Towd Point Mortgage Funding 2016-Granite1 PLC

Transcription

1 Presale: Towd Point Mortgage Funding 2016-Granite1 PLC Primary Credit Analyst: Rory O'Faherty, London +44 (0) ; Secondary Contact: Vedant Thakur, London; Table Of Contents Residential Mortgage-Backed Bonds, Including Unrated Notes Transaction Summary Strengths, Concerns, And Mitigating Factors Transaction Structure Servicing Terms and Conditions Of The Notes Collateral Description Counterparties Payment Structure And Transaction Features Credit And Cash Flow Analysis Scenario Analysis Sectoral Credit Highlights APRIL 4,

2 Table Of Contents (cont.) Surveillance Related Criteria And Research APRIL 4,

3 Presale: Towd Point Mortgage Funding 2016-Granite1 PLC Residential Mortgage-Backed Bonds, Including Unrated Notes This presale report is based on information as of April 4, 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 April 4, 2016 Class Prelim. rating* Class size (%) Available credit enhancement (%) Interest Step-up interest A AAA (sf) Three-month LIBOR plus a margin SDC certificates Three-month LIBOR plus a margin Optional call date Legal final maturity April 2019 July 2046 N/A N/A N/A N/A N/A April 2019 July 2046 B - Dfrd AA (sf) Three-month LIBOR plus a margin C - Dfrd A (sf) Three-month LIBOR plus + a margin D - Dfrd A- (sf) Three-month LIBOR plus a margin E - Dfrd BBB (sf) Three-month LIBOR plus a margin F - Dfrd BB (sf) Three-month LIBOR plus a margin G Dfrd B (sf) Three-month LIBOR plus a margin Three-month LIBOR plus a margin Three-month LIBOR plus a margin Three-month LIBOR plus a margin Three-month LIBOR plus a margin Three-month LIBOR plus a margin Three-month LIBOR plus a margin April 2019 July 2046 April 2019 July 2046 April 2019 July 2046 April 2019 July 2046 April 2019 July 2046 April 2019 July 2046 Z NR 3.35 N/A N/A N/A April 2019 July 2046 X NR 3.00 N/A N/A N/A April 2019 July 2046 DC1 certificates N/A N/A N/A N/A N/A April 2019 July 2046 DC2 certificates N/A N/A N/A N/A N/A April 2019 July 2046 DC3 certificates N/A N/A N/A N/A N/A April 2019 July 2046 *The rating on each class of securities is preliminary as of April 4, 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 opinions. The preliminary ratings address timely receipt of interest and ultimate repayment of principal for the class A notes. The preliminary ratings assigned to the class B to G notes are interest-deferred ratings and address the ultimate payment of interest and principal. Our preliminary ratings on the class B to G 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. The SDC certificates will accrue interest on each IPD and on the first optional redemption date the cumulative accrued interest may be (subject to conditions outlined in detail below) may be distributed to the SDC certificate holders. Dfrd--Deferred. N/A--Not applicable. NR--Not rated. APRIL 4,

4 Transaction Participants Originator Legal title holder Beneficial title seller Arranger Servicer Interim servicer Backup servicer Backup servicer Cash manager Issuer account bank Collection account bank Liquidity facility Security trustee and note trustee Share trustee NRAM PLC NRAM PLC Cerberus European Residential Holdings B.V. Morgan Stanley & Co. International PLC NRAM PLC Bradford & Bingley PLC Specialist Mortgage Services Ltd. Western Mortgage Services Ltd. Citibank N.A., London Branch Citibank N.A., London Branch National Westminster Bank PLC Wells Fargo Bank N.A., London Branch Citibank N.A., London Branch Wilmington Trust SP Services (London) Limited Transaction Key Features* Expected closing date Collateral To be determined U.K. residential mortgage loans Principal outstanding of the provisional pool (bil. ) 6.36 Country of origination Concentration London and southeast England, 31.57% Property occupancy Owner-occupied (100%) Weighted-average indexed current LTV ratio (%) Weighted-average original LTV ratio (%) Average loan size balance ( ) 76,114 Largest loan size ( ) 1,780,796 Weighted-average seasoning (months) Weighted-average interest rate (%) 4.50 Arrears exceeding one month (%) 8.44 Redemption profile (%) Interest-only: and repayment: Mortgage loan priority *Data is based on a pool as of Dec. 31, We expect the final pool to be a subset of this. Based on Standard & Poor's methodology. LTV--Loan-to-value. U.K. First ranking Transaction Summary Standard & Poor's Ratings Services has assigned preliminary credit ratings to Towd Point Mortgage Funding 2016-Granite1 PLC's (Towd Point) class A to G notes. At closing, Towd Point will also issue unrated class Z and X notes, as well as SDC, DC1, DC2, and DC3 certificates. Towd Point will purchase the beneficial interest in a portfolio of U.K. residential mortgage loans from the seller (Cerberus European Residential Holdings B.V.; CERH), using the notes' issuance proceeds. The seller in turn purchased the mortgage loans from NRAM PLC (NRAM; formerly Northern Rock (Asset Management) PLC). APRIL 4,

