Rating Action Commentary
ֳ Maintains 4 Tranches of Southern Pacific RMBS on Rating Watch Negative
Tue 06 Aug, 2024 - 11:30 AM ET
ֳ - London - 06 Aug 2024: ֳ has maintained Southern Pacific Financing 05-B Plc's (SPF 05-B) class E notes, Southern Pacific Securities 06-1 Plc's (SPS 06-1) class D1a and D1c notes and Southern Pacific Financing 06-A Plc (SPF 06-A) class E notes on Rating Watch Negative (RWN).
The RWN reflects the uncertainty around fixed fees paid by the deals post LIBOR transition. ֳ expects to resolve the RWN within six months.
Transaction Summary
The three transactions are UK non-conforming RMBS securitisations, comprising loans originated between 2003 and 2006 by wholly-owned subsidiaries of Lehman Brothers. They closed between 2005 and 2006.
KEY RATING DRIVERS
Elevated Fixed Fees Drives RWN: ֳ placed the tranches on RWN on 22 February 2024. This reflected that if the level of fixed fees paid by the transactions continued in the long term, it could lead to downgrades. We previously tested scenarios where the fixed fees remain elevated for the transactions' remaining life and this scenario suggested model-implied downgrades for SPS 06-1's class D1a and D1c notes and SPF 05-B and SPF 06-A's class E notes.
Since then, ֳ has observed that fixed fees have started to decline in SPF 05-B and SPS 06-1 but remain elevated compared with those before the LIBOR transition. These two deals completed their LIBOR transition in June 2022. In SPF 06-A, the LIBOR transition was completed in March 2024, coinciding with a rise in fixed fees, which are currently elevated compared with before the LIBOR transition. ֳ has therefore maintained the RWN for a further six months. We will continue to monitor the fixed fees paid to determine appropriate long-term assumptions, which may lead to downgrades within the next six months.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Legal fees relating to the LIBOR transition continuing and fixed fees remaining elevated would likely lead to the classes currently on RWN being downgraded.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Legal fees relating to the LIBOR transition ceasing and fixed fees paid by the issuer reverting to similar levels seen prior to the transition, inflation adjusted, would likely lead to the resolution of the RWN and affirmation of the notes with Stable Outlooks.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, ֳ in relation to this rating action.
DATA ADEQUACY
Southern Pacific Financing 05-B Plc, Southern Pacific Financing 06-A Plc, Southern Pacific Securities 06-1 plc
ֳ has checked the consistency and plausibility of the information it has received about the performance of the asset pool[s] and the transaction[s]. ֳ 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.
ֳ did not undertake a review of the information provided about the underlying asset pool[s] ahead of the transactions' initial closing. The subsequent performance of the transaction[s] over the years is consistent with the agency's expectations given the operating environment and ֳ is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.
Overall, and together with any assumptions referred to above, ֳ'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.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
SPF 05-B, SPF 06-A and SPS 06-1 have an ESG Relevance Score of 4 for "Human Rights, Community Relations, Access & Affordability" due to a significant proportion of the pools containing owner-occupied loans advanced with limited affordability checks, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
SPF 05-B, SPF 06-A and SPS 06-1 have an ESG Relevance Score of 4 for "Customer Welfare - Fair Messaging, Privacy & Data Security" due to the pools exhibiting an IO maturity concentration of legacy non-conforming owner-occupied loans of greater than 20%, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Southern Pacific Financing 05-B Plc | UK Issued, EU Endorsed |
| Southern Pacific Financing 06-A Plc | UK Issued, EU Endorsed |
| Southern Pacific Securities 06-1 plc | UK Issued, EU Endorsed |