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Report Says Future Flooding Represents A Low Risk For U.K. RMBS Ratings

LONDON (S&P Global Ratings) March 19, 2020--According to a report published today by S&P Global Ratings, U.K. residential mortgage-backed securities (RMBS) rating flood risk is relatively low, with only 0.2% of collateral in transactions expected to be exposed to high precipitations next year.

Read S&P Global Ratings' Report
Future Flooding Represents A Low Risk For U.K. RMBS Ratings

This relatively low risk reflects the structural characteristics built in U.K. RMBS transactions, such as various types of credit enhancement, the structure of the priority of payments, our various credit and cash flow stresses, and credit factors, as well as the geographical diversity of the collateral.

From our analysis of 101 RMBS transactions that we rate, we found that the residential loans in U.K. RMBS transactions are primarily concentrated in regions, which are not exposed to high precipitations. This concentration acts as a natural hedge against flood risk.

We performed a scenario analysis in which we calculated the loss rate and loss severity of mortgage loans by region based on various property valuation haircuts following a potential flood. In addition, we considered the effect of insurance protection as an important credit feature of U.K. RMBS on flood risk for RMBS investors, and took a closer look at the potential effects of the risk of flooding on financial institutions. In the U.K., insurance protection for residential properties is a prerequisite to secure a mortgage and should thus reduce exposure to flood risk for RMBS investors, in our view. The mortgage books of rated U.K. banks are broadly well-distributed across the country, which should limit the effect of any flood events disproportionally impairing their financial profiles. However, (unrated) regional or smaller lenders could face a concentration of mortgage defaults in a specific region due to the highly localized nature of storms.

This report does not constitute a rating action.

The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@spglobal.com. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box located in the left column at www.standardandpoors.com. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4009.

Primary Credit Analyst:Arnaud Checconi, London (44) 20-7176-3410;
ChecconiA@spglobal.com
Secondary Contacts:Valentina Guerra, Paris 33 1 4075 2565;
valentina.guerra@spglobal.com
Beth Burks, London (44) 20-7176-9829;
Beth.Burks@spglobal.com
Osman Sattar, FCA, London (44) 20-7176-7198;
osman.sattar@spglobal.com
David J Masters, London (44) 20-7176-7047;
david.masters@spglobal.com
Mario Chakar, London (44) 20-7176-7070;
mario.chakar@spglobal.com
Maren Josefs, London (44) 20-7176-7050;
maren.josefs@spglobal.com
Data Visualization:SAHAYAJAYASEELAN SENATHIKAGU, New York (1) 212-438-5937;
sahayajayaseelan.sen@spglobal.com
Deegant R Pandya, New York (1) 212-438-1289;
deegant.pandya@spglobal.com

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