OREANDA-NEWS. Fitch Ratings has affirmed Pepper (UK) Limited's (Pepper) Special and Master Servicer Ratings at 'RSS2+' and 'RMS2', respectively. Fitch has simultaneously withdrawn Pepper's UK Primary (Prime and Subprime) Ratings of 'RPS2+' and assigned the servicer a UK Primary Servicer Rating of 'RPS2+'.

The withdrawal follows the update to Fitch's structured finance servicer rating criteria report, in which the distinction between prime and subprime loans for EMEA residential primary servicing activities has been removed. For further information, see 'Fitch Updates EMEA Servicer Addendum for Rating Structured Finance Servicer' and 'Rating Criteria for Structured Finance Servicers' report, published on 1 July 2016.

The ratings reflect Pepper's strong servicing capabilities and the well-managed growth of the business. Pepper's assets under management (AUM) continue to grow at a significant rate, with two new servicing clients and the boarding of seven portfolios in 2015. At the time of review, Pepper successfully boarded the Slate 1 and 2 transactions, comprising around 27,000 flexible live loans. This is the largest portfolio boarded by Pepper to date, demonstrating servicing proficiency and strong boarding capabilities.

The servicing team has been expanded and support functions have been strengthened, with total headcount increasing to 293 employees at end-2015 from 175 employees at end-2014. In August-2015 Pepper relocated all central London based employees to a larger office in the greater London area, providing capacity for the increased headcount. Fitch views the move to have been appropriately managed, although it led to an increase in the annualised staff turnover rate for 2015 - which is higher than the average seen across rated peers. Fitch also acknowledges that there was no turnover across master servicing staff.

The average company tenure of middle management and operational staff remains lower than that seen at peers, although Fitch recognises that this is largely a result of expansion. The average industry experience has remained stable and broadly in line with rated peers, demonstrating the quality of new hires.

The affirmations take into consideration the year-on-year increase in the average number of training hours delivered to employees. This number remains lower than that seen at rated-peers.

There were 40 internal advancements in 2015. Fitch recognises that this was partly driven by company growth; however, in the agency's view this also demonstrates Pepper's commitment to staff development.

In 2015 Pepper's senior management team was expanded to include a new Managing Director role focused on the origination business. In Fitch's view this new role broadens the servicer's experience and demonstrates a commitment to diversify activities, which is beneficial for the servicer's sustainability. The average industry experience and company tenure across the senior management team compares better than or is in line with rated peers.

Over the 12 months to December 2015, Pepper has developed its core servicing platform to manage multiple loans and asset types, multi-currency mortgages and loans with additional securities and flexible features. These developments have further improved the efficiency of processes. For one residential client Pepper set up a servicing hub to provide real-time access to loan information and send documents electronically. Pepper expects to roll out this feature to other clients in 2016, and Fitch therefore could not fully assess its impact on operations.

Pepper's risk-management regime includes regular quality controls and internal audits, covering end-to-end operations. Fitch assesses the regime as strong and fewer high risk findings year-on-year demonstrate an effective feedback and resolution process.

The servicer continues to demonstrate effective servicing capabilities. The timeliness and control of primary servicing activities, such as loan administration and investor reporting, are in line with highly rated peers. Recovery rates and timelines, across special servicing portfolios, are also in line with peers.

The affirmation of the Master Servicer Rating reflects the continued strong oversight role that Pepper has over Homeloan Management Limited (UK assets; RPS1-/RSS2+) for the ALBA transactions. A dedicated team based in Skipton provides third-party oversight and internal quality control, ensuring adherence to service level agreements. Additional quality controls now include reviewing outstanding and unreconciled bank entries, as well as validating the accuracy and timeliness of monthly sampled cash posting.

At end-December 2015, Pepper's total residential AUM consisted of 84,735 loans (December 2014: 30,188) with an outstanding principal balance of GBP7.9bn (GBP4.1bn). Pepper acts as special servicer on 100% of the portfolio, while it acts as primary servicer on 60,949 of these loans, with an outstanding principal balance of GBP7.04bn.

Pepper is also the appointed master servicer on 21,781 residential loans with an outstanding principal balance of GBP851m and is the appointed back-up servicer on a portfolio comprising 2,772 loans, with an outstanding principal balance of GBP284m.

The rating action commentary is based on information provided to Fitch as of December-2015, unless stated otherwise.

Fitch employed its global servicer rating criteria in analysing the servicer's operations and financial condition, with the criteria including a comparison of similar UK servicers as part of the review process.