- Following our review of Castell 2020-1 PLC, we raised our ratings on the class D-Dfrd, E-Dfrd, and F-Dfrd notes.
- At the same time, we affirmed our ratings on the class A, B, and C-Dfrd notes.
- Our current macroeconomic forecasts and forward-looking view of the U.K. residential mortgage market are considered in our ratings through additional cash flow sensitivities assuming increased arrears and house price declines.
- The transaction is backed by a pool of second-lien mortgage loans secured on properties in the U.K.
LONDON (S&P Global Ratings) Jan. 26, 2023--S&P Global Ratings today raised its credit ratings on Castell 2020-1 PLC's class D-Dfrd notes to 'AA (sf)' from 'A (sf)', E-Dfrd notes to 'AA- (sf)' from 'BBB (sf)', and F-Dfrd notes to 'A- (sf)' from 'BB (sf)'. At the same time, we affirmed our 'AAA (sf)' ratings on the class A and B notes, and our 'AA+ (sf)' rating on the class C-Dfrd notes.
The transaction is backed by a pool of second-lien mortgage loans secured on properties in the U.K.
Today's rating actions reflect the increase in credit enhancement on the asset-backed notes due to prepayments. % Of the portfolio at closing, 47% was due to revert to a floating rate from a fixed rate of interest by the end of 2022, and 40% has prepaid since closing (see "New Issue: Castell 2020-1 PLC," published on Sept. 24, 2020). As a result, because the transaction has amortized sequentially since closing, credit enhancement for the outstanding notes has significantly increased. At the same time, the required credit coverage at all rating levels has declined since our previous review ("Castell 2020-1 PLC Class B To F-Dfrd Notes Ratings Raised; Class A Rating Affirmed," published on Jan. 12, 2022).
Since our previous review, our weighted-average foreclosure frequency (WAFF) assumptions have decreased at all rating levels to 'B' from 'AAA'. The weighted-average indexed current loan-to-value (LTV) ratio of the pool has declined by 8.5 percentage points over the same period, driven by a steady increase in house prices. The reduction in the weighted-average indexed current LTV ratio has a positive effect on our WAFF assumptions as the LTV ratio applied is calculated with a weighting of 80% of the original LTV ratio and 20% of the current LTV ratio.
This reduction in the weighted-average current LTV ratio has also led to a reduction in our weighted-average loss severity (WALS) assumptions.
|Credit Analysis Results|
|Rating level||WAFF (%)||WALS (%)||Credit coverage (%)|
Loan-level arrears in the transaction have increased since closing and currently stand at 3.6%. Total arrears are above our U.K. prime index, while prepayments are in line with it (see "European RMBS Index Report Q3 2022," published on Nov. 7, 2022). Cumulative defaults currently stand at 0.60%.
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 counterparty criteria.
Our credit and cash flow results indicate that the available credit enhancement for the class A, B, and C-Dfrd notes continues to be commensurate with the assigned ratings. We therefore affirmed our 'AAA (sf)' ratings on the class A and B notes, and our 'AA+ (sf)' rating on the class C-Dfrd notes.
The rating on the class C-Dfrd notes is below that indicated by our cash flow analysis. These notes are rated according to the payment of ultimate interest and principal, and so interest can defer on these notes when they are not the most senior class of notes outstanding. We do not believe that the presence of interest deferral mechanisms is consistent with the definition of a 'AAA' rating.
The upgrades of the class D-Dfrd, E-Dfrd, and F-Dfrd notes reflect the decline of required credit coverage at all rating levels since our previous review. At the same time, prepayments have significantly increased credit enhancement for the asset-backed notes. As a result, our cash flow analysis indicated that the class D-Dfrd, E-Dfrd, and F-Dfrd notes could withstand stresses at higher ratings than those previously assigned. We therefore raised our ratings on these classes of notes.
The ratings on the class D-Dfrd, E-Dfrd, and F-Dfrd notes are below the level indicated by our standard cash flow analysis. The assigned ratings reflect sensitivities related to higher levels of defaults due to macroeconomic factors (such as cost of living pressures on borrowers), their relative position in the capital structure, and the amount of available credit enhancement as compared with the next-most-senior class of notes.
Our rating on the class F-Dfrd notes also reflects the results of an additional liquidity sensitivity that captures the risk associated with the fact that the class C-Dfrd to F-Dfrd notes do not benefit from any reserve fund to support the payment of previously deferred interest when the notes become the most senior class outstanding.
Macroeconomic forecasts and forward-looking analysis
We expect U.K. inflation to remain high for the rest of 2023 and house prices to decline by 3.5% in 2023 (see "Economic Research: European Housing Prices: A Sticky, Gradual Decline," published on Jan. 11, 2023). Although high 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.
We consider the borrowers in the transaction to be prime and, as such, will generally be resilient to inflationary pressures.
Of the borrowers in this transaction, 53% are paying a fixed rate of interest on average until 2024. As a result, in the short to medium term, borrowers are protected from rate rises, but will be affected by cost of living pressures.
Given our current macroeconomic forecasts and forward-looking view of the U.K. residential mortgage market, we have performed additional sensitivities related to higher levels of defaults due to increased arrears and house price declines. The assigned ratings are robust to a 10% increase in defaults and can withstand a house price decline of up to 10%.
We have also performed additional sensitivities considering the underlying collateral. These included increases in the assumptions used for calculating interest accrual during the foreclosure period for the first-charge mortgage, extended recovery timings, and higher levels of prepayments. The assigned ratings remain robust to the results of these additional sensitivities.
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- Cost Of Living Crisis: Payment Shock Greatest In Legacy U.K. Nonconforming RMBS, Dec. 15, 2022
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- Residential Mortgage Market Outlooks Maintained For 15 European Jurisdictions Following Revised Economic Forecasts, April 28, 2022
- Castell 2020-1 PLC Class B To F-Dfrd Notes Ratings Raised; Class A Rating Affirmed, Jan. 12, 2022
- ESG Industry Report Card: Residential Mortgage-Backed Securities, March 31, 2021
- New Issue: Castell 2020-1 PLC, Sept. 24, 2020
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|Primary Credit Analyst:||Aarondeep Hothi, London + 44 20 7176 0111;|
|Secondary Contact:||Pratish Dcruz, London +44 2071766749;|
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