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Avon Finance No. 1 plc -- Moody's assigns definitive ratings to RMBS Notes issued by Avon Finance No. 1 plc

Rating Action: Moody's assigns definitive ratings to RMBS Notes issued by Avon Finance No. 1 plc

Global Credit Research - 04 Aug 2020

London, 04 August 2020 -- Moody's Investors Service ("Moody's") has assigned definitive credit ratings to the following Classes of Notes issued by Avon Finance No. 1 plc:

....GBP 735.7M Class A Mortgage Backed Floating Rate Notes due November 2049, Assigned Aaa (sf)

....GBP 70.5M Class B Mortgage Backed Floating Rate Notes due November 2049, Assigned Aa1 (sf)

....GBP 30.0M Class C Mortgage Backed Floating Rate Notes due November 2049, Assigned A2 (sf)

....GBP 18.6M Class D Mortgage Backed Floating Rate Notes due November 2049, Assigned Baa2 (sf)

....GBP 23.3M Class E Mortgage Backed Floating Rate Notes due November 2049, Assigned Ba2 (sf)

....GBP 25.2M Class F Mortgage Backed Floating Rate Notes due November 2049, Assigned B3 (sf)

Moody's has not assigned ratings to the GBP 28.6M Class R Notes due November 2049, to the Principal Residual Certificates, the Revenue Residual Certificates or the Class X Certificate.

The portfolio backing this transaction consists of UK Non-Conforming residential mortgage loans which were previously securitised in the transaction Warwick Finance Residential Mortgages Number Two plc, which was called on 22 June 2020.

The portfolio pool balance of approximately GBP 953 million, as of the 16 June 2020 portfolio reference date, consists of 8,809 loans. Secured by first ranking mortgages on properties located in the UK, of which 73.3% are owner occupied and 26.7% are buy-to-let.

RATINGS RATIONALE

The ratings take into account the credit quality of the underlying mortgage loan pool, from which Moody's determined the MILAN Credit Enhancement ("MILAN CE") and the portfolio expected loss, as well as the transaction structure and legal considerations. The expected portfolio loss of 4.25% and the MILAN required CE of 19.0% serve as input parameters for Moody's cash flow model and tranching model.

The expected loss is 4.25%, which is in line with other recent UK non-conforming transactions and takes into account: (i) the proportion of the portfolio having some adverse credit (8.9%); (ii) the relatively high proportion of self-certified (68.6%), Buy-To-Let (26.7%) and interest-only loans (82.3%); (iii) the weighted average current LTV of 72.2%; (iv) the relatively high proportion of loans in arrears in the portfolio (13.7%); (v) the current macroeconomic environment and our view of the future macroeconomic environment in the UK taking into account the impact of Covid-19 outbreak as well as Brexit; (vi) 16.8% exposure to Covid-19 related payment holidays as of 16 June 2020 and (vii) benchmarking with similar transactions in the UK non-conforming sector.

MILAN CE for this pool is 19.0%, which is in line with other recent UK non-conforming transactions and takes into account: (i) the current LTV of 72.2%; (ii) borrowers with adverse credit history (8.9%); (iii) the relatively high proportion of loans in arrears in the portfolio (13.7%); (iv) the relatively high proportion of self-certified (68.6%), Buy-To-Let (26.7%) and interest-only loans (82.3%); and (v) benchmarking with similar transactions in the UK non-conforming sector.

The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of consumer assets from the collapse in the UK economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

At closing, a non-amortising General Reserve Fund will be fully funded to 3% of the closing pool, i.e. GBP 28.6 million, and will be replenished to 3% with revenue receipts to the extent available. If the General Reserve Fund balance at any interest payment date falls below 2.0%, the build-up of an additional Liquidity Reserve will be triggered. The Liquidity Reserve Fund will be sized following a target balance schedule of outstanding Class A and B Notes, and will cover shortfalls on senior expenses, interest shortfall on the Class A at any time, shortfall on the X certificates payment, and interest shortfall on the Class B if its PDL is below 10%. The Liquidity Reserve Fund will be funded by diversion of principal proceeds until fully funded. Once fully funded, it will be topped-up using the revenue waterfall. The target balance schedule is defined as follow: Nov-2020: 2.25% of outstanding Class A-B; Feb-2021: 1.85% of outstanding Class A-B; May-2021: 1.65% of outstanding Class A-B; Aug-2021: 1.55% of outstanding Class A-B; Nov-2021 onwards: 1.50% of outstanding Class A-B. The LRF amortization proceeds will flow through the principal waterfall.

Operational Risk Analysis: Western Mortgage Services Limited (not rated) acts as a servicer. To mitigate servicing disruption risk, there is a servicer facilitator, CSC Capital Markets UK Limited (not rated), and an independent cash manager, U.S. Bank Global Corporate Trust Limited (not rated; a subsidiary of U.S. Bancorp (A1)). To ensure payment continuity over the transaction's lifetime, the transaction documents incorporate estimation language whereby the cash manager can use the three most recent servicer reports to determine the cash allocation in case no servicer report is available. The transaction also benefits from principal to pay interest for the Class A Notes and for Classes B to F Notes, subject to certain conditions being met.

Interest Rate Risk Analysis: 100% of the portfolio pay a floating rate of interest. As is the case in many UK RMBS transactions the basis risk mismatch between the floating rate on the underlying loans and the floating rate on the Notes is unhedged. Moody's has applied a stress to account for the basis risk in its portfolio yield calculation.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1228742. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The analysis undertaken by Moody's at the initial assignment of ratings for RMBS securities may focus on aspects that become less relevant or typically remain unchanged during the surveillance stage. Please see "Moody's Approach to Rating RMBS Using the MILAN Framework" for further information on Moody's analysis at the initial rating assignment and the on-going surveillance in RMBS.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors that may cause an upgrade of the ratings of the Notes include significantly better than expected performance of the pool together with an increase in credit enhancement of Notes.

Factors that would lead to a downgrade of the ratings include: (i) increased counterparty risk leading to potential operational risk of servicing or cash management interruptions; and (ii) economic conditions being worse than forecast resulting in higher arrears and losses.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1237948.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to one of the credit rating outcomes announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Duy-Anh Bui Analyst Structured Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Anthony Parry Senior Vice President/Manager Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454

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