5 The preliminary pool totals 6.32 billion (as of Dec. 31, 2015) 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. The pool comprises first-lien U.K. residential mortgage loans that NRAM originated. Bradford & Bingley PLC (B&B; acting on behalf of NRAM) will be the interim servicer of the loans in the pool. The owner of NRAM and B&B, UK Asset Resolution Ltd. (UKAR), is in the process of selling the B&B mortgage servicing business. We expect the sale of B&B's mortgage servicing business to complete shortly after this transaction closes. On Feb. 1, 2016, Computershare Ltd. (Computershare) entered into an exclusivity period with UKAR. Should the sale of its mortgage servicing business complete, B&B will continue as interim servicer until a new long-term servicing contract is in place, at which point the purchaser will provide services to NRAM and become back-up servicer according to pre-defined servicing agreements. Approximately 92.57% of the pool comprises standard variable rate (SVR) loans, or loans which will revert to an SVR in the future. Based on our legal analysis and the conditions outlined in the various servicing agreements, we have been able to give credit to the documented SVR floor rate for approximately 98% of the SVR loans, which will apply post December For the remaining SVR loans on which we have not given credit to the minimum rate, this is due to documented conditions in the underlying mortgage agreements that permit the legal title holder to charge a borrower interest based on the lower of the SVR rate and a rate linked to the bank of England base rate (BBR) plus a margin determined by the legal title holder. We rate the class A notes based on the payment of timely interest. Interest on the class A notes is equal to three-month sterling LIBOR plus a class-specific margin. However, the class B to G 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 rated notes (class A to G) 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 G notes, result in interest being deferred. Deferred interest will also accrue at the lower of the two rates. Our 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. APRIL 4,

6 As previously mentioned, we treat the class B to G notes as deferrable-interest notes in our analysis. Under the transaction documents, the issuer can defer interest payments on these notes. While our preliminary 'AAA (sf)' rating on the class A notes addresses the timely payment of interest and the ultimate payment of principal, our preliminary ratings on the class B to G notes address the ultimate payment of principal and interest. 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 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 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. The pool has a weighted-average current loan-to-indexed value ratio of 68.99%. At closing, the class A notes will benefit from a liquidity facility (provided by Wells Fargo N.A.), which will be funded to 1.7% of the class A note balance. This facility will amortize in line with the class A notes. After the first optional redemption date (FORD) in April 2019, the transaction will then begin to use any amounts standing to the credit of the SDC certificates ledger, principal, and revenue to build up a liquidity reserve fund (also to 1.7% 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 post the FORD 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 G 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. 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 principal deficiency ledger (PDL). Concerns and mitigating factors Of the preliminary pool, 98.3% of the loans are flexible mortgages. We have used each loan's maximum drawable balance when calculating their expected foreclosure frequency and loss severities. Also, under the terms and conditions for the Northern Rock-originated loans with flexible features, there is only an obligation to fund any overpaid amounts if there are funds available to do so. We have received legal analysis on this point that the issuer is only obliged to fund any redrawings should sufficient funds be available. If not, then the original seller will repurchase the loan. Of the loans analyzed, 8.44% were in one month or more of arrears as of the cut-off date. APRIL 4,

