Rating Action Commentary
ֳ Upgrades Two Tranches of Newgate Funding Plc 2007 Series
Mon 10 Jun, 2024 - 11:41 AM ET
ֳ - London - 10 Jun 2024: ֳ has upgraded two tranches of the Newgate Funding Plc 2007 series and affirmed the others, as detailed below.
Transaction Summary
The three transactions are seasoned securitisations of mixed pools containing mainly residential non-conforming owner-occupied mortgage loans with a few residential buy-to let mortgage loans.
KEY RATING DRIVERS
Recovery Rate Weakness Constrains Ratings: The ratings of all classes except Newgate Funding 2007-1 and Newgate Funding 2007-2's class A and class M notes and Newgate Funding 2007-3's class A notes are below their model-implied ratings. This reflects weaker than expected recoveries currently being achieved by the servicer albeit on the limited number of recent observations.
We observe an approximate loss severity of 25%, which translates into a recovery rate (RR) below that calculated by ֳ's resiglobal model: UK in the expected case. The ratings are robust to an adjusted RR, which accounts for lower recoveries. This led to the affirmations of most tranches. The upgrades of two tranches reflect that they have built up sufficient credit enhancement (CE).
Transaction Account Bank Sensitivity: The reserve funds for all three deals are sizable due to irreversible trigger breaches early in the transactions' life, particularly for Newgate Funding 2007-3 which has a non-amortising reserve sized at GBP23.8 million. As this reserve fund provides the majority of CE for the class D and E notes, the ratings are or are likely to become subject to excessive counterparty exposure. The ratings of these classes are unable to exceed the rating of the transaction account bank, which is currently 'A+'.
Sequential Amortisation Triggers Breached: All three transactions contain triggers that turn-off pro-rata amortisation based on three-month plus arrears and at 10% of the original pool balance. The three-month plus arrears trigger has been breached in Newgate Funding 2007-1 and 2007-2, leading to the notes amortising sequentially. ֳ has considered a return to pro-rata amortisation and a continuation of sequential amortisation in the ratings.
Asset Pool Performance Deterioration: The performance of the pools of all three transactions has deteriorated from the previous review, as shown by the significant increase in one-month plus and three-month plus arrears. The latter have increased from approximately 15% to 20% for Newgate Funding 2007-1 and 2007-2 and from 10% to 18% for Newgate 2007-3. The levels are significant due to the performance-based triggers tied to the pro-rata amortisation of the pool.
Back-loaded Default Risks: All pools contain a high share of interest-only loans, resulting in elevated default risk later in the life of the transactions when the principal installments fall due. ֳ applied a performance adjustment factor floor at 100% for the non-conforming sub-pools, in line with its UK RMBS Rating Criteria.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The transaction's performance may be affected by changes in market conditions and economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults that could reduce CE available to the notes.
Additionally, unanticipated declines in recoveries could result from lower net proceeds, which may make certain notes susceptible to negative rating action depending on the extent of the decline in recoveries. ֳ conducted sensitivity analyses by stressing each transaction's base case foreclosure frequency (FF) and RR assumptions, and examining the rating implications for the notes. A 15% increase in the weighted average (WA) FF and a 15% decrease in the WARR indicates downgrades of no more than four notches for 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 potential 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 four notches for Newgate Funding 2007-3 and seven notches for Newgate Funding 2007-1 and Newgate Funding 2007-2.
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 pools and the transactions. ֳ 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 transaction's initial 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.
ESG Considerations
Newgate Funding Plc Series 2007-1, 2007-2, 2007-3 has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to the underlying asset 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.
Newgate Funding Plc Series 2007-1, 2007-2, 2007-3 has an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability 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.
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
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Newgate Funding Plc Series 2007-1 | UK Issued, EU Endorsed |
| Newgate Funding Plc Series 2007-2 | UK Issued, EU Endorsed |
| Newgate Funding Plc Series 2007-3 | UK Issued, EU Endorsed |