Rating Action Commentary
ֳ Upgrades 14 Tranches of Ludgate Funding plc Series; Affirm Others
Tue 02 Aug, 2022 - 1:02 PM ET
ֳ - London - 02 Aug 2022: ֳ has upgraded 14 tranches of the Ludgate Funding plc series - Ludgate 06, 07 and 08 - and affirmed the remaining eight as detailed below. The Outlook is Stable. All ratings have been removed from Under Criteria Observations (UCO), apart from the class A notes.
Transaction Summary
The three Ludgate Funding plc transactions are secured by loans originated by Wave (formerly Freedom Funding Limited) and purchased by Merrill Lynch International Bank Limited. The loans are buy-to-let (BTL) and non-conforming owner-occupied (OO) and secured against properties located in England and Wales.
KEY RATING DRIVERS
Removed from UCO: ֳ updated its UK RMBS Rating Criteria on 23 May 2022 to include its latest sustainable house prices, house price indexation and gross disposable household income for each of the 12 UK regions. The changes increased the multiple for all regions other than the north east and northern Ireland. Its sustainable house prices are now higher in all regions except northern Ireland. This has a positive impact on recovery rates (RR) and, consequently, ֳ's expected loss in UK RMBS transactions, resulting in today's rating actions.
ֳ also reduced its foreclosure frequency (FF) assumptions for loans in arrears based on a review of historical data from its UK RMBS rating portfolio. The changes better align our assumptions with observed performance in the expected case and incorporate a margin of safety at the 'Bsf' level.
Credit Enhancement (CE) Accumulation: All classes of notes benefit from the availability of non-amortising reserves. Unless a performance trigger is breached, pro-rata amortisation will continue until the notes fall below 10% of their initial balance. This has led to a gradual increase in CE, which supported the affirmations and the upgrades.
Furthermore, due to an incorrect allocation of funds in the October 2021 interest payment date (IPD) according to ֳ, Ludgate 2007 FF1 has been subject to sequential amortisation for three IPDs. This has led to a faster build-up of CE for the most senior notes but a slower one for the junior notes.
In October 2021, funds that should have been saved for the next IPD (January 2022) were released in advance, which resulted in a shortfall in January 2022. This triggered the use of the reserve fund and therefore a pro-rata amortisation trigger breach, but which has since been replenished to target. ֳ expects the pro-rata amortisation to resume in October 2022.
Ratings Lower than Model-Implied: The ratings on Ludgate 2006 FF1 class D and E notes, Ludgate 2007 FF1 class B, C, D, and E notes and Ludgate 2008-W1 class E notes are one notch below their respective model-implied ratings. This reflects ֳ's view that a modest increase in arrears could result in lower model-implied ratings towards the current ratings in future analyses.
Stable Performance and Arrears: Arrears levels remain limited across the three transactions, with three-month plus arrears under 2.5%. Despite increases during the pandemic, during the last three IPDs the figures came close to low pre-pandemic levels, and in all cases well below the ֳ index for non-conforming deals. Performance of the three Ludgate transactions remain among the best in the non-conforming sector.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The transactions' performance may be affected by adverse changes in market conditions and economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults and could reduce CE available to the notes.
ֳ conducted sensitivity analyses by stressing each transaction's base case FF and recovery rate (RR) assumptions, and examining the rating implications on all classes of issued notes. A 15% increase in weighted average (WA) FF and a 15% decrease in WARR indicates downgrades of no more than six notches for the class E notes across all three transactions.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE and, potentially, upgrades.
ֳ tested an additional rating sensitivity scenario by applying a decrease in the WAFF of 15% and an increase in the WARR of 15%. The results indicate upgrades of up to six notches for the class E notes across all three transactions.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.
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
ֳ 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 pools ahead of the transactions' closing. The subsequent performance of the transactions 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.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Ludgate 06, 07 and 08 each has an ESG Relevance Score of '4' for customer welfare - fair messaging, privacy & data security due to a material concentration of interest-only loans, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Ludgate 06, 07 and 08 each has an ESG Relevance Score of '4' for human rights, community relations, access & affordability due to mortgage pools with limited affordability checks and self-certified income, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on ֳ's ESG Relevance Scores, visit
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
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Ludgate Funding Plc Series 2006 FF1 | UK Issued, EU Endorsed |
| Ludgate Funding Plc Series 2007 FF1 | UK Issued, EU Endorsed |
| Ludgate Funding Plc's Series 2008-W1 | UK Issued, EU Endorsed |