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Fitch Upgrades Six Preferred Residential Securities Tranches
March 24, 2017 / 5:16 PM / 4 months ago

Fitch Upgrades Six Preferred Residential Securities Tranches

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(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.

Transaction reporting provided by Acenden, as at 14 December 2016. MODELS <a href=" "> ResiEMEA. <a href=" "> EMEA RMBS Surveillance Model. <a href=" ">EMEA Cash Flow Model. Fitch has the following rating actions: Preferred Residential Securities 05-1 PLC Class B1a (ISIN XS0217637213): affirmed at 'AAAsf'; Outlook Stable Class B1c (ISIN XS0217069813): affirmed at 'AAAsf'; Outlook Stable Class C1c (ISIN XS0217070076): affirmed at 'AAAsf'; Outlook Stable Class D1c (ISIN XS0217070829): upgraded to 'Asf' from 'BBBsf'; Outlook Stable Class E (ISIN XS0217071041): upgraded to 'BB+sf' from 'Bsf'; Outlook Stable. Preferred Residential Securities 05-2 PLC Class A2a (ISIN XS0234203684): affirmed at 'AAAsf'; Outlook Stable Class A2c (ISIN XS0234204732): affirmed at 'AAAsf'; Outlook Stable Class B1a (ISIN XS0234207594): affirmed at 'AAAsf'; Outlook Stable Class B1c (ISIN XS0234208485): affirmed at 'AAAsf'; Outlook Stable Class C1a (ISIN XS0234209020): affirmed at 'AAsf'; Outlook Stable Class C1c (ISIN XS0234209459): affirmed at 'AAsf'; Outlook Stable Class D1c (ISIN XS0234212594): upgraded to 'BBBsf' from 'BBsf'; Outlook Stable Class E1c (ISIN XS0234213642): upgraded to 'B+sf' from 'Bsf'; Outlook Stable. Preferred Residential Securities 06-1 PLC Class A2a (ISIN XS0243656625): affirmed at 'AAAsf'; Outlook Stable Class A2b (ISIN XS0243704532): affirmed at 'AAAsf'; Outlook Stable Class A2c (ISIN XS0243663837): affirmed at 'AAAsf'; Outlook Stable Class B1a (ISIN XS0243655577): affirmed at 'AAAsf'; Outlook Stable Class B1c (ISIN XS0243665022): affirmed at 'AAAsf'; Outlook Stable Class C1a (ISIN XS0243658670): affirmed at 'AAsf'; Outlook Stable Class C1c (ISIN XS0243665964): affirmed at 'AAsf'; Outlook Stable Class D1a (ISIN XS0243659728): upgraded to 'BBBsf' from 'BBsf'; Outlook Stable Class D1c (ISIN XS0243666939): upgraded to 'BBBsf' from 'BBsf'; Outlook Stable Class E1c (ISIN XS0243669529): affirmed at 'Bsf'; Outlook Stable Class FTc (ISIN XS0243675336): affirmed at 'CCCsf'; Recovery Estimate (RE) 75%. Preferred Residential Securities 8 PLC Class A1a1 (ISIN XS0198309691): affirmed at 'AAAsf'; Outlook Stable Class A1a2 (ISIN XS0198313024): affirmed at 'AAAsf'; Outlook Stable Class A1b (ISIN XS0198313610): affirmed at 'AAAsf'; Outlook Stable Class A1c (ISIN XS0198318171): affirmed at 'AAAsf'; Outlook Stable Class B1a (ISIN XS0198318411): affirmed at 'AAAsf'; Outlook Stable Class B1c (ISIN XS0198318841): affirmed at 'AAAsf'; Outlook Stable Class C1a (ISIN XS0198319062): affirmed at 'AAAsf'; Outlook Stable Class C1c (ISIN XS0198319229): affirmed at 'AAAsf'; Outlook Stable Class D1a (ISIN XS0198319575): affirmed at 'Asf'; Outlook Stable Class D1c (ISIN XS0198319906): affirmed at 'Asf'; Outlook Stable Class E (ISIN XS0198320409): affirmed at 'Asf'; Outlook Stable. Contacts: Lead Surveillance Analyst Haider Sarwar, CFA Associate Director +44 203 530 1561 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Robbie Sargent Senior Director +44 203 530 1404 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on Applicable Criteria Criteria Addendum: UK Residential Mortgage Assumptions (pub. 03 Feb 2017) here EMEA RMBS Rating Criteria (pub. 29 Nov 2016) here Fitch’s Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance – Excel File (pub. 26 Oct 2016) here Global Structured Finance Rating Criteria (pub. 27 Jun 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021085 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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