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Stratton Mortgage Funding 2020-1 PLC RMBS Ratings Raised On Three Classes Of Notes; Three Classes Affirmed
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Stratton Mortgage Funding 2020-1 PLC RMBS Ratings Raised On Three Classes Of Notes; Three Classes Affirmed

Overview

  • Following our review of Stratton Mortgage Funding 2020-1 PLC, we raised our ratings on the class B-Dfrd, C-Dfrd, and D-Dfrd notes.
  • At the same time, we affirmed our ratings on the class A, E-Dfrd, and F-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 mainly by first-ranking nonconforming owner-occupied and buy-to-let mortgage loans in the U.K. The assets were previously securitized in Alba 2015-1 PLC (70.02%) and Alba 2006-1 PLC (29.98%), as at closing.

LONDON (S&P Global Ratings) Jan. 30, 2023--S&P Global Ratings today raised its credit ratings on Stratton Mortgage Funding 2020-1 PLC's class B-Dfrd notes to 'AA+ (sf)' from 'AA (sf)', C-Dfrd notes to 'AA- (sf)' from 'A (sf)', and D-Dfrd notes to 'A- (sf)' from 'BBB+ (sf)'. At the same time, we affirmed our 'AAA (sf)' rating on the class A notes, 'BBB- (sf)' rating on the class E-Dfrd notes, and 'BB (sf)' rating on the class F-Dfrd notes.

Today's rating actions reflect the build-up of credit enhancement due to the sequential amortization of the notes. At the same time, the required credit coverage at all rating levels has decreased since closing.

Since closing, our weighted-average foreclosure frequency (WAFF) assumptions have decreased at all rating levels to 'B' from 'AAA', and the level of arrears has reduced significantly due to the reclassification of certain loans in arrears as payment holidays. This has resulted in lower WAFFs.

House price appreciation since closing, lower jumbo loans concentration in the pool, and the lower market value decline applied, have also led to a reduction in our weighted-average loss severity (WALS) assumptions.

Credit Analysis Results
Rating level WAFF (%) WALS (%) Credit coverage (%)
AAA 36.26 40.28 14.61
AA 29.83 32.83 9.79
A 26.17 21.39 5.60
BBB 22.53 14.82 3.34
BB 18.47 10.74 1.98
B 17.56 7.65 1.34

Loan-level arrears in the transaction have declined due to the reclassification of unpaid amounts to historic payment holidays. Arrears currently stand at 14.2%. Total arrears are above our U.K. nonconforming pre-2014 index, while prepayments are in line with it (see "European RMBS Index Report Q3 2022," published on Nov. 7, 2022). Cumulative losses currently stand at £375,809.

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 notes continues to be commensurate with the assigned rating. We therefore affirmed our 'AAA (sf)' rating on the class A notes.

The upgrades of the class B-Dfrd, C-Dfrd, and D-Dfrd notes reflect the decline of required credit coverage at all rating levels since closing. 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 B-Dfrd, C-Dfrd, and D-Dfrd notes could withstand stresses at higher ratings than those previously assigned. We therefore raised our ratings on these classes of notes.

The rating on the class B-Dfrd notes is below the level 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 ratings on the class C-Dfrd and D-Dfrd notes are below the level indicated by our cash flow analysis. The pool contains loans to borrowers with self-certified incomes, a prior bankruptcy, and prior county court judgments. There is also a high exposure to interest-only loans. We consider that such borrowers may be adversely affected under the current macroeconomic conditions, and so the assigned ratings reflect sensitivities related to higher levels of defaults due to macroeconomic factors (such as cost of living pressures on borrowers).

The ratings on the class E-Dfrd and F-Dfrd notes are below the level indicated by our standard cash flow analysis. These classes of notes do not benefit from the liquidity provided by the liquidity reserve fund. The liquidity reserve has a required amount 2.0% of the class A, B, C-Dfrd, and D-Dfrd outstanding note balance. Once the class A to D-Dfrd notes have fully redeemed, the general reserve will be released to the principal waterfall. The assigned ratings reflect the lack of liquidity and sensitivities related to higher levels of defaults due to macroeconomic factors (such as cost of living pressures on borrowers).

Macroeconomic forecasts and forward-looking analysis

We expect U.K. inflation to remain high for the rest of 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 nonconforming and, as such, will generally be prone to inflationary pressures.

Of the borrowers in this transaction, 100% are paying a floating rate of interest. As a result, in the short to medium term, borrowers are not protected from rate rises, and will also 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 reflect the results of these sensitivities.

The transaction is backed mainly by first-ranking nonconforming owner-occupied and BTL mortgage loans in the U.K. The assets were previously securitized in Alba 2015-1 PLC (70.02%) and Alba 2006-1 PLC (29.98%), as at closing.

Related Criteria

Related Research

Primary Credit Analyst:Ganesh A Rajwadkar, London + 44 20 7176 7614;
ganesh.rajwadkar@spglobal.com
Secondary Contact:Sebastian Mauersberger, Frankfurt + 49 1729 913944;
sebastian.mauersberger@spglobal.com

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