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Moody's assigns provisional ratings to Stanlington No. 2 PLC RMBS

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Rating Action: Moody's assigns provisional ratings to Stanlington No. 2 PLC RMBSGlobal Credit Research - 04 Mar 2022GBP[ ] million RMBS Notes provisionally rated, relating to a portfolio of United Kingdom residential non-conforming and buy-to-let mortgage loansLondon, 04 March 2022 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to Notes issued by Stanlington No. 2 PLC:....GBP[]M Class A Mortgage Backed Floating Rate Notes due June 2045, Assigned (P)Aaa (sf)....GBP[]M Class B Mortgage Backed Floating Rate Notes due June 2045, Assigned (P)Aa2 (sf)....GBP[]M Class C Mortgage Backed Floating Rate Notes due June 2045, Assigned (P)A2 (sf)....GBP[]M Class D Mortgage Backed Floating Rate Notes due June 2045, Assigned (P)Baa2 (sf)....GBP[]M Class E Mortgage Backed Floating Rate Notes due June 2045, Assigned (P)Ba2 (sf)....GBP[]M Class F Mortgage Backed Floating Rate Notes due June 2045, Assigned (P)B3 (sf)Moody's has not assigned a rating to the GBP[]M Class Z1 Mortgage Backed Notes due June 2045, to the GBP[]M Class Z2 Mortgage Backed Notes due June 2045 and to the GBP[]M Class X Mortgage Backed Floating Rate Notes due June 2045.RATINGS RATIONALEThe Notes are backed by a pool of UK residential non-conforming and buy-to-let (BTL) mortgage loans originated by multiple lenders: GMAC-RFC Limited (currently known as Paratus AMC Limited, "Paratus", NR), Bluestone Mortgages Limited (formerly known as Basinghall Finance Limited and Basinghall Finance PLC, NR), First Alliance Mortgage Company Limited (NR), Victoria Mortgage Funding Limited (NR) and Paratus. 49.7% of the portfolio was previously securitized in Stanlington No. 1 PLC and 49.9% in Ciel No 1. PLC.The portfolio of assets amount to approximately GBP 295 million as of 30 November 2021 pool cutoff date. The general reserve fund will be funded to 1% of the Class A to Class Z1 Notes' principal balance at closing. The general reserve fund has two sub-ledgers, an amortising liquidity reserve sized at 1.0% of Class A and B Notes' outstanding principal balance, and a credit reserve sized at 1.0% of Class A to Class Z1 Notes' principal balance at closing less any amounts in the liquidity reserve fund. The total credit enhancement for the Class A Notes will be 14% .The ratings are primarily based on the credit quality of the portfolio, the structural features of the transaction and its legal integrity.According to Moody's, the transaction benefits from various credit strengths such as: (i) the 14.5 years seasoning of the pool is significantly higher than the average of UK RMBS transactions and over twelve years of the portfolio historical data is available; (ii) the portfolio has a low WA current loan-to-indexed value ratio of 57.5% as calculated by Moody's; (iii) no further loan advances or product switches are allowed; and (iv) a liquidity and credit reserve are available as described above.However, Moody's notes that the transaction features some credit challenges such as: (i) high arrears, predominantly in the Stanlingon No. 1 legacy portfolio, reflect the non-conforming nature of the borrowers and have resulted in capitalised fees and/or arrears of 2.2% of the current pool balance for over 1,400 loans; (ii) 94% of the loans have bullet repayments; (iii) the transaction has relatively low excess spread, given WA interest of the pool is 2.7%; (iv) a basis mismatch between the interest rates received on the loans and the interest rates payable on the notes; and (v) an unrated servicer (Paratus). Various mitigants have been included in the transaction structure such as a back-up servicer facilitator (Intertrust Management Limited, NR) which is obliged to appoint a back-up servicer if necessary. The portfolio characteristics and the absence of a basis swap has been considered in our cashflow analysis.Moody's determined the portfