Q3. Since the average total delinquency rate for prime transactions fell to 3.0% in Q3--the lowest rate observed since Q2 2008)--it decreased further to 2.7% in Q4. (See "U.K. RMBS Index Report Q4 2015: Delinquencies Continue To Fall Across Our Index," published on April 8, 2016). The constant prepayment rate increased again in Q across our index, reflecting the greater range of available refinancing opportunities available in the market, coupled with borrowers' desire to take advantage of low interest rates. Surveillance We will maintain surveillance on the transaction until the notes mature or are otherwise retired. To do this, we will analyze regular servicer reports detailing the performance of the underlying collateral, monitor supporting ratings, and make regular contact with the servicer to ensure that it maintains minimum servicing standards and that any material changes in the servicer's operations are communicated and assessed. The key performance indicators in the surveillance of this transaction are: Increases in credit enhancement for the notes; Total and 90-day delinquencies; MAY 13,

24 Cumulative realized losses; LTV ratios; Constant prepayment rates; and Increases in the seasoning of the collateral pool. Related Criteria And Research Related criteria Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, May 29, 2015 Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015 Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Oct. 24, 2013 Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013 Assessing Bank Branch Creditworthiness, Oct. 14, 2013 Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 U.K. RMBS Methodology And Assumptions, Dec. 9, 2011 Methodology: Credit Stability Criteria, May 3, 2010 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009 Related research U.K. RMBS Index Report Q4 2015: Delinquencies Continue To Fall Across Our Index, April 8, 2016 European Housing Markets Continue To Heal As Mortgage Rates Stay Low, March 2, EMEA RMBS Scenario And Sensitivity Analysis, Aug. 6, 2015 Outlook Assumptions For The U.K. Residential Mortgage Market, June 29, 2015 European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic Factors, July 8, 2014 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Additional Contact: Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com MAY 13,

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