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Investment-Grade U.K. And Dutch RMBS Ratings Likely To Remain Resilient To COVID-19 Effects

The COVID-19 pandemic has initiated an unparalleled policy response, and to the expectation of a sharp contraction in GDP and an increase in unemployment across both the U.K. and Eurozone. This will consequently lead to stress within residential mortgage-backed securities (RMBS) transactions, the extent of which is not currently clear. Many lenders are currently offering payment holidays as a method of borrower forbearance. It is not yet clear how payment holidays will be resolved, nor is it clear the extent to which payment holidays will alleviate borrower distress and prevent delinquencies and defaults.

Scenario Analysis

We have performed three hypothetical stress scenarios (low, medium, and high shock), each with three phases, to five theoretical RMBS transactions that are representative of recent transactions in each of the following markets.

  • U.K. nonconforming;
  • U.K. buy-to-let (BTL);
  • Dutch prime owner-occupied; and
  • Dutch BTL.

For this report, we have performed a scenario analysis to examine the impact of an additional low, medium, and high shock. This covers a series of hypothetical stress scenarios, each following three stages of compounded stress, grouped by the following themes:

  • Phase 1: Liquidity shock;
  • Phase 2: Increase in defaults; and
  • Phase 3: House price declines and delay in repossession.

Details of the stresses applied and the results can be found below.

Key Findings

Table 1


Table 2


Table 3


Table 4


Table 5


Sensitivity Of Structural Features To Implied Rating Movements

The analysis we have detailed above reflects generic, stylized transactions that we consider to be broadly typical of their markets. Actual structural features differ on a transaction-by-transaction basis, and these features may create additional protections against downgrade, interest shortfall, or default for some notes, while increasing the risk of these occurrences for others. We highlight some of the main sensitives below.

Reserve funds:   Performance triggers that govern the release of the reserve fund will be important in dictating actual ratings migration. To the extent they are set too high and do not get triggered soon enough, then reserve funds may amortize, releasing funds to residual noteholders, and their value in protecting noteholders from shock may be diminished.

Absolute levels of excess spread:   The absolute level of excess spread will affect ratings migration. Transactions generating more excess cash flow are able to clear balances on principal deficiency ledgers and top up depleted reserve funds.

Liquidity reserve funds (LRFs):   The technical detail of LRFs differ between transactions. Generically, they start at higher amounts and over time they transfer to a general reserve fund or, if they are not used, they are released when senior notes are paid down. The release mechanisms, together with other features such as the overall level of the general reserve fund, will affect ratings migration.

Using principal to pay interest (also referred to as principal borrowing or principal additional amounts):   This feature works by using collected principal that would otherwise be distributed to noteholders to cure any temporary interest shortfall. The feature is more effective in pools that have amortizing loans and less effective, particularly in low prepayment scenarios, in pools with large portions of interest only loans.

Because a principal deficiency ledger (PDL) is created when principal is used to pay interest, where principal borrowing can be used to pay all classes of notes, and not just the senior notes, this will require more interest to pay principal and increase the risk of a shortfall on the most junior notes in a transaction.

Similarly, if triggers designed to limit the use of principal due to a prolonged and sizable increase in delinquencies are not set appropriately, principal will continue to be used to pay interest on the junior notes, which erodes credit enhancement for the senior notes.

Pro rata amortization:   Most recently issued RMBS transactions do not have pro rata payment and so we have not considered this in our scenario analysis. To the extent that a transaction does have pro rata triggers, the ratings impact would depend on the appropriateness of the pro rata trigger and under what circumstances a transaction would revert to sequential paydown.

Prepayment rates and loan deleveraging:   The overall prepayment rate and resultant deleveraging alter credit enhancement levels and overall resilience to shocks of the nature we have modelled. The actual rate of prepayment will depend on both the loan's features and the mortgage market. Predictions on prepayments are difficult to make, but pools with lower loan-to-value ratios and pools where the fixed-rate period ends sooner generally have higher prepayment rates.

In addition, deleveraging at the loan level, will also affect default and loss severity expectations. Deleveraging at the loan level tends to be limited for newly originated loans, as interest forms a greater proportion of installments.


In addition to the sensitives explained above, the following assumptions are relevant:

  • This analysis looks at asset-level performance assumptions and cash flow stresses only. It does not seek to factor in the effects of counterparty ratings movements or sovereign rating movements, or of any unmitigated operational risks that may transpire, e.g., a servicer default.
  • We have run standard assumptions for payment holiday related delinquencies, interest rates, and default timing curves.
  • We assume that the reserve fund and the liquidity reserve fund, where relevant, are funded upfront in cash, rather than through principal and interest collections. To the extent that they are not, rating migration for junior notes may be greater than presented.
  • We assume that the transaction has a separate waterfall, with principal to pay interest if there is insufficient revenue and interest collections to pay senior costs and interest.
  • Some borrowers with payment holidays will transition to delinquency and some on to default. Different stages of delinquency have different assumed increases in default probability. We simulated the effect of this by increasing the default probability in each scenario by a fixed number.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Alastair Bigley, London 44 (0) 207 176 3245;
Secondary Contacts:Feliciano P Pereira, CFA, London + 44 20 7176 7021;
Jurga Bridikyte, London + 44 20 7176 0630;

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