TOWD POINT MORTGAGE FUNDING AUBURN 11 PLC

Transcription

1 Presale: TOWD POINT MORTGAGE FUNDING AUBURN 11 PLC This presale report is based on information as of Feb. 2, 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 Assigned Class A1 Prelim. rating* AAA (sf) Class size (%) Available credit enhancement (%) Interest Three-month LIBOR plus 85 bps A2 AA (sf) Three-month LIBOR plus 95 bps SDC certificates Step-up interest Three-month LIBOR plus 150 bps Three-month LIBOR plus 175 bps Optional call date February 2020 February 2020 N/A N/A N/A N/A N/A February 2020 B-Dfrd AA- (sf) Three-month LIBOR plus 100 bps C-Dfrd A+ (sf) Three-month LIBOR plus 110 bps D-Dfrd BBB+ (sf) Three-month LIBOR plus 130 bps E-Dfrd BB (sf) Three-month LIBOR plus 50 bps Three-month LIBOR plus 250 bps Three-month LIBOR plus 325 bps Three-month LIBOR plus 450 bps Three-month LIBOR plus 400 bps February 2020 February 2020 February 2020 February 2020 Z NR 6.75 N/A N/A N/A February 2020 Legal final maturity May 2045 May 2045 May 2045 May 2045 May 2045 May 2045 May 2045 May 2045 Primary Credit Analyst: Vedant Thakur, London (44) ; vedant.thakur@spglobal.com Secondary Contact: Feliciano P Pereira, London 44 (0) ; feliciano.pereira@spglobal.com See complete contact list on last page(s) FEBRUARY 2,

2 Preliminary Ratings Assigned (cont.) Class DC1 certificates DC2 certificates Prelim. rating* Class size (%) Available credit enhancement (%) Interest Step-up interest Optional call date N/A N/A N/A N/A N/A February 2020 N/A N/A N/A N/A N/A February 2020 Legal final maturity May 2045 May 2045 *The rating on each class of securities is preliminary as of Feb. 2, 2017, 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 opinions. The preliminary ratings address timely receipt of interest and ultimate repayment of principal for the class A1 and A2 notes. The preliminary ratings assigned to the class B to E notes are interest-deferred ratings and address the ultimate payment of interest and principal. Our preliminary ratings on the class B to E notes also address the payment of interest based on the lower of the stated coupon and the net weighted-average coupon cap. The tranche size may change prior to closing. Subordination only. Up and until the FORD, payments may be made to SDC ledger to the extent senior fees are less than the cap. The amount built up in the SDC ledger will only be distributed to the SDC certificate holders on the FORD, to the extent that the issuer has decided to exercise its right to redeem all of the notes on that date. Bps--basis points. Dfrd--Deferred. N/A--Not applicable. NR--Not rated. FORD--First optional redemption date. Transaction Participants Originator Co-arrangers Joint lead managers Servicer Backup servicer Cash manager Seller, retention holder, and co-sponsor Issuer account bank Collection account bank Liquidity facility Trustee Capital Home Loans Ltd. Merrill Lynch International, Merrill Lynch Pierce Fenner & Smith Inc., and Morgan Stanley & Co. International PLC Wells Fargo Securities International Ltd., Morgan Stanley & Co. International PLC, Merrill Lynch International, and Merrill Lynch Pierce Fenner & Smith Inc. Capital Home Loans Ltd. Homeloan Management Ltd. Capital Home Loans Ltd. Cerberus European Residential Holdings B.V. Elavon Financial Services D.A.C., UK Branch Barclays Bank PLC Wells Fargo Bank N.A., London Branch U.S. Bank Trustees Ltd. Supporting Ratings Institution/role Barclays Bank PLC as collection account provider Wells Fargo Bank National Association, London Branch as Liquidity facility provider* Elavon Financial Services DAC, U.K. Branch as GIC provider and bank account provider Ratings A-/Negative/A-2 AA-/Negative/A-1+ AA-/Stable /A-1+ *Rating derived from the rating on the parent entity, Wells Fargo Bank N.A. Rating derived from the rating on the parent entity, Elavon Financial Services DAC. GIC--Guaranteed investment contract. Transaction Key Features* Expected closing date Feb. 20, 2017 Collateral U.K. residential mortgage loans Principal outstanding of the provisional pool (bil. ) Country of origination U.K. FEBRUARY 2,

