OREANDA-NEWS. Fitch Ratings has upgraded 22 tranches and affirmed 42 tranches of seven Eurosail transactions and Mortgage Funding 2008-1. The transactions are securitisations of UK non-conforming residential mortgages, originated by Southern Pacific Mortgage Limited, Preferred Mortgages Limited, GMAC-RFC, Matlock Bank Limited (London Mortgage Company), Northern Rock and Alliance and Leicester Plc. A full list of ratings actions is available at www.fitchratings.com or by clicking on the link above.

KEY RATING DRIVERS
Stable Performance
The asset performance has remained relatively stable over the past 12 months in the eight transactions. Eurosail 2006-4, 2007-2 and 2007-5 have better performance with average three months plus (3m+) arrears of 11.7%, attributed to the higher proportion of loans classified as near prime (at least 84%) and no second-lien loans. Eurosail 2006-3, 2007-1 and Mortgage Funding 2008-1, with average 3m+ arrears of 26%, have at least 50% of loans classified as sub-prime and around 11% of second-lien loans.

The transactions continue to pay down sequentially due to the breaches of pro-rata triggers, allowing for a build-up of credit enhancement available to the rated notes. The analysis showed that the available credit enhancement was sufficient for 22 tranches to withstand higher rating stresses, resulting in the upgrades.

Absence of Basis Swap
The default of Lehman Brothers left six transactions (Eurosail 2006-3, 2006-4, 2007-1, 2007-2, 2007-5 and Mortgage Funding 2008-1) without a hedge against the basis risk between the LIBOR-linked notes and Bank of England base rate-linked (BBR-linked) mortgages. Less than 17% of the underlying loans in the portfolio are currently linked to BBR. In its analysis, Fitch reduced the coupons generated by the BBR-linked portion of the collateral. The current credit enhancement is sufficient to withstand the respective rating stresses.

Accrued Interest on Liquidity Facility Drawing
The liquidity facilities for Eurosail 2006-4 and 2007-2 were drawn down following the downgrade by another rating agency of the liquidity facility provider, Danske Bank (A/Stable/F1). Danske Bank has since been upgraded again, triggering repayment of the standby drawing, along with the accrued interest on the drawn amounts. The accrued interest is expected to be around GBP3m for 2006-4 and GBP2.4m for 2007-2 and will be payable on the next interest payment date.

These payments will result in draws on the reserve funds, which currently stand at GBP3.8m for 2006-4 and GBP2.3m for 2007-2, reducing available credit enhancement to the notes. Fitch expects the reserve funds to be replenished from available excess spread in four and three payment dates, respectively. The agency considered these reserve fund drawings in its rating analysis.

RATING SENSITIVITIES
Fitch believes that the expected increase in interest rates could put a strain on borrower affordability, particularly given the weaker profile of the underlying non-conforming borrowers. If defaults and associated losses increase beyond the agency's stresses, the junior tranches may be downgraded.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable methodologies indicates that is adequately reliable.

SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by Acenden as at 28 February 2015
- Transaction reporting provided by Acenden as at 1 March 2015