(The following statement was released by the rating agency) LONDON, March 24 (Fitch) Fitch Ratings has upgraded six tranches and affirmed 29 tranches of Preferred Residential Securities 05-1 PLC (PRS05-1), Preferred Residential Securities 05-2 PLC (PRS05-2), Preferred Residential Securities 06-1 PLC (PRS06-1) and Preferred Residential Securities 8 PLC (PRS8). The transactions are securitisations of seasoned non-conforming residential mortgage loans originated by Preferred Mortgages Limited. A full list of rating actions follows at the end of this rating action commentary. KEY RATING DRIVERS Credit Enhancement (CE) Build-up Using both its surveillance model and cash flow model, Fitch concluded the current levels of CE were sufficient to withstand the rating stresses, leading to today’s upgrades and affirmations of the note ratings. CE for the class senior notes of PRS05-1, PRS05-2, PRS06-1 and PRS8 increased to 62.1%, 97.3%. 85.5% and 83.6% at end-2016, from 55%, 92.1%, 77.3% and 73.8% respectively, a year ago. All other transactions are expected to continue amortising on a sequential basis due to trigger breaches, which will further increase CE. Stable Asset Performance Loans that are three months or more in arrears have shown steady improvement post-crisis. This measure remained stable between December 2015 to December 2016, averaging around 20% for PRS05-1, 19% for PRS05-2 and 18% for PRS06-1 and PRS8, of their respective pool balances. The Fitch Non-Conforming Index measured loans that are three months or more in arrears at around 9%, as of end-2016. The servicer reports the balance of loans in arrears in terms of loans with overdue monthly contractual payments, referred to as delinquencies, and loans with overdue monthly contractual payments and/or outstanding fees or other amounts due, known as amounts outstanding. Fitch has used the balances of loans reported with delinquencies in its analysis. Interest Only (IO) Concentration Tested The transactions have a material concentration of IO loans, maturing within a three-year period during the lifetime of the transactions. PRS05-1 has the largest concentration, with 45.8% maturing between 2028 and 2030. As per its criteria, Fitch tested additional foreclosure frequency assumptions for the IO loans with maturities concentrated in a three-year period. The results of the additional foreclosure frequency assumption testing have not constrained the notes’ ratings. Negative Swap Payments Fitch analysed the impact of negative payments being payable within the cross currency swap agreements. If EURIBOR or USD LIBOR decreases to the extent that the rate payable by the swap counterparty (Barclays, A/Stable and Swiss Reinsurance, A+/Stable) is negative, the issuer is expected to pay this amount to the swap counterparty. The margins payable by the swap counterparty range from 0.19% to 1.45% across the transactions. Fitch analysed the impact on excess spread, stressing interest rates and foreign exchange spot rates in line with its criteria. Fitch found the reduction in excess spread to be immaterial to the note ratings. Tail Risk Tested Fitch tested the ability of the notes currently rated ‘AAAsf’ to withstand losses associated with shrinking pools. Fitch concluded that the transactions’ reserve funds, combined with the subordination provided by the notes rated below ‘AAAsf’, was sufficient to withstand the stresses. PRS05-1, PRS05-2, PRS06-1 and PRS8 had 622, 628, 951 and 553 borrowers remaining, respectively, at December 2016 . Error Corrected Fitch found that in its rating action dated 1 April 2016 with respect to PRS06-1 there were certain incorrect data entries in the model, as a prior adverse credit foreclosure frequency increase was incorrectly applied. Correcting this inconsistency had an effect on the Class D1a and Class D1c, as reflected in this rating action. RATING SENSITIVITIES In Fitch’s opinion, borrower affordability is being supported by the low interest rate environment. However, low constant prepayment rates suggest that borrowers have been unable to refinance, leaving the performance of the pools highly sensitive to future interest increases. PRS05-1, PRS05-2 and PRS8 have fewer than 700 borrowers remaining in their respective pools. The small borrower count could lead to dependency on the reserve fund to protect against tail risk losses, which could limit any future upgrades. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that affected the rating analysis. Fitch has not reviewed the results of any third-party assessment of the asset portfolio information, or conducted a review of origination files, as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions’ initial closing. The subsequent performance of the transactions over the years is consistent with the agency’s expectations given the operating environment. Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Overall, Fitch’s assessment of the information relied upon for the agency’s rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable. SOURCES OF INFORMATION The information below was used in the analysis.
Loan-by-loan data provided by Acenden, as at 30 November 2016.