3 Transaction Key Features* (cont.) Concentration London and southeast England, 35.78% Property occupancy Buy-to-let 92.90% Weighted-average indexed current LTV ratio (%) Weighted-average original LTV ratio (%) Average loan size balance ( ) 121,655 Largest loan size ( ) 1,415,317 Weighted-average seasoning (months) 120 Weighted-average interest rate (%) 1.55 Arrears exceeding one month (%) 1.40 Redemption profile Interest-only: 98.6% and repayment: 1.4% Mortgage loan priority First ranking *Data is based on a pool as of Dec. 31, We expect the final pool to be a subset of this. Based on our methodology. LTV--Loan-to-value. Transaction Summary S&P Global Ratings has assigned preliminary credit ratings to TOWD POINT MORTGAGE FUNDING AUBURN 11 PLC's (TPMF-AUB 11) class A1, A2, B-Dfrd, C-Dfrd, D-Dfrd, and E-Dfrd notes. At closing, TPMF-AUB 11 will also issue unrated class Z notes, as well as SDC, DC1, and DC2 certificates. TPMF-AUB 11 will be a securitization of first-lien U.K. owner occupied and buy-to-let residential mortgage loans. At closing, TPMF-AUB 11 will acquire the beneficial interest in the portfolio of U.K. buy-to-let and owner occupied mortgages from Cerberus European Residential Holdings B.V. (the seller; CERH), using the note issuance proceeds to purchase the rights to the mortgage loans. The legal title will remain with Capital Home Loans Ltd. (CHL). The preliminary pool totals billion (as of Dec. 31, 2016) and we expect the final securitized pool to be a subset of this. We base our credit analysis on the preliminary pool and we expect the final pool to be a representative sample of this. CHL, which is in our view a specialized and experienced entity in the buy-to-let sector, originated a number of transactions before 2008 via its Auburn shelf, but stopped originating as a result of the global financial crisis. CHL originated 99.95% of the loans securitized in this transaction, with Irish Permanent PLC originating the remaining 0.05%. CHL is the servicer of the transaction, and Homeloan Management Ltd. is the back-up servicer. As CHL no longer originates, the mortgages in this pool are highly seasoned, with an average of more than 120 months. The pool has a high concentration in the south east of England, including London, at 35.78%. Furthermore, 98.6% of the mortgages are interest-only, while the remaining 1.4% pay capital and interest. We treat the class B to E notes as deferrable-interest notes in our analysis. Under the transaction documents, the issuer can defer interest payments on these notes, and any deferral of interest would not constitute an event of default, even when this class of notes is the most senior. While our preliminary 'AAA (sf)' and 'AA (sf)' ratings on the class A1 and A2 FEBRUARY 2,

4 notes, respectively, address the timely payment of interest and the ultimate payment of principal, our preliminary ratings on the class B to E notes address the ultimate payment of principal and interest. Interest on the class A1 and A2 notes is equal to three-month British pound sterling LIBOR plus a class-specific margin. However, the class B to E notes are somewhat unique in the European residential mortgage-backed securities (RMBS) market in that they pay interest based on the lower of the coupon on the notes (three-month sterling LIBOR plus a class-specific margin) and the net weighted-average coupon (WAC) cap. The net WAC on the assets is based on the interest accrued on the assets (whether it was collected or not) during the quarter, less senior fees, divided by the current balance of the assets at the beginning of the collection period. This rate is then divided by the outstanding balance of the class A to E notes as a percentage of the outstanding balance of the assets at the beginning of the period to derive the net WAC cap. The net WAC cap is then applied to the outstanding balance of the notes in question to determine the required interest. In line with our imputed promises criteria, our preliminary ratings address the lower of these two rates (see "Principles For Rating Debt Issues Based On Imputed Promises," published on Dec. 19, 2014). A failure to pay the lower of these amounts will, for the class B to E notes, result in interest being deferred. Deferred interest will also accrue at the lower of the two rates. Our preliminary ratings however, do not address the payment of what are termed "net WAC additional amounts" i.e., the difference between the coupon and the net WAC cap where the coupon exceeds the net WAC cap. Such amounts will be subordinated in the interest priority of payments. In our view, neither the initial coupons on the notes nor the initial net WAC cap are "de minimis", and nonpayment of the net WAC additional amounts is not considered an event of default under the transaction documents. Therefore, we do not need to consider these amounts in our cash flow analysis, in line with our criteria for imputed promises. Within the mortgage pool, the loans are linked to the Bank of England base rate (BBR) (99.50%), or a variable rate index (0.50%). There will be no swap in the transaction to cover the interest rate mismatches between the assets and liabilities. We have stressed for basis risk accordingly. 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, a liquidity facility (only for the class A1 and A2 notes), and excess spread (there will be no reserve fund to provide credit enhancement in this transaction) will provide credit enhancement to the rated notes that are senior to the unrated notes and certificates. Taking these factors into account, we consider that the available credit enhancement for the rated notes is commensurate with the preliminary ratings assigned. Strengths, Concerns, And Mitigating Factors Strengths In our view, CHL is an experienced buy-to-let servicer, with its Auburn transactions exhibiting low levels of arrears. Homeloan Management is a back-up servicer for the transaction. We rank Homeloan Management as ABOVE AVERAGE as a mortgage servicer. All of the pool's mortgage loans are first-lien residential mortgage loans and the portfolio is well-seasoned. In our view, more seasoned performing loans exhibit lower risk profiles than less seasoned loans. FEBRUARY 2,

