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    ALBA 2005-1 PLC Class E U.K. Nonconforming RMBS Rating Lowered; All Other Ratings Affirmed

    Overview

    • Following our review of ALBA 2005-1 PLC, we lowered our rating on the class E notes.
    • At the same time, we affirmed our ratings on the class A, B, C, and D notes.
    • The transaction is backed primarily by a pool of legacy nonconforming mortgage loans secured on properties in England, Scotland, and Wales.

    LONDON (S&P Global Ratings) Feb. 7, 2023--S&P Global Ratings today lowered its credit rating on ALBA 2005-1 PLC's class E notes to 'BB+ (sf)' from 'BBB (sf)'. At the same time, we affirmed our 'AAA (sf)', 'AA+ (sf)', 'AA (sf)', and 'AA- (sf)' ratings on the class A, B, C, and D notes, respectively.

    Today's rating actions reflect the marginal rise in the required credit coverage at the 'A' rating level and below since our previous review, while the transaction is now amortizing sequentially, the reserve fund has been drawn due to increased fixed fees (see "ALBA 2005-1 PLC Class D And E U.K. Nonconforming RMBS Ratings Raised Following Review; Three Ratings Affirmed," published on Dec. 15, 2021).

    Since our previous review, our weighted-average foreclosure frequency (WAFF) assumptions have increased at all rating levels primarily due to higher arrears and a higher proportion of reperforming loans.

    WAFF And WALS Assumptions
    WAFF WALS CC
    AAA 27.66% 30.01% 8.30%
    AA 20.61% 20.43% 4.21%
    A 16.85% 8.16% 1.37%
    BBB 13.21% 3.54% 0.47%
    BB 9.37% 2.00% 0.19%
    B 8.51% 2.00% 0.17%
    WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. CC--Credit coverage.

    Loan-level arrears have increased to 6.9% from 6.2% (still below our nonconforming RMBS index; see "European RMBS index report Q3 2022," published on Nov. 7, 2022). Cumulative losses are at approximately 2.5%, while the pool factor is low at 13%.

    The reserve fund was drawn due to a significant rise in fixed fees and rising interest adversely affected the cost of liabilities in our stressed scenarios.

    In addition to our standard runs, we also performed some sensitivity runs around the starting interest rates, fees, and higher foreclosure rates given the uncertain economic outlook.

    We affirmed our 'AAA (sf)' rating on the class A notes to reflect our credit and cash flow results, which indicate the available credit enhancement continues to be commensurate with the rating.

    The class B, C, and D notes could withstand our stresses at higher rating levels than those assigned. However, additional factors that we considered in our analysis constrained the ratings. First, we considered their sensitivity to tail-end risks given the low pool factor. In addition, we took into account these classes' relative position in the capital structure and the lower credit enhancement than the senior notes. We therefore affirmed our 'AA+ (sf)' rating on the class B notes, our 'AA (sf)' rating on the class C notes, and our 'AA- (sf)' rating on the class D notes.

    We lowered our rating on the class E notes to 'BB+ (sf)' from 'BBB (sf)' due to the higher fixed fees causing the drawing of the reserve fund which is the only source of credit enhancement to these notes. Under our cash flow analysis, in some scenarios the assigned rating sees some minor technical principal shortfalls. However, we view these shortfalls as non-material and likely to reduce with increased credit enhancement due to amortization.

    Notably, the higher fees include one-off expenses related to the LIBOR transition, but also various corporate service provider fees related to regulatory and financial reporting requirements.

    Counterparty risk does not constrain the ratings and the replacement language in the documentation is in line with our counterparty criteria (see "Related Criteria").

    We expect U.K. inflation to remain high in 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. This is a buy-to-let transaction and although underlying tenants may be affected by inflationary pressures, borrowers in the pool are generally considered to be professional landlords and will benefit from diversification of properties and rental streams. Borrowers in this transaction are largely paying a fixed rate of interest on average until 2025. As a result, in the short to medium term, they are protected from rate rises but will feel the effect of rising cost of living pressures. Our credit and cash flow analysis and related assumptions consider the transaction's ability to withstand the potential repercussions of the current economic environment--including higher inflation and an increase in the cost of living--such as higher defaults and longer recovery timing due to a potential backlog in court cases. Considering these factors, we believe that the available credit enhancement is commensurate with the ratings assigned.

    The transaction is backed primarily by a pool of legacy nonconforming mortgage loans secured on properties in England, Scotland, and Wales.

    Related Criteria

    Related Research

    Primary Credit Analyst:Arnaud Checconi, London + 44 20 7176 3410;
    ChecconiA@spglobal.com
    Research Contributor:Tanmay Saykhedkar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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