Overview
- We reviewed Chester A's current asset pool and capital structure as part of our regular surveillance cycle.
- Following our review, we raised our ratings on the class C-Dfrd to E-Dfrd notes, and affirmed our ratings on the class A and B-Dfrd notes.
- Chester A securitizes a seasoned pool of nonconforming U.K. residential mortgage loans.
LONDON (S&P Global Ratings) March 31, 2022--S&P Global Ratings today raised to 'AA+ (sf)', 'A+ (sf)', and 'BBB+ (sf)' from 'AA- (sf)', 'A- (sf)' and 'BBB- (sf)' its credit ratings on Chester A PLC's class C-Dfrd, D-Dfrd, and E-Dfrd notes. At the same time, we affirmed our 'AAA (sf)' and 'AA+ (sf)' ratings on the class A and B-Dfrd notes.
Today's rating actions follow our review of the current asset pool, capital structure, and performance under our related criteria.
At 17%, delinquencies remain above our U.K. nonconforming RMBS index (see "European RMBS Index Report Q4 2021," published on Feb. 17, 2022). The transaction has a small--although growing--proportion of loans that have passed their original maturity date without repaying (2.4%) and have had their maturity revised. We have considered these loans to be defaulted (with a recovery benefit) and modelled the transaction undercollateralized.
We expect U.K. inflation to reach 5.9% in 2022. Although elevated inflation is overall credit negative for all borrowers, inevitably some borrowers will be more negatively affected than others, and to the extent inflationary pressures materialize more quickly or more severely than currently expected, risks may emerge.
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 (WAFF) and our weighted-average loss severity (WALS) assumptions have decreased for all levels since our previous review. The WAFF has decreased due to a decrease in the loan-to-value (LTV) ratio, while a reduction in the weighted-average indexed current LTV ratio due to a steady increase in house price have caused a drop in the WALS. Overall, credit coverage has decreased at all ratings since our previous review.
| WAFF And WALS Assumptions | ||||||||
|---|---|---|---|---|---|---|---|---|
| Rating level | WAFF (%) | WALS (%) | Credit Coverage (%) | |||||
| AAA | 38.10 | 32.44 | 12.36 | |||||
| AA | 31.33 | 25.36 | 7.94 | |||||
| A | 27.55 | 14.59 | 4.02 | |||||
| BBB | 23.65 | 9.33 | 2.21 | |||||
| BB | 19.14 | 6.43 | 1.23 | |||||
| B | 18.08 | 4.47 | 0.81 | |||||
| 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.
Considering the results of our credit and cash flow analysis, the increase in available credit enhancement, and the transaction's performance, we consider that the available credit enhancement for the class C-Dfrd, D-Dfrd, and E-Dfrd notes is now commensurate with higher ratings than those currently assigned. We have therefore raised to 'AA+ (sf)' from 'AA- (sf)', to 'A+ (sf)' from 'A- (sf)', and to 'BBB+ (sf)' from 'BBB- (sf)' our ratings on the class C-Dfrd, D-Dfrd, and E-Dfrd notes, respectively.
Our cash flow analysis on the class C-Dfrd notes indicates a higher rating than that assigned, but we do not consider deferrable notes to be commensurate with our 'AAA (sf)' rating.
Similarly, our cash flow analysis indicated higher ratings for the class D-Dfrd and E-Dfrd than those assigned. However, we consider the borrowers in the transaction to be nonconforming, and as such will generally have lower resilience to inflationary pressures than prime borrowers. The ratings assigned also consider the risk of interest-only loans within this pool. About 75% of the pool is interest-only for life, while less than 10% 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. Additionally, our 'A+ (sf)' and 'BBB+ (sf)' ratings on the class D-Dfrd and E-Dfrd notes also consider these classes of notes' sensitivity to excess spread and their available credit enhancement, the transaction's sequential pay nature, and the fact that these notes are junior within the structure.
We have also affirmed our 'AAA (sf)' and 'AA+ (sf)' ratings on the class A notes and B-Dfrd notes as the available credit enhancement continues to be commensurate with the assigned ratings. 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.
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).
Chester A is a securitization of a pool of nonconforming residential mortgage loans.
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Criteria | Structured Finance | RMBS: Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009
Related Research
- European RMBS Index Report Q4 2021, Feb. 17, 2022
- Sovereign Risk Indicators, Dec. 13, 2021
- European Economic Snapshots, Dec. 6, 2021
- European Housing Market Inflation Is Here to Stay, Nov. 2, 2021
- Economic outlook Europe Q4 2021: A Faster-Than-Expected Liftoff, Sept. 23, 2021
- 2017 EMEA RMBS Scenario And Sensitivity Analysis, July 6, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
| Primary Credit Analyst: | Alice Delemarle-Charton, CFA, London + 44 20 7176 3594; alice.delemarle@spglobal.com |
| Research Contributor: | Prajakta Matkar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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