7 Of the loans in the preliminary pool, 34.27% are fast-track mortgages, 14.15% are to borrowers who have had at least one county court judgment (CCJ), and 5.62% were granted to borrowers who have previously been declared bankrupt or have individual voluntary arrangements (IVAs). There is also a high proportion (52.14%) of interest-only loans in the pool. We have addressed all of these features accordingly in our credit analysis in line with our U.K. RMBS criteria (see "U.K. RMBS Methodology And Assumptions," published on Dec. 9, 2011). At closing, 94.86% of the loans in the preliminary portfolio will be either linked to or will revert to an SVR, which the servicer can set at its discretion. However, there are conditions the servicer and interim servicer will follow when setting the rates on these SVR loans. From December 2016, 98% of these loans will be subject to a documented floor of three-month LIBOR plus 2.40% (see "SVR setting"). Our preliminary ratings on the class G notes are consistent with our cash flow output, but are particularly sensitive to a further deterioration in the yield of the asset pool. Our cash flow analysis incorporates numerous conservative assumptions which address this risk. Transaction Structure The portfolio comprises loans originated by NRAM. On Dec. 7, 2015, the original seller (NRAM) sold a beneficial interest in the mortgages to the seller, CERH. At closing, CERH will sell its beneficial interest in the mortgages to the issuer (Towd Point), but unless a perfection trigger occurs, the legal title will remain with the original seller. At closing, Towd Point will use the proceeds from the notes' issuance to purchase the full beneficial interest in each of the mortgage loans in the pool from the seller. The issuer will grant security over all of its assets in the security trustee's favor. APRIL 4,

8 Representations and warranties CERH provides representations and warranties in the mortgage sale agreement, which we view as being considerably weaker than those which we typically see in European RMBS transactions. If there is a breach of the documented representations and warranties that is not remedied within 30 days, the seller will have the option to either repurchase APRIL 4,

9 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. Any indemnity payments (if principal in nature) made by CERH to the issuer will be used to amortize the notes, but all cash flows derived from that loan will then be for the seller's benefit until CERH has been repaid in full (to the extent of the indemnity payment made), after which all monies received on that loan will be for the benefit of the issuer. We have accounted for this weak representations and warranties package in our analysis. Flexible loans Flexible loans, which can overpay and then at some point in the future redraw the overpaid amount, will account for 98.3% of the final pool. In our analysis of this type of loan, we assess credit and also a potential set-off risk associated with them. For our credit analysis, we use the maximum drawable balance (the maximum balance a borrower is permitted to draw up to based on the most recent underwriting assessment) to calculate the current LTV ratio for the loan, and we also assess the original LTV ratio based on the loan's original approved balance. If, under the terms and conditions of the mortgage, there is an obligation to fund a redraw and if these amounts are not able to be funded, the borrower may fund the redraw amount elsewhere and the additional funding costs may be set off against their outstanding loan balance. The legal analysis provided to us indicates that under the loan's terms and conditions, there is no obligation to fund any redrawings. Therefore, we have not accounted for the further set-off risk relating to flexible loans in our cash flow analysis. Further advances Under the transaction documents, should a borrower request and be granted a further advance, the seller will be obliged to repurchase the loan in question. Payment holidays The pool comprises loans that can take payment holidays, subject to certain underlying conditions. A borrower may apply to the servicer for a payment holiday, or if the borrower has made a certain number of consecutive payments they could take a payment holiday. Any such payment holiday would be added to the current balance of the loan. Given the liquidity support for the senior fees, the class A notes' interest, coupled with the deferrable nature of interest payments on the class B to G notes, the impact of any liquidity stress caused by payment holidays is limited. We have taken this into account in our cash flow analysis. Servicing NRAM will be the master servicer for the loans, with a delegation to B&B to act on behalf of NRAM. Following the sale of the B&B servicing business, NRAM will continue to be the master servicer for the loans in the pool, but with the delegation now assigned to a long-term servicer. On Feb. 1, 2016 Computershare entered into a period of exclusivity with UKAR. The successful purchaser of the B&B servicing business will also be the back-up servicer in the transaction, to assume NRAM's role if there is a servicer termination event. Each of the above roles and the relevant documentation pertaining to it will be finalized prior to closing. We reviewed B&B's mortgage servicing business in September 2015 and our view is that it has improved significantly since UKAR's formation, as shown by the improved performance of the loan pool. B&B's approach is fully aligned with APRIL 4,

10 the Financial Conduct Authority's (FCA) principles, embedding good conduct and delivering fair and appropriate outcomes to their customers, in our opinion. The company has an experienced leadership team with over 25 years' financial services industry experience and we view their compliance and risk management structure to be robust. We are comfortable that there are adequate staff levels and supportive IT systems to continue to effectively service the loans in the pool. Terms and Conditions Of The Notes The issuer will pay interest quarterly in arrears on the payment dates in January, April, July, and October of each year, beginning in July The legal final maturity date for all classes of notes will be in July The class A notes accrue interest at a rate of three-month LIBOR plus a class margin. However, the class B to G notes accrue interest based on the lower of three-month 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 first optional redemption date in April 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 G 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 'AAA (sf)' rating on the class A notes addresses the timely payment of interest and the ultimate payment of principal. Under the transaction documentation, should the class B to G 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. Collateral Description The preliminary pool, which is based on the cut-off date of Dec. 31, 2015, amounts to 6,362,732,402 and comprises 82,458 loans. At closing, the pool will be a subset of the larger 6.36 billion pool. Prior to closing, we will conduct our credit analysis on the final selected pool. The pool information and characteristics presented here are based on the analyzed pool ( 6.36 billion). In our credit analysis, we have not included loans with a total of 36.7 million outstanding as they have passed their maturity date. As chart 1 shows, the pool is well-seasoned with a weighted-average seasoning of months. In our view, APRIL 4,

11 well-seasoned loans have a lower risk and we have considered this in our credit analysis. We also consider that the risk associated with performing loans and a loan-to-income multiple of less than five, or fast-track loans at origination, will reduce over time. Chart 2 The pool also contains loans that have had at least one CCJ (14.15%) and borrowers that have previously been declared bankrupt or IVA (5.62%). These loans have an adjusted weighted-average foreclosure frequency (WAFF) to address, in our view, a higher risk. The pool contains a large number of flexible mortgages, and we have used their maximum drawable balance to calculate their original LTV ratio and current LTV ratio. Of the pool, 38.63% of the loans were granted for refinance and cash out purposes. This carries an additional adjustment to our WAFF calculation, given that, in our view, these loans carry a higher risk. APRIL 4,

12 Chart 3 The pool is relatively well-diversified in terms of geographic distribution compared to a typical U.K. RMBS transaction, with 30.73% concentrated in southeast England and London (see chart 4). APRIL 4,

13 Chart 4 The pool's 87.55% weighted-average original LTV ratio exceeds the average for a typical U.K. RMBS transaction, calculated using our U.K. RMBS criteria (see chart 5). Given the originators and our understanding of their underwriting guidelines, it is unlikely that loans were originated with original LTV ratios greater than 100%. We have therefore capped our calculation at 100%. At the same time, loans with low current indexed LTV ratios are likely to incur lower loss severities if the borrower defaults. Our weighted-average current LTV ratio is 68.9%, which is lower than the average U.K. RMBS transaction. APRIL 4,

14 Chart 5 APRIL 4,

15 Chart 6 Of the pool, 47.86% comprises repayment mortgage loans, and 52.14% interest-only or part and part loans. According to our U.K. RMBS criteria, if the aggregate long-term interest-only percentage is greater than 50% of the total pool balance, we apply an adjustment factor to the excess amount above 50%. The pool has 8.44% of loans that are more than one-month delinquent as at the cut-off date. In our analysis, we also incorporated an arrears projection for the pool in the near- to medium-term. We determine this projection by analyzing the historic arrears performance data of the originators' mortgage books and the current pool. Counterparties Issuer bank account provider The issuer will open the issuer bank account with Citibank N.A., London Branch. The transaction documents will specify that the issuer and issuer bank account provider 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 APRIL 4,

16 Our long-term ICR on the bank account provider falls below 'A+', if it does not have a short-term rating. Collection bank account The collection account bank provider at closing will be National Westminster Bank PLC. The collections deposited from each of the loans will be transferred into the issuer account daily. There is a declaration of trust over these collections in the issuer's favor. The transaction documents will specify that the issuer and the servicer must take remedial actions, including the replacement of National Westminster Bank as the collection account bank 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 'BBB', where the short-term rating is at least 'A-2'; or Our long-term ICR on the bank account provider falls below 'BBB+', if it does not have a short-term rating. 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 1.7% 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 (%)* A AAA (sf) SDC certificates N/A N/A N/A B-Dfrd AA (sf) C-Dfrd A (sf) D-Dfrd A- (sf) E-Dfrd BBB (sf) F-Dfrd BB (sf) G-Dfrd B (sf) Z NR X NR DC1 certificates N/A N/A N/A DC2 certificates N/A N/A N/A DC3 certificates N/A N/A N/A *Subordination at closing. The tranche size may change prior to closing. NR--Not rated. N/A--Not applicable. APRIL 4,

17 Liquidity support At closing, a liquidity facility will be provided by Wells Fargo and will be sized at 1.7% 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 and there is to be no minimum floor level on the facility. Following the FORD in April 2019, the structure will begin to build up a liquidity reserve fund. This fund will have the same required balance as the liquidity facility (1.7% 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 1.7% 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. Prior to the FORD, the amounts payable to the SDC ledger will be made after the payment of 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 eight 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. The excess cashflow reserve fund After the FORD, the junior notes (the class B, C, D, E, F, and G 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 subordinated the net WAC additional amounts until all of the rated notes have been redeemed or on the final redemption date (December 2042). If the issuer does not use any amounts in the excess cashflow 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 G notes have fully redeemed. At that point, any remaining amounts will be applied through the principal priority of payments. APRIL 4,

18 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've been paid to the SDC ledger, and (iv) any excess spread generated by the transaction (see the revenue priority of payments below). 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 G 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 rated notes (class A to G) 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 G 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 on the class G notes (i.e. three-month sterling LIBOR plus 3% pre FORD and three-month sterling LIBOR plus 5% post FORD). Our preliminary ratings do not address the repayment of such amounts. Revenue priority of payments Trustee fees; Counterparty fees; Third party expenses and transfer costs; Legal title holder fees; Issuer profit amount; Servicing fees; Liquidity facility fees; The class A notes' interest; The class A 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; APRIL 4,

19 The class D notes' interest; The class D notes' PDL; The class E notes' interest; The class E notes' PDL; The class F notes' interest; The class F notes' PDL; The class G notes' interest; The class G notes' PDL; Credit the liquidity reserve fund (post-ford); The class Z notes' PDL; Amounts to be paid to the deposit account; Servicing subordinated fees; Swap termination amounts; 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 F notes' net WAC additional amounts; The class G notes' net WAC additional amounts; The class X notes' interest (pre-ford); The class X notes' principal (pre-ford); Payments due on the DC1 certificates (pre-ford); Amounts to the excess reserve fund (post-ford); Payments due on the DC2 certificates (post-ford and redemption of the class G notes or legal final maturity); and Payments due on the DC3 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). Once the liquidity reserve has been topped up for the first time, principal receipts will not be used to top it back up to its required balance in the event of any subsequent drawings; The class A notes' principal; The class B notes' principal; The class C notes' principal; The class D notes' principal; The class E notes' principal; The class F notes' principal; The class G 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 F notes' net WAC additional amounts; The class G notes' net WAC additional amounts; The class Z notes' principal; The DC2 certificates; and The DC3 certificates. APRIL 4,

