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Warwick Finance Residential Mortgages Number Three U.K. Nonconforming RMBS Ratings Raised; Class D Notes Affirmed


  • We have reviewed Warwick Finance Residential Mortgages Number Three's current asset pool and capital structure following the restructuring of the transaction.
  • Following our review, we have raised our ratings on the Class A, B-Dfrd, C-Dfrd, and E-Dfrd notes, and have affirmed our rating on the class D-Dfrd notes.
  • Warwick Finance Residential Mortgages Number Three is a securitization of a pool of prime, nonconforming, and buy-to-let residential mortgage loans.

LONDON (S&P Global Ratings) Sept. 25, 2020--S&P Global Ratings today raised its credit ratings on Warwick Finance Residential Mortgages Number Three PLC's class A, B-Dfrd, C-Dfrd, and E-Dfrd notes. At the same time, we have affirmed our rating on the class D-Dfrd notes.

Today's rating actions follow the restructuring of the transaction.

As part of the restructuring, a liquidity reserve fund was introduced to cover senior fees and expenses and to provide liquidity support for the class A notes. The reserve fund's day 1 size is zero and the required amount is 1.5% of the class A notes' outstanding balance. The liquidity reserve fund is funded via the principal waterfall and excess amounts form part of available principal receipts.

We no longer rate the class A notes based on ultimate interest and principal. Instead, our ratings now address the timely payment of interest and the ultimate payment of principal.

Also as part of the restructuring, the notes now reference the daily compounded sterling overnight index average (SONIA), while they previously referenced three-month sterling LIBOR. We derived the stressed interest rate curves for compounded SONIA by subtracting a spread of 0.25% from the LIBOR curves we model. There has been a close relationship between the backward-looking compounded SONIA and the forward-looking LIBOR determined for the same period. However, since SONIA does not include the various risk premiums reflected in LIBOR, the former has generally been lower. The spread adjustment applied to the interest rate reflects the lower SONIA rates historically observed.

Finally, the margin on the rated notes has increased by 15 basis points.

Delinquencies have been relatively stable since closing. Although there was a reduction in total delinquencies toward the end of 2019 and beginning of 2020, total delinquencies crept up in second-quarter 2020 and are now at levels similar to closing levels (5.4% as of July 2020 compared with 5.6% at closing). This is lower than our U.K. nonconforming RMBS index, reflecting the transaction's stable performance (see "U.K. RMBS Index Report Q2 2020," published on Sept. 8, 2020). The transaction has a significant proportion of loans that are current and have had a performance arrangement within the past five years (about 9.5%). We have captured this in our analysis.

The transaction's available credit enhancement has increased for all classes of notes since our previous review as a result of the sequential note amortization.

Our weighted-average foreclosure frequency assumptions have increased for all levels since our previous review. This is mostly due to our updated base foreclosure frequency assumptions for the U.K. We have applied our relevant criteria to revise the 'B' assumptions for an archetypal pool for 13 European jurisdictions, including the U.K., and we have updated the interpolated intermediate foreclosure frequency assumptions for the 'B+' to 'AA+' rating levels accordingly. Additionally, total arrears have increased by about 1% since the previous review.

Our weighted-average loss severity assumptions have decreased for all levels since our previous review. This is driven by the reduction in weighted-average indexed current loan-to-value ratio.

Overall, there has been a decrease in credit coverage at all rating levels since our previous review.

WAFF And WALS Assumptions
Rating level WAFF (%) WALS (%) Credit Coverage (%)
AAA 26.57 40.91 10.87
AA 19.84 32.81 6.51
A 16.17 19.33 3.13
BBB 12.46 12.45 1.55
BB 8.37 8.55 0.72
B 7.43 5.90 0.44
WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity.

There are no counterparty constraints on the ratings on the notes in this transaction. The replacement language in the documentation is in line with our current counterparty criteria.

Taking into account the results of our credit and cash flow analysis, the structural changes to the transaction including the introduction of the liquidity reserve fund, the increase in available credit enhancement, and the transaction's performance, we consider that the available credit enhancement for the class A, B-Dfrd, C-Dfrd, and E-Dfrd notes is now commensurate with higher ratings than those currently assigned. We have therefore raised our ratings on the class A, B-Dfrd, C-Dfrd, and E-Dfrd notes to 'AAA (sf)' from 'AA+ (sf)', to 'AA+ (sf)' from 'AA (sf)', to 'AA (sf)' from 'AA- (sf)', and to 'A (sf)' from 'A- (sf)', respectively.

We consider the available credit enhancement for the class D-Dfrd notes to be commensurate with our currently assigned rating. We have therefore affirmed our 'A+ (sf)' rating on the class D-Dfrd notes.

Our cash flow analysis on the class B-Dfrd notes indicated a higher rating than that assigned, but we do not consider deferrable notes to be commensurate with our 'AAA (sf)' rating.

Similarly, for the Class C-Dfrd, D-Dfrd, and the E-Dfrd notes our cash flow analysis indicated a higher rating level than that assigned. However, the ratings assigned capture the risk of interest-only loans within this pool. About 89% of the pool is interest-only for life, while 38% of the pool is buy-to-let. Therefore, a large proportion of the pool comprises interest-only loans on owner-occupied properties. Since there is no mandatory capital repayment over the loan's term, there is a risk that the outstanding principal balance will not be paid by the end of the loan term. Our ratings assigned on these notes also capture the transaction's sequential pay nature and the fact that these notes are junior within the structure.

Our credit stability analysis indicates that the maximum projected deterioration that we would expect at each rating level over one- and three-year periods, under moderate stress conditions, is in line with our credit stability criteria (see "Methodology: Credit Stability Criteria," published on May 3, 2010).

Warwick Finance Residential Mortgages Number Three is a securitization of a pool of prime, nonconforming, and buy-to-let residential mortgage loans.

Related Criteria

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Primary Credit Analyst:Rory O'Faherty, London + 44 20 7176 3724;
Secondary Contact:Aarondeep Hothi, London + 44 20 7176 0111;

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