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Warwick Finance Residential Mortgages Number Three PLC Ratings Affirmed On All Classes Of U.K. RMBS Notes


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Warwick Finance Residential Mortgages Number Three PLC Ratings Affirmed On All Classes Of U.K. RMBS Notes


  • Following our review of Warwick Finance Residential Mortgages Number Three PLC, we affirmed our ratings on the class A to E-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 nonconforming owner-occupied and BTL mortgage loans secured on properties in the U.K.

LONDON (S&P Global Ratings) Feb. 2, 2023--S&P Global Ratings today affirmed its 'AAA (sf)', 'AA+ (sf)', 'AA (sf)', 'A+ (sf)', and 'A (sf)' credit ratings on Warwick Finance Residential Mortgages Number Three PLC's class A, B-Dfrd, C-Dfrd, D-Dfrd, and E-Dfrd notes, respectively.

Today's affirmations reflect that while the transaction has been amortizing sequentially, resulting in increased credit enhancement for the outstanding notes, there has been an increase in loan-level arrears and losses since our previous review (see "Warwick Finance Residential Mortgages Number Three U.K. Nonconforming RMBS Ratings Raised; Class D Notes Affirmed," published on Sept. 25, 2020). There are currently £4.6 million of losses in the principal deficiency ledger. Cumulative losses are 0.25%. Since closing, 213 repossessions have taken place, with losses realized on 161 of these repossessions. The average loss severity is currently 21.96%.

Since our previous review, our weighted-average foreclosure frequency (WAFF) assumptions have increased at all rating levels. The original loan-to-value (LTV) ratio of the pool has increased to 86.5%, while loan-level arrears have increased to 6.4%, since our previous review. At the same time, the exposure to interest-only loans that have gone past maturity without fully repaying has increased.

The weighted-average current LTV ratio has decreased by 7.0 percentage points since our previous review, driven by a steady increase in house prices, and we have applied additional valuation haircuts given the observed loss severities from within the transaction. At the same time, the amount of overvaluation applied at each rating level has decreased since our previous review. Overall, our weighted-average loss severity (WALS) has decreased slightly at the 'AAA' to 'AA' rating levels and has increased at all other rating levels.

Credit Analysis Results
Rating level WAFF (%) WALS (%) Credit coverage (%)
AAA 29.89 39.15 11.70
AA 22.84 31.30 7.15
A 18.90 19.45 3.68
BBB 14.84 13.24 1.97
BB 10.35 9.50 0.98
B 9.33 6.73 0.63

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-Dfrd, and C-Dfrd notes continues to be commensurate with the assigned ratings. We have therefore affirmed our 'AAA (sf)' rating on the class A notes, 'AA+ (sf)' rating on the class B-Dfrd notes, and 'AA (sf)' rating on the class C-Dfrd notes. The ratings on the class B-Dfrd and C-Dfrd notes are below those indicated by our cash flow analysis. These classes of 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. Our rating on the class C-Dfrd notes also reflects the relative position of this class of notes in the capital structure and the amount of available credit enhancement as compared with the class B-Dfrd notes.

The ratings on the class D-Dfrd and E-Dfrd notes are below the levels indicated by our standard cash flow analysis. We affirmed the 'A+ (sf)' rating on the class D-Dfrd notes and 'A (sf)' rating on the class E-Dfrd notes, given the negative performance trend that we have observed in terms of losses and arrears, and the fact that there is significant near-term interest-only maturity risk, with 22% of the pool being interest-only or part-and-part and maturing within the next five years.

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 nonconforming and as such are generally less resilient to inflationary pressure than prime borrowers. Of the collateral 37%, is buy-to-let (BTL) and, although underlying tenants may be affected by inflationary pressures, these borrowers may benefit from diversification of properties and rental streams.

Of the borrowers in this transaction, 100% are paying a floating rate of interest. As a result, borrowers are also exposed to rate rises.

Given our current macroeconomic forecasts and forward-looking view of the U.K. residential mortgage market, as well as the nature of the underlying collateral, 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 30% increase in defaults and can withstand a house price decline of up to 15%. We have also performed sensitivities with extended recovery timing, to account for delays to repossession proceedings due to court backlogs, and the assigned ratings remain robust. We have also performed sensitivities where we extend the maturity dates of the interest-only loans and the assigned ratings remain robust.

The transaction is backed by a pool of nonconforming owner-occupied and BTL mortgage loans secured on properties in the U.K.

Related Criteria

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Primary Credit Analyst:Aarondeep Hothi, London + 44 20 7176 0111;
Secondary Contact:Abhijit A Pawar, London + 44 20 7176 3774;

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