20 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 0.50% per annum multiplied by the opening pool balance for that calculation period multiplied by the calculation period day count. The cap covers all senior fees (although certain fees may be subordinated if they exceed the cap). Some of the fees include VAT, while others exclude it. Other fees are also subject to annual uplifts linked to inflation. We have used a stressed servicing fee equal to 0.60% 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 12.5 basis points (bps) per quarter less the actual senior fees in that quarter and any amounts required to pay interest on the class A notes or to clear a balance on the class A PDL (after the application of principal or available liquidity). For example, if annual senior fees are actually 20 bps, the SDC ledger will receive 30 bps, but if senior fees increase to 50 bps, then nothing will be paid to the ledger (assuming in this example, that nothing is required to be paid to 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 LIBOR plus a class-specific margin interest rate and the net WAC cap. However, the loans will either be linked to BBR, fixed interest, or an SVR at closing. We have sized and stressed the basis risk associated with the BBR linked loans, and have modeled the fixed-rate loans in our cash flow analysis. For the SVR linked loans, we have taken into account the SVR setting policy, and stressed any interest rate or basis risk. SVR setting A large proportion of the portfolio has standard variable interest rates. Typically, when we apply our criteria and assess the historical difference between three-month LIBOR and an SVR (only taking positive differences), we do not give credit to any margin above three-month LIBOR. However, based on our legal analysis and the servicer's obligations in this transaction, we can give credit to the documented SVR floor. From December 2016 onward, the SVR rate will be set at at least equal to three-month LIBOR, plus 2.40%, although many borrowers are also receiving a discounted loyalty benefit, which erodes the minimum SVR rate slightly. We have accounted for this discount in our analysis. There are also a small number of loans in the pool which are currently APRIL 4,

21 paying a fixed rate of interest with a future switch to a floating rate. These loans can be set at the lower of the SVR rate and BBR plus a margin. We have accounted for the potential that the yield on these loans may be below the SVR rate in our cash flow analysis. 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. 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. APRIL 4,

22 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 Final 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 U.K. RMBS criteria to calculate the loss severity incorporate our calculation of the degree of over- or under-valuation for each specific 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 3. 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). APRIL 4,

23 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 18 months after a payment default for owner-occupied 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 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 10%. 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 reflect that once a class of notes becomes the most senior outstanding, that class will pay timely interest and ultimate principal under each of the scenarios at the assigned rating level. Prior to becoming the most senior tranche, our preliminary ratings on the class B to G notes address the fact that interest can be deferred. APRIL 4,

24 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 3 40 High and low Closing and year 3 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 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 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 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 16% 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. APRIL 4,

25 Table 9 Assuming An Additional 16% 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 seasoning or repayments of some loans, could partially mitigate the effect of deteriorating performance of other loans. Sectoral Credit Highlights Following a recent run of weak activity surveys, a slowdown in GDP growth in the third quarter of 2015 came as little surprise, but was a little worse than we had expected. That's because services almost entirely accounted for growth, while manufacturing output fell by 0.3% and the construction sector contracted by 2.2%. That left third-quarter output no higher than in the same quarter in Manufacturing's poor performance, however, was unsurprising in light of weak overseas demand and the strength of sterling. The U.K. expansion nevertheless continues to benefit from strong household demand and business investment, while the biggest downside risks are related to foreign trade. We expect GDP growth in the U.K. to average 2.4% in 2015 and 2016, and 2.2% in What's worth noting is that the minutes of the November meeting of the Bank of England's (BoE) Monetary Policy Committee (MPC) sent a particularly dovish message, explaining that the U.K. is on a very different monetary path than the U.S. Although the MPC did remark on the resilience of the domestic economy, it is clearly very concerned about the weaker outlook abroad. And though domestic demand has held up well, it has not translated into rising inflationary pressures--meaning that the MPC has plenty of leeway to wait until global uncertainties have been resolved. Therefore, we now expect the first BoE rate hike in the fourth quarter of 2016, a little sooner than current market expectations. The stable economy, continued fall in the jobless rate, and very low interest rates have underpinned a solid performance on the residential real estate market. House prices reached a record high in November as the average price reached 288,000. This reflects all time peaks in London, the South East, the East, and the West Midlands. House price inflation in England was 8.8% year-on-year to November We expect a more modest increase in 2016 of 5% year-on-year growth for the U.K. APRIL 4,