5 The pool has a weighted-average current loan-to-indexed value ratio of 73.6%. At closing, the class A notes (class A1 and A2 notes) will benefit from a liquidity facility (provided by Wells Fargo N.A.), which will represent 1.65% of the class A notes' balance. This facility will amortize in line with the class A notes, with a floor of 1% of the closing balance of the class A notes. After the first optional redemption date (FORD) in February 2020, the transaction will then begin to use any amounts in the SDC certificates ledger, principal, and revenue to build up a liquidity reserve fund (also to 1.65% of the outstanding balance of the class A notes). As the liquidity reserve fund builds up to its required amount, the liquidity facility will in turn be reduced by a corresponding amount. Once the target balance of the liquidity reserve fund is achieved, the facility will be cancelled. The use of both the liquidity facility and the liquidity reserve fund is limited to the class A notes. An excess cash flow reserve fund will also be funded through excess spread and potentially through funds released from the SDC ledger (see below). The issuer will use this fund to pay interest (after the use of available revenue, principal, and liquidity) on the class B to E notes according to the interest priority of payments. The issuer can also use available principal receipts to mitigate shortfalls in senior expenses and to pay interest on the most senior notes outstanding. However, as long as class A1 notes is the most senior class outstanding, principal receipts can be used to pay interest on the class A2 notes if both of these triggers are satisfied: (i) The cumulative defaulted collateral balance is less than 30% of the closing collateral balance, and (ii) the class A2 notes do not have any balance in the principal deficiency ledgers (PDL). The capital structure is fully sequential. Credit enhancement can therefore build up meaningfully over time for the rated notes, which will enable the capital structure to withstand performance shocks. Any losses on the portfolio, any use of principal as available revenue receipts, and any use of principal to build up the liquidity reserve fund would result in the issuer recording an amount in the PDL. Concerns and mitigating factors The weighted-average original loan-to-value (LTV) ratio is 82.70%, which is higher than our expected archetypal LTV ratio of 73.00%. We have factored this in our credit analysis. The transaction is exposed to the south east of England, including London, with 35.78% of the portfolio's concentration in this area. We have factored this in our credit analysis. The concentration of jumbo valuation (valuations that exceed 312,500 in the north of the U.K., or 500,000 in the south) is 14.65%, including London. We have factored this in our credit analysis. Of the mortgage loans, 34.55% are flexible, which means that relevant borrowers may request a redraw of capital from the lender of amounts representing previous overpayments. In addition, an amount not exceeding the total amount of previous overpayments made by such a borrower may be applied not as overpayments but as or toward payment of the borrower's subsequent monthly payments (payment holiday). We received legal comfort that the flexible loan risk in the pool will be mitigated because, according to the mortgage contract, there is no obligation from CHL to fund a borrower in case of a redraw request. Therefore, this risk cannot be transferred to the issuer. Furthermore, the borrower has no right to set off any damage against the seller. As long as CHL is the servicer of this transaction, all payments are directed to the collection accounts held by CHL at Barclays Bank PLC. If the servicer were to become insolvent, mortgage collection amounts that have not yet been transferred to the issuer's bank account may become part of the servicer's bankruptcy estate. In order to mitigate this credit risk, collections will be transferred daily, a declaration of trust will be in place for the collection account, which benefits the issuer, and the bank accounts will have rating downgrade remedy actions in place. In our opinion, one month of collections could be disrupted, and we have therefore applied a liquidity stress to address this risk. FEBRUARY 2,

6 Transaction Structure At closing, TPMF-AUB 11 will issue seven classes of notes. It will use the issuance proceeds to purchase the beneficial title of the mortgage loans in the portfolio from the beneficial title seller. The issuer will grant security over all of its assets for the security trustee's benefit (see chart 1). Seller and originator CHL is the originator in the transaction. CHL is also the mortgage servicer for all of the loans in the transaction. We have reviewed CHL's collections and default management processes. CHL's arrears management's expertise and experience has resulted in CHL-originated mortgage loans consistently outperforming our wider buy-to-let index of transactions that we rate. FEBRUARY 2,

