OREANDA-NEWS. Fitch Ratings has assigned Nordax Nordic 2 AB's variable funding notes (VFNs) final ratings as follows:

NOK1,921.7m VFN, due November 2038: 'Asf'; Outlook Stable
EUR100m VFN, due November 2038: 'Asf'; Outlook Stable

The transaction is a warehouse facility which securitises two separate pools of receivables purchased by Nordax Nordic 2 AB (the issuer, SPV). The pools consist of unsecured consumer loans originated to borrowers in Norway and Finland by Nordax Bank AB (publ) (Nordax, also seller and servicer). Loans extended to Finnish obligors can be funded against by drawing on the VFN denominated in EUR (the Finnish VFN) up to a maximum commitment amount of EUR100m; loans to Norwegian obligors can be funded against by drawing on the VFN denominated in NOK (the Norwegian VFN). As the total programme commitment amount is NOK1,921.7m, total drawings on the Norwegian VFN are capped at the difference between the programme commitment amount and the Finnish VFN commitment amount.

The ratings are based on Fitch's assessment of Nordax's origination and servicing procedures, Fitch's expectations of future asset performance, available credit enhancement, and the transaction's legal structure. In assigning the ratings, Fitch has considered the two VFNs as independent structures, only linked by a cross-default provision.

KEY RATING DRIVERS
Ratings Capped at 'Asf'
Fitch has capped the ratings of Nordax's Finnish VFN at 'Asf' due to the limited historical data available to analyse these assets, particularly considering the long-term profile of the assets (up to 15 years). In addition, an account bank with a Long-term rating of 'BBB+' is defined as eligible under both the Finnish and the Norwegian transaction documents, which, in line with Fitch's criteria, limits the highest achievable rating to 'Asf' for both VFNs.

Ratings Link on Cross-default Provision
As a default under the Finnish VFN leads to an event of default on the Norwegian VFN, and vice versa, Fitch views the ratings of the notes as being linked. The rating on the Norwegian VFN is therefore constrained by the 'Asf' rating cap on the Finnish assets, notwithstanding the rating cap due to account bank eligibility.

Asset Performance
The underlying loans are unsecured consumer loans that have historically experienced high default rates. This risk is partially mitigated by high recovery rates and the strong yield the portfolio generates. Separate asset assumptions were set for the two countries, reflecting the Finnish assets' worse default performance but stronger recoveries.

Based on this approach, Fitch applied a weighted average (WA) default base case of 25% and a stress of 1.8x at the 'Asf' level for the Finnish portfolio and 15% with a stress of 2.3x at 'Asf' for the Norwegian pool. The agency has used a WA recovery assumption of 58.5% for the Finnish pool, which was stressed with a high recovery haircut (36% for 'Asf') to reflect the unsecured nature of the underlying receivables. A WA recovery base case of 46% was assigned for the Norwegian pool with a 'Asf' recovery haircut of 30%.

Revolving Transaction
The transaction encompasses a one-year revolving period. Fitch has assessed the risk of deteriorating asset quality and performance throughout this period and believes that the combination of early amortisation triggers and concentration limits in place are sufficient to protect against this risk.

Variable Funding; Dynamic Credit Enhancement
The notes are structured to enable variable funding, whereby the notes will deleverage or increase in line with the borrowing base to ensure that a maximum advance rate is maintained. The Finnish VFN benefits from minimum credit enhancement of 39.58% (a 60.42% advance rate) and the Norwegian VFN from 29.42%. Fitch gained additional comfort in relation to potential risk from deteriorating credit quality of the assets, due to the dynamic nature of the credit enhancement in place. If delinquency or default rates increase, the available credit enhancement for the transaction should also increase; otherwise an early amortisation event would be triggered.

Servicing Continuity and Commingling Risk
Nordax is the servicer. Upon a servicer default, Emric Operations AB as back up servicer is contractually committed to take over the servicing of the pools with 20 business days. In addition, Citigroup N.A is contracted to take over the responsibility for the cash management functions until a successor cash manager is appointed. A liquidity reserve is also in place, which should be sufficient to cover a period of one month's payment interruption. The combination of these factors means that servicing discontinuity and payment interruption risk are adequately mitigated within the transaction.

In addition, borrowers have been notified to pay directly into the account of the issuer, which should help mitigate commingling risk within the transaction.

TRANSACTION SUMMARY
The issuer is incorporated in Sweden as a special purpose vehicle with limited liability and is wholly owned by Nordax. The issuer's full ownership by Nordax is unusual compared with securitisation structures in most other European jurisdictions. However, Fitch has received a legal opinion confirming that an insolvency of Nordax will not cause the SPV to be consolidated or forced into insolvency. Fitch's confidence is reinforced by the successful use of this type of SPV structure in previous Swedish securitisations.

The Norwegian portfolio contains 6% of loans for which no consent has been obtained from the obligor with respect to the transfer of the loan to the issuer, introducing a risk that the transfer could be deemed void under Norwegian law. Based on transaction counsel's view on the limited likelihood of such a risk materialising, as well as the mitigating factors contained in the transaction documents, Fitch believes that this is not a material risk to the transaction. Fitch nevertheless tested the Norwegian VFN's ability to withstand an additional loss of 6% in line with the proportion of the pool that could be exposed to this risk. No impact on the ratings was identified.

RATING SENSITIVITIES
Expected impact on the note ratings of increased defaults (Norwegian VFN/Finnish VFN):
Current ratings: 'Asf'/'Asf'
Increase base case defaults by 25%: 'Asf'/'Asf'

Expected impact on the note ratings of reduced recoveries (Norwegian VFN/Finnish VFN):
Current ratings: 'Asf'/'Asf'
Reduce base case recovery by 25%: 'Asf'/'Asf'

Expected impact on the note ratings of increased defaults and reduced recoveries (Norwegian VFN/Finnish VFN):
Current ratings: 'Asf'/'Asf'
Increase default base case 25%; reduce recovery base case by 25%: 'Asf'/'Asf'

Impact of Nullification
Current ratings Norwegian VFN: 'Asf'
Apply 6% loss due to nullification: 'Asf'

DUE DILIGENCE USAGE
Fitch was provided with a third party asset portfolio assessment in relation to this rating action.

DATA ADEQUACY
Fitch reviewed the results of the third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis. Fitch believes the sample size and relevance of the tested fields suggest the data provided by the originator for assigning the ratings is of acceptable quality.

Fitch considers the data relied upon in assigning these ratings to be sufficient and robust relative to their materiality to assigning and maintaining the ratings.

REPRESENTATIONS AND WARRANTIES
The representations, warranties, and enforcement mechanisms (RW&Es) contained in the transaction documents that are available to investors are substantially comparable to those typically contained in European consumer loan transactions, as described in Fitch's research Representations and Warranties and Enforcement Mechanisms in Global Structured Finance, dated 12 June 2015.