Moody's: No rating impact on notes issued by Charles Street Conduit Asset Backed Securitisation 1 Limited following amendment.
....GBP435M VFN Notes, Affirmed Aa2 (sf); previously on Oct 28, 2014 Assigned Aa2 (sf)
The rating action is prompted by amendments to the transaction documents, consisting of the following:
- Increase of the Note Issuance Facility
- Change to the margin of the rated note
- Changes to the portfolio covenants
- Change to the revolving period to allow the addition of new loans until January 2020
Moody's affirmed the ratings of the VFN and determined that it has sufficient credit enhancement to maintain its current rating of Aa2(sf).
However, Moody's opinion addresses only the credit impact associated with the proposed amendment, and Moody's is not expressing any opinion as to whether the amendment has, or could have, other non-credit related effects that may have a detrimental impact on the interests of note holders and/or counterparties.
Below is the detailed description and analytical considerations for the key changes to the documents:
Increase of the Note Issuance Facility
The facility is increased to GBP 1 Billion from its previous level of GBP 675 Million. Following the increase of the facility the Issuer would have the option to increase the drawn down amount of the VFN up to GBP 1 Billion. There is a requirement to increase the amount of subordination and the target reserve fund to maintain the same proportion in relation to the VFN if the Issuer wishes to increase the VFN. The reserve fund will be funded up to its new target amount using the principal receipts from the portfolio. Given the senior position of the reserve fund in the principal waterfall, Moody's assumed within its cash flow analysis that the reserve fund would build up quickly to its target level following an increase of the VFN.
Change to the margin of the VFN
The current margin on the VFN is reduced to 262.5bps from 287.5bps. In the event the VFN is rated below Aa2(sf) the margin steps up to 300bps. As part of its cash flow analysis, Moody's directly modelled and took into account the new current margin on the VFN.
Changes to the portfolio covenants
The amendment also includes various changes to the portfolio covenants, consisting primarily of the below:
- Reduction of the Weighted Average Current Loan-to-Value Ratio of the pool being reduced from 75% to 67.5%
- Percentage of pool with an LTV of 80% being reduced from 10% to 7%
- Increase of permitted proportions of loans for commercial purpose lending being increased from 50% to 57.5%
- Increase in the percentage of pool and notional of loans in excess of GBP1.75m (previously GBP1.25m) being increased from 6% to 7.5%
- Increase in the weighted average LTV on commercial purpose bridging loans being increased from 65% to 67.5%
These changes to the portfolio covenants did not have a material impact on the Moody's MILAN CE. However, the expected loss assumption was increased from 7.5% to 7.7% to reflect the increase in the proportion of commercial purpose lending loans, increase in weighted average LTV of commercial purpose bridging loans and increase in proportion and notional amount of large loans which can be included in the portfolio.
Further, the amendment reduced the delinquency trigger level from 15% to 14%, which is classed as a sale demand event. The breach of portfolio covenants, sale demand event or event of default results in no further increase of the VFN, stops the addition of new loans into the pool, and changes the principal priority of payments. Moody's took into account changes to these triggers as well as the extension of the revolving period in the cash flow modelling.
Amendments were also introduced to the standby servicer agreement, which may make it easier for the standby servicer to resign. Moody's has taken into account these changes in its assessment of the operational risks in the transaction.
Moody's ratings address the expected loss posed to investors by the legal final maturity of the notes. Moody's ratings address only the credit risks associated with the transaction. Other risks have not been addressed, but may have a significant effect on yield to investors.
The principal methodology used in this rating was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in January 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
The analysis undertaken by Moody's at the initial assignment of a rating for an RMBS security may focus on aspects that become less relevant or typically remain unchanged during the surveillance stage. Please see Moody's Approach to Rating RMBS Using the MILAN Framework for further information on Moody's analysis at the initial rating assignment and the on-going surveillance in RMBS.
Factors that would lead to an upgrade or downgrade of the rating:
Factors Which Could Lead to a Downgrade: Deterioration in credit worthiness of Lloyds Bank Plc as issuer account bank, deterioration in the UK economy and real estate markets and unforeseen legal or regulatory changes.
Factors Which Could Lead to a Upgrade: Improvements in the UK economy and real estate markets, defaults and losses experienced by the transaction which are substantially below Moody's assumptions for the transaction.
Moody's will continue monitoring the ratings. Any change in the ratings will be publicly disseminated by Moody's through appropriate media.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Mar 25, 2016|
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