7 At the time of our recent review in January 2017, we were satisfied that CHL is capable of performing its functions in the transaction. Flexible loans Of the mortgage loans in the pool, 34.55% are flexible, which means that relevant borrowers may request a repayment from the lender of amounts representing previous overpayments. CHL's current redraw policies limit the redraw back up to an LTV ratio of 25%. Based on the redraw conditions, the current risk to the structure is limited, in our opinion. Furthermore, we have been given legal comfort that the special-purpose entity (SPE) has no obligation to fund a redraw request and borrowers have no right to set off any amount against the SPE. Consequently, we haven't sized for this risk in our cash flow analysis. Representations and warranties If there is a breach of the documented representations and warranties that is not remedied within 30 business days, the seller will have the option to either repurchase the entire loan from the pool or make an indemnity payment to the issuer to cover the amount of the loss resulting from the breach. We have accounted for the relatively weak representations and warranties package in our analysis. Terms and Conditions Of The Notes The issuer will pay interest quarterly in arrears on the payment dates in February, May, August, and November of each year, beginning in May The legal final maturity date for all classes of notes will be in May The class A notes accrue interest at a rate of three-month sterling LIBOR plus a class specific margin. However, the class B to E notes accrue interest based on the lower of three-month sterling LIBOR plus a class-specific margin and the net WAC cap. The class-specific margin for each class of notes will step up on the FORD in February As mentioned in the transaction structure section, the lower of these two rates is what our ratings address in line with our imputed promises criteria. A failure to pay the lower of these amounts will, for the class B to E notes, result in interest being deferred. Deferred interest will also accrue at the lower of the two rates. However, our ratings do not address the payment of the net WAC additional amounts, i.e., the difference between the coupon and the net WAC rate where the coupon exceeds the net WAC. Such amount will be subordinated in the interest priority of payments. In our view, neither the initial coupons on the notes nor the initial net WAC rate are "de minimis", and nonpayment of the net WAC additional amounts is not considered an event of default under the transaction documents. Therefore, we do not need to consider these amounts into our cash flow analysis, in line with our criteria for imputed promises. Our preliminary ratings on the class A notes address the timely payment of interest and the ultimate payment of principal. Under the transaction documentation, should the class B to E notes have insufficient funds to meet the lower of the class-specific margin or the net WAC cap, the issuer can defer interest payments on these notes and any deferral of interest would not constitute an event of default. FEBRUARY 2,

8 Collateral Description The preliminary pool, which is based on the cut-off date of Dec. 31, 2016, amounts to 1,646,474,305.7 and comprises 13,534 loans secured on owner-occupied and buy-to-let properties in England, Wales, Scotland, and Northern Ireland. CERH has indicated that the final portfolio will be a subset of the initial portfolio. We understand that CHL verified the borrowers' income for all owner occupied loans as part of its underwriting process. The portfolio is mainly concentrated in the south east of England, including London (35.78%; see chart 4). The proportion of the portfolio with jumbo valuations is 14.65%. A loan is classified as jumbo under our European residential loans criteria based on property value thresholds for north and south England (see "Methodology And Assumptions: Assessing Pools Of European Residential Loans," published on Dec. 23, 2016). Chart 2 FEBRUARY 2,

9 Chart 3 FEBRUARY 2,

10 Chart 4 FEBRUARY 2,

11 Chart 5 FEBRUARY 2,

12 Chart 6 The portfolio's 82.7% weighted-average original LTV ratio is above the average for a typical U.K. RMBS, calculated using our European residential loans criteria (see chart 5). We consider that borrowers with minimal equity in their property are less likely to be able to refinance, and are more likely to default on their obligations, than borrowers with lower original LTV ratio loans. At the same time, loans with high current indexed LTV ratios are likely to incur greater loss severities if the borrower defaults. As CHL no longer originates, the weighted-average seasoning is very high compared with other U.K. RMBS transactions. As of Dec. 31, 2016, the seasoning was more than 120 months (see chart 2). Of the portfolio, 98.60% comprise interest-only (including part-and-part mortgage loans) and 1.40% repayment mortgage loans. We view interest-only loans with a term of less than 10 years as having a higher risk of default than repayment mortgages and long-term interest-only loans. Of the interest-only loans, 0.27% have a maturity of less than 10 years. The portfolio's loan purpose is split between purchase, refinancing, and a small percentage of equity release. For our analysis, we have classified them as remortgage loans and applied stresses accordingly (see chart 3). The portfolio currently has a small percentage of loans that are currently delinquent (1.40%). We have therefore FEBRUARY 2,

13 incorporated in our analysis an arrears projection of 3.9% in the 60 days delinquencies bucket. We determined this projection based on the performing arrangements that the loans in the pool have seen in the past and the historical arrears performance of existing CHL transactions that we rate or have rated, i.e., the Auburn transactions. Counterparties Issuer bank account provider The issuer will open the issuer bank account with Elavon Financial Services Ltd., UK Branch. The transaction documents will specify that the issuer and issuer bank account provider must take remedial actions, including the replacement of Elavon Financial Services 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+'. Collection bank account Borrowers pay into collection accounts held with Barclays Bank in CHL's name. All of these amounts are transferred to the transaction account at the end of each business day. The transaction documents establish a declaration of trust over any amounts in the direct-debit and non-direct-debit collection accounts. The transaction documents 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+'. Liquidity facility provider The liquidity facility provider at closing will be Wells Fargo Bank N.A. (London Branch). Up and until the liquidity reserve fund is fully funded to 1.65% of the outstanding balance of the class A notes (i.e., post-ford), the liquidity facility will be available to pay senior fees and class A interest. The transaction documentation will include requisite replacement framework and draw to cash provisions will be in place in line with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). Payment Structure And Transaction Features The only source of credit enhancement for the notes is subordination (see table 1). Table 1 Credit Enhancement For The Notes Class Preliminary rating Class size (%)* Initial credit enhancement (%) A1 AAA (sf) A2 AA (sf) SDC certificates N/A N/A N/A B-Dfrd AA- (sf) C-Dfrd A+ (sf) D-Dfrd BBB+ (sf) E-Dfrd BB (sf) Z NR 6.75 N/A DC1 certificates N/A N/A N/A FEBRUARY 2,

14 Table 1 Credit Enhancement For The Notes (cont.) Class Preliminary rating Class size (%)* Initial credit enhancement (%) DC2 certificates N/A N/A N/A *The tranche size may change prior to closing. Subordination at closing. NR--Not rated. N/A--Not applicable. Liquidity support At closing, a liquidity facility will be provided by Wells Fargo and will be sized at 1.65% of the class A notes. The issuer can use the facility to pay the senior fees and the class A interest only. The liquidity facility will amortize in line with the class A notes, with a floor of 1% of the closing balance of the class A notes. Following the FORD in February 2020, the structure will begin to build up a liquidity reserve fund. This fund will have the same required balance as the liquidity facility (1.65% of the outstanding balance of the class A notes) and will be funded through principal and revenue receipts as well as monies from the SDC ledger. The SDC ledger can only be used in the event that on the FORD the issuer fails to exercise its right to redeem all of the notes. As the liquidity reserve fund builds up to the required level, a corresponding amount will be released from the liquidity facility. Once the liquidity reserve has reached 1.65% of the class A notes, the liquidity facility agreement will be cancelled. As the class A notes amortize and monies are released from the liquidity reserve fund, the cash will flow to the excess cash flow reserve fund, which will provide liquidity support for the mezzanine and junior notes (see below). The issuer can also use principal receipts as a source of liquidity to mitigate shortfalls in senior expenses and interest shortfalls for the most senior class of notes outstanding. However, as long as class A1 notes is the most senior class of notes outstanding, principal receipts can be used to pay interest on class A2 notes if certain triggers are satisfied. Before the FORD, the amounts payable to the SDC ledger will be made after the payment of senior expenses, interest to the class A noteholders, and clearing the class A PDL. In making interest payments, the issuer will first use principal receipts, then the liquidity facility (pre-ford) or the liquidity reserve (post-ford), and finally the excess reserve fund, if available revenues are insufficient. Principal deficiency ledger The cash manager will establish and maintain a PDL, comprising of seven subledgers, one for each rated class of notes and the class Z notes. Any losses on the portfolio and any use of principal as available revenue receipts would result in the cash manager recording a PDL amount. The cash manager will first record PDL amounts in the class Z notes' deficiency ledger. The cash manager will use excess interest to clear any PDL amounts recorded to enable the transaction to be fully collateralized. The issuer cannot use the liquidity facility or the liquidity reserve to clear any PDL balances. FEBRUARY 2,

15 The excess cash flow reserve fund The junior notes (the class B-Dfrd, C-Dfrd, D-Dfrd, and E-Dfrd notes) will have the added benefit of liquidity support from the excess cash flow reserve fund. The issuer can use this reserve to pay any interest shortfalls or to clear any previously deferred interest, but it cannot use it to pay the subordinated net WAC additional amounts until all of the rated notes have been redeemed or on the final redemption date (May 2045). If the issuer does not use any amounts in the excess cash flow reserve fund on any particular interest payment date (IPD), the amounts standing to the credit of it will not be released, but will instead build up until the class E notes have fully redeemed. At that point, any remaining amounts will be applied firstly to cover shortfalls in amounts available to pay net WAC additional amounts and then secondly toward the DC1 payments. The excess cash flow reserve fund will be built up through (i) amounts released from the SDC ledger after the liquidity reserve fund has reach its required amount (see below); (ii) amounts released from the liquidity reserve fund; (iii) post the FORD amounts, which otherwise would have been paid to the SDC ledger; and (iv) any excess spread generated by the transaction (see "Revenue priority of payments"). The excess cash flow reserve fund will be applied post the use of available revenue and principal to make interest payments. Stated coupon vs. net WAC cap The class A notes pay an interest rate equal to three-month sterling LIBOR plus a class-specific margin. Our preliminary rating on the class A notes addresses timely payment of interest. The class B to E notes pay interest based on the lower of the coupon on the notes (three-month sterling LIBOR plus a class-specific margin) and the net WAC cap. The net WAC is calculated based on the interest accrued on the assets (whether it was collected or not) during the quarter, less senior fees, divided by the current balance of the assets at the beginning of the collection period. This rate is then divided by the outstanding balance of the class A to E notes (minus the aggregate amount recorded on the PDLs in respect of these notes) as a percentage of the outstanding balance of the assets at the beginning of the period to derive the net WAC cap. The net WAC cap is then applied to the outstanding balance of the notes in question to determine the required interest. A failure to pay the lower of these amounts will, for the class B to E notes, result in interest being deferred. Deferred interest will also accrue at the lower of the two rates. Net WAC additional amounts The net WAC additional amounts refers to the difference between the stated coupon and the net WAC cap where the stated coupon exceeds the net WAC cap. For instance, should the coupon be 2.0% and the net WAC cap 1.5%, the noteholders will receive interest based on 1.5%, which is what our preliminary ratings address. The 0.5% difference between the coupon and the net WAC cap constitutes the net WAC additional amount and will be subordinated in the revenue priority of payments. Interest on the net WAC additional amounts will, for each class of notes accrue at the stated coupon for each class of notes (i.e., the minimum of the index plus the margin and net WAC cap). Our preliminary ratings do not address the repayment of such amounts. Revenue priority of payments Trustee and servicing fees; Third party expenses and transfer costs; FEBRUARY 2,

16 Issuer profit amount; Liquidity facility fees; The class A1 notes' interest; The class A1 notes' PDL; The class A2 notes' interest; The class A2 notes' PDL; Payments to the SDC ledger; The class B notes' interest; The class B notes' PDL; The class C notes' interest; The class C notes' PDL; The class D notes' interest; The class D notes' PDL; The class E notes' interest; The class E notes' PDL; Credit the liquidity reserve fund (post-ford); The class Z notes' PDL; Trustee and servicing subordinated fees; The class B notes' net WAC additional amounts; The class C notes' net WAC additional amounts; The class D notes' net WAC additional amounts; The class E notes' net WAC additional amounts; Amounts to the excess reserve fund; and Payments to the DC1 certificates. Principal priority of payments Pay shortfalls in senior fees or interest shortfalls on the most senior notes outstanding; Build up the liquidity reserve fund (post-ford); The class A1 notes' principal; The class A2 notes' principal; The class B notes' principal; The class C notes' principal; The class D notes' principal; The class E notes' principal; The class B notes' net WAC additional amounts; The class C notes' net WAC additional amounts; The class D notes' net WAC additional amounts; The class E notes' net WAC additional amounts; The class Z notes' principal; and The DC1 certificates. Senior fees and SDC certificates At closing, according to the transaction documents, there will be a cap for each IPD for certain senior fees and expenses. This cap (the aggregate expense fee rate) is equal to 0.25% per year multiplied by the opening pool balance for that calculation period multiplied by the calculation period day count. The cap covers all senior fees (although FEBRUARY 2,

17 certain fees may be subordinated if they exceed the cap). Some of the fees include VAT, while others exclude it. We have used a stressed servicing fee equal to 0.50% in our cash flow modeling, as in our opinion, this will be sufficient to find a replacement servicer (other than the back-up servicer mentioned in the servicing analysis above) as well as any VAT, which may be payable by the issuer. Other one-off fees, such as the back-up servicing invocation fees, the cost of replacement of the bank account or collection account, and the back-up servicer facilitator fee, as well as other annually recurring fixed fees, have been modeled separately. Up and until the FORD, payments may be made to SDC ledger to the extent senior fees are less than the cap. These payments are made just below the class A notes in the revenue priority of payments. The payments to the SDC ledger are equal to 25 bps per quarter less the actual senior fees in that quarter and any amounts required to pay interest shortfall on the class A notes or to clear a balance on the class A notes' PDL (after the application of principal or available liquidity). For example, if annual senior fees are actually 20 bps, the SDC ledger will receive 5 bps, but if senior fees increase to 25 bps, then nothing will be paid to the ledger (assuming in this example that there is no interest shortfall on the class A notes). The amount built up in the SDC ledger will only be distributed to the SDC certificate holders on the FORD, to the extent that the issuer has decided to exercise its right to redeem all of the notes on that date. If this right is not exercised, then amounts in the SDC ledger will be assigned to build up the liquidity reserve fund to its required amount and then to the excess cash flow reserve fund. We do not typically see such features in European RMBS transactions that we rate. Interest rate risk The notes will pay the lower of three-month sterling LIBOR plus a class-specific margin interest rate and the net WAC cap. However, the loans will either be linked to the BBR, or a standard variable rate (SVR) at closing. We have sized and stressed the basis risk associated with the BBR-linked loans in our cash flow analysis. For the SVR loans, we do not give credit to any margin above three-month sterling LIBOR. Credit And Cash Flow Analysis We stressed the transaction's cash flows to test the credit and liquidity support that the assets, subordinated tranches, liquidity facility, liquidity reserve fund, and excess reserve fund provide. Credit enhancement The 'B' credit enhancement level for the standard U.K. mortgage loan pool is commensurate with our current assumptions of expected losses on the pool. These expected losses vary according to changes in the outlook for the U.K. mortgage market and consider macroeconomic factors such as unemployment, inflation, 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. We used the assumptions in table 2 as part of our credit analysis of the transaction's underlying assets. FEBRUARY 2,

18 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 4.00 BB 2.00 Default and recovery amounts We model the foreclosure frequency for each loan in the pool, as well as the amount of loss if the property is subsequently sold (the loss severity, expressed as a percentage of the outstanding loan). We also 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 credit enhancement levels that we consider commensurate with each rating level with that of the final 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 (%) Expected loss modelled 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 loans' and borrowers' characteristics, as well as our subsequent assessment of the WAFF and the WALS for this portfolio, which we used as inputs for our cash flow analysis (see table 4). Table 4 Preliminary Pool WAFF/WALS Rating level WAFF (%) WALS (%) AAA AA A BBB BB WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. For modeling purposes, the repossession market value declines we apply under our European residential loans criteria to calculate the loss severity incorporate our calculation of the degree of over- or under-valuation for each specific FEBRUARY 2,

19 region of the U.K. Table 5 shows the resulting market value declines that we used in our analysis of this pool. Table 5 Repossession Market Value Declines At 'AAA', 'AA', 'A', 'BBB', And 'BB' 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 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 timing of this recession on the ability to repay the liabilities by starting the recessionary period at closing and in year three. We apply the WAFF to the principal balance outstanding on the closing date. 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; %) WAFF--Weighted-average foreclosure frequency. Recovery timings We assume that the issuer regains any recoveries 12 months after a payment default for buy-to-let properties. The value of recoveries at each rating level is 100%, minus the WALS for that rating level. We base the WALS we use in the cash flow model on principal loss, including foreclosure costs. We do not give credit FEBRUARY 2,

20 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 test shows that once a note becomes the most senior outstanding, the transaction's other structural mechanisms mitigate the interest reduction caused by the defaulted mortgage loans during the foreclosure period. 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 five different interest rate scenarios up, down, up-down, down-up, and forward curve. We model three prepayment scenarios at all rating levels high, low, and forecast. For this transaction, we modeled the forecast constant payment rate as 4.6%. 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 60 different scenarios at a 'AA' rating level and above (see table 7). Our preliminary ratings on the class B to E notes address the fact that interest can be deferred even when they become the most senior class outstanding. Table 7 RMBS Stress Scenarios Rating level Total number of scenarios Prepayment rate Recession start Interest rate Default timing 'AAA' 60 High, expected, and low 'AA-' and below Closing and year three 40 High and low Closing and year three Up, down, up-down, down-up, forward for standard run Up, down, up-down, down-up, forward for standard run 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 be a contributing factor in the downgrade of the rated notes. In our analysis, our assumptions for the increase in delinquencies are specific to a transaction, although these levels FEBRUARY 2,

21 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 default probability of the pool by projecting buckets of expected arrears. Note that even under these scenarios, structural features in securitizations may mitigate these deteriorations in performance. Further delinquencies of 8% In the first scenario, in addition to the rating-dependent stress assumptions, we apply a further 8% 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 8%, but we deem all of the loans to 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 levels of delinquencies. Table 8 Assuming An Additional 8% Of Arrears, Split Equally Between One Monthly Payment And Three Monthly Payments Missed Rating level WAFF (%) WALS (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Table 9 Assuming An Additional 8% Of Arrears, All Of Which Have Missed Three Monthly Payments Rating level WAFF (%) WALS (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Under the first scenario, the ratings on the notes in the transaction should 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)'). Under the second scenario, the ratings on the notes should not suffer a rating transition of more than three rating categories (for example, the 'AAA (sf)' rated notes would achieve a rating of at least 'BBB (sf)'). We based the analysis above on a simplified assumption, i.e., that the increase in arrears materializes immediately on the day after closing. In reality, these are likely to occur over a period of time. Therefore, other factors, such as FEBRUARY 2,

22 seasoning or repayments of some loans, could partially mitigate the effect of deteriorating performance of other loans. Sectoral Credit Highlights Real GDP growth in Q decreased to 0.5% from 0.6% in Q2 2016, but the Bank of England Monetary Policy Committee has already reduced its forecast for 2016 GDP growth to 1.5% from 2.2%, as Brexit concerns are dragging down economic activity (see "Europe's Economic Outlook After The Brexit Vote," published on July 4, 2016). Unemployment was stable at 4.9% compared with Q However, we expect it to rise slightly through 2017 and to increase more substantially in 2018, again driven by businesses holding back on investment in the more uncertain economic environment. On July 4, 2016, The Bank of England cut its policy rate by 25 bps to 0.25% and deployed a range of additional easing measures to preempt financial market instability and support the economy. These measures include a 60 billion increase in the overall asset purchase scheme as part of quantitative easing, to 435 billion from 375 billion. Mortgage rates (not counting those directly linked) will likely not move one for one with the Central Bank rate. Given the already record low level of mortgage rates and that 80% of the new business is in the form of fixed rates, lenders are approaching a lower limit of profitability. Therefore, we do not expect mortgage rates to fall much lower (see "Low Lending Rates Keep Europe's Housing Markets' Recovery On Track," published on Aug. 4, 2016). The introduction of higher stamp duty tax rates for buy-to-let and second homes in April 2016 has significantly affected house sales in recent months. A rush to complete sales ahead of the tax change caused a sharp rise in March, which was followed by a substantial decline in April. U.K. home sales stabilized in May. However, sales of 89,700 in June remained 16% below the average over the six months to February Weighted-average 90+ day delinquencies among nonconforming transactions fell to 9.7% in Q from 9.8% in Q This decrease was partly due to an improvement in overall performance, but also to the inclusion of a number of new deals classified as nonconforming, which have lower seasoning and are currently outperforming our nonconforming index (see "U.K. RMBS Index Report Q3 2016," published on Nov. 24, 2016). The constant prepayment rate decreased across our nonconforming index by 90 bps and by 180 bps across our buy-to-let index. The prepayment rate in the prime index remained stable at 17.3%. 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: FEBRUARY 2,

23 Increases in credit enhancement for the notes; Total and 90-day delinquencies; Cumulative realized losses; LTV ratios; Constant prepayment rates; and Increases in the collateral pool's seasoning. Related Criteria And Research Related Criteria Criteria - Structured Finance - General: Methodology And Assumptions: Assessing Pools Of European Residential Loans, Dec. 23, 2016 Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 08, 2016 Criteria - Structured Finance - General: Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 02, 2015 General Criteria: Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 Criteria - Structured Finance - General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 09, 2014 General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013 Legal Criteria: Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Criteria - Structured Finance - General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 General Criteria: Methodology: Credit Stability Criteria, May 03, 2010 Criteria - Structured Finance - General: Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009 Related Research Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016 European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016 U.K. RMBS Index Report Q3 2016, Nov. 24, 2016 Brexit's Impact, Part 2: Recession Averted, Slow Growth Ahead, Sept. 28, 2016 Low Lending Rates Keep Europe's Housing Markets' Recovery On Track, Aug. 4, 2016 Europe's Economic Outlook After the Brexit Vote, July 4, 2016 Outlook Assumptions For The U.K. Residential Mortgage Market, June 8, EMEA RMBS Scenario And Sensitivity Analysis, Aug. 6, 2015 Analytical Team FEBRUARY 2,