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    ALBA 2006-2 PLC Ratings Raised On Two Classes; Two Lowered; Three Affirmed

    Overview

    • Following our review of ALBA 2006-2, we raised our ratings on the class E and F notes and lowered our ratings on the class A3a and A3b notes.
    • At the same time, we affirmed our ratings on the class B, C, and D notes.
    • ALBA 2006-2 is backed by a mortgage pool of nonconforming first-ranking residential mortgages in England, Wales, Scotland, and Northern Ireland.

    LONDON (S&P Global Ratings) Nov. 21, 2022--S&P Global Ratings today raised to 'A- (sf)' from 'BBB (sf)' and to 'BB+ (sf)' from 'B+ (sf)' its credit ratings on ALBA 2006–2 PLC's class E and F notes, respectively, and lowered to 'A (sf)' from 'A+ (sf)' its credit ratings on both the class A3a and A3b notes. At the same time, we affirmed our 'A (sf)' ratings on the class B, C, and D notes.

    On Nov. 1, 2022, S&P Global Ratings lowered its long- and short-term issuer credit ratings on Credit Suisse International, which provides the currency and interest rate swaps in this transaction. We also lowered to 'A' from 'A+' our long-term resolution counterparty rating (RCR) on Credit Suisse International. Under our counterparty criteria, our collateral assessment is weak, and considering the downgrade language in the swap documents and the current RCR on Credit Suisse International, the maximum supported rating on the notes is lowered to 'A (sf)' from 'A+ (sf)'. Today's rating actions reflect this change on the maximum supported rating. They also address our full analysis of the most recent transaction information we have received and the transaction's structural features.

    Total arrears (7.6%) in the transaction decreased slightly and have been consistently below our non-conforming index (10.9%). Although the notes amortize pro rata, the nonamortizing reserve fund has led to a slight increase in credit enhancement for the notes.

    We applied our global RMBS criteria to our analysis of this transaction. Compared with our previous review, the weighted-average foreclosure frequency (WAFF) decreased at all rating levels. This is mainly due to the lower loan-to-value (LTV) ratio we used for our foreclosure frequency analysis--which reflects 80% of the original LTV ratio and 20% of the current LTV ratio--an approximate 3% decrease in arrears, and a lower proportion of buy to let (BTL) borrowers.

    Our weighted-average loss severity assumptions slightly decreased at all rating levels, owing mainly to a lower LTV ratio and a lower repossession market value decline.

    Credit Analysis Results
    Rating level WAFF (%) WALS (%)
    AAA 23.37 35.81
    AA 16.50 28.11
    A 12.74 16.64
    BBB 9.15 10.31
    BB 5.27 6.71
    B 4.40 3.89

    The overall effect of our credit analysis results is a decrease in the required credit coverage for all rating levels.

    Available credit enhancement in this transaction has slightly increased since our previous review, due to a nonamortizing reserve fund. The transaction is currently paying both principal and interest pro rata because all of the pro rata conditions in the transaction documents have been met.

    We determined that our assigned ratings on this transaction's classes of notes should be the lower of (i) the rating as capped by our counterparty criteria, or (ii) the rating that the class of notes can attain under our global RMBS criteria. We also performed sensitivity analysis for deterioration in credit performance such as an increase in defaults and a longer recovery period. The assigned ratings remain robust in our sensitivity analysis.

    Our credit and cash flow results indicate that available credit enhancement for the class A3a, A3b, B, C, and D notes is commensurate with higher ratings than those currently assigned. However, our ratings on all these classes are capped by our counterparty risk criteria. We have therefore lowered to 'A (sf)' from 'A+ (sf)' our ratings on the class A3a and A3b notes and affirmed our 'A (sf)' ratings on the class B, C, and D notes.

    Under our credit and cash flow analysis, the class E and F notes can withstand our stresses at higher rating levels than those currently assigned. However, our ratings of these classes also consider their subordinated position in the payment structure--which is sequential with pro rata conditions currently met--and their lower credit enhancement than the more senior notes. This means they are more vulnerable to any adverse movement in collateral behavior if the U.K. macroeconomic environment weakens compared to our baseline expectations. We also considered that the nonconforming borrowers in this transaction will generally have lower resilience to current inflationary and interest rate pressures. Additionally, we considered the transaction's tail-end risk, given that the pool factor is below 20% and there is a high proportion of interest only loans in the portfolio. Taking all of these factors into account, we raised to 'A- (sf)' from 'BBB (sf)' and to 'BB+ (sf)' from 'B+ (sf)' our rating on the class E and F notes, respectively.

    The current U.K. macroeconomic outlook remains uncertain and has recently been subject to significant changes in short timeframes. In addition to the increases in energy costs and the overall cost of living, rate rise expectations remain fluid, occurring against a backdrop of stagnating macroeconomic conditions. The ratings assigned reflect this market uncertainty and our overall analysis considers the implications of further deterioration in credit conditions.

    ALBA 2006-2 is backed by a mortgage pool of nonconforming first-ranking residential mortgages in England, Wales, Scotland, and Northern Ireland.

    Related Criteria

    Related Research

    Primary Credit Analyst:Aimilia Katsogianni, London + 44 20 7176 3711;
    aimilia.katsogianni@spglobal.com

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