- On Oct. 7, 2020 we placed our ratings on Banna RMBS on CreditWatch negative due to the transaction's performance since closing, which is not in line with our expectations.
- A deterioration in the economic environment stemming from the COVID-19 pandemic has seen an increase in the proportion of loans in long-term arrears and has affected the servicer's strategy for the portfolio, with limited recoveries received to date.
- Following the application of our relevant structured finance criteria, we have affirmed and removed from CreditWatch negative our ratings on the class A, B-Dfrd, C-Dfrd, and E-Dfrd notes, and lowered and removed from CreditWatch negative our rating on the class D-Dfrd notes.
LONDON (S&P Global Ratings) Dec. 22, 2020--S&P Global Ratings today affirmed and removed from CreditWatch negative its 'AAA (sf)', 'AA (sf)', 'A+ (sf)', and 'CCC (sf)' credit ratings on Banna RMBS DAC's class A, B-Dfrd, C-Dfrd, and E-Dfrd notes, respectively. At the same time, we have lowered to 'BB (sf)' from 'BB+ (sf)' and removed from CreditWatch negative our rating on the class D-Dfrd notes.
Today's rating actions follow our Oct. 7, 2020, CreditWatch negative placement of all rated notes (see "Banna RMBS DAC Ratings Placed On CreditWatch Negative"). Our review reflects the application of our relevant criteria and our full analysis of the most recent transaction information that we have received, and considers the transaction's current structural features (see "Related Criteria").
Since the transaction closed in November 2019, the servicer, Pepper Finance Corporation DAC (Pepper Ireland), has had limited success in foreclosing or restructuring loans in late arrears (over 90 days due and up to several years). Instead, the proportion of loans over 90 days in arrears or past the maturity date has increased to 34.8% from 26.8% of the pool (approximately £32 million as of end August 2020 compared with £30 million at closing). In addition, loans considered as defaulted amounts under the transaction (loan in arrears by more than 360 days) have increased to 20.8% from 14.0%.
Our understanding of the servicing strategy at closing was that the majority of loans in late arrears were being worked through, meaning that if not restructured the amount of recovery proceeds from foreclosures would have been higher than received to date. Instead, only 13 loans that were in late arrears at closing have redeemed. The redemptions happened on average 32 months after the loan fell into arrears, which is significantly longer than our assumptions at closing, based on the servicer's strategy for the portfolio.
We have therefore adjusted our recovery timing assumption, applying a 35-month recovery period to all loans, and we no longer differentiate between loans already in late arrears (90 days or more) and performing loans.
As a large proportion of the borrowers in the pool are making partial or no payments, there is limited excess spread in the transaction. In combination with the funding adjustment cost, this resulted in an almost total depletion of the reserve fund on the first interest payment date (IPD), and the ongoing use of principal to pay revenue items, which resulted in a balance of GBP476,456 on the class Z-Dfrd principal deficiency ledger (PDL) on the most recent IPD. The reserve fund has only partially built back up for the first time on the September 2020 IPD because of an exceptional revenue income in the previous quarter from large accrued interest payments on loans recently redeemed. Our expectations for revenue receipts is that they are likely to continue to be erratic, with the potential for reserve fund draws and further increases in the class Z-Dfrd PDL balance, even with stable collateral performance.
Among the loans that have been recorded as performing, we have received information on 11 loans redeeming at a discount of 3% on average, the range of discount being from 1% to 5%. We understand that there are no limits--either to the proportion of the portfolio or the level of discount--to the level of discounted payoffs the servicer can offer on performing loans. These discounted payoffs were at the servicer's discretion and were likely granted to prevent larger discounts for imminent arrears. We have not projected a widespread discount on the performing portfolio considering the small number of such cases since closing, and we do not anticipate discounted payoffs to be the norm.
We have updated our credit analysis using the August 2020 pool. The weighted-average foreclosure frequency (WAFF) and the weighted-average loss severity (WALS) for the performing subpool have decreased at most rating levels due to fewer arrears, fewer loans restructured in the past three years, and a decrease in the weighted-average loan-to-value ratio. However, our loss assumption for the pool at a 'B' level of stress is 5.1%, up from 4.3% at closing, given the nonperforming subpool has a WAFF of 100% and it represents a greater proportion of the pool compared with at closing. Our loss assumption for the pool at a 'BB' level of stress is 6.0%, up from 5.4% at closing.
We have run additional sensitivities to incorporate the performance data received since closing. Considering the behavior of the portfolio to date and the increased credit pressure from the COVID-19-related lockdowns, our expectation is for the current trend of loans in early arrears rolling into late arrears to continue. Therefore, in our cash flow analysis, we have considered loans currently in arrears up to 90 days to be in default to assess the effect on our cash flow results. This analysis has informed our ratings.
Given the servicing fee includes an annual £300 per loan payment for loans more than 30 days in arrears, we have also conducted additional cash flow analysis to test the sensitivity of our ratings to higher servicing fees than those assumed at closing.
We have not specifically adjusted our credit assumptions for COVID-19-related payment holidays (7.75% of the performing subpool) but considered them in the default projections applied in sensitivity runs. We do not believe either that COVID-19-related payment holidays pose a liquidity risk as the class A notes, which have amortized significantly already, benefit from a liquidity reserve, and the other classes can defer interest payment. We have however run sensitivities for extended recovery periods in our cash flow analysis to account for the effect that the lockdown has on U.K. courts.
The application of our updated credit figures (the August 2020 pool) and our cash flow analysis indicate that the available credit enhancement is commensurate with the ratings assigned for the class A and C-Dfrd notes. Our analysis indicates that the class B-Dfrd notes could withstand our stresses at higher rating levels than that assigned. However, our ratings reflect the uncertain economic environment. In the context of the very low number of loans in late arrears being redeemed since closing, as well as the current economic environment, we have lowered our rating on the class D-Dfrd notes as this rating is sensitive to late arrears not reverting to cash flow status and is also highly sensitive to the recovery amounts achieved on such loans.
Our rating on the class E-Dfrd notes stems from the application of our 'CCC' category ratings criteria (see "Related Criteria"). We consider repayment of this class of notes to be dependent upon favorable business, financial, and economic conditions, in view of the currently high level of defaults and delinquencies in the pool, increasing arrears, and limited excess spread.
S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. While the early approval of a number of vaccines is a positive development, countries' approval of vaccines is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by mid-2021. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
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|Primary Credit Analyst:||Alice Delemarle-Charton, CFA, London + 44 20 7176 3594;|
|Secondary Contact:||Philip Bane, Dublin + 353 1 568 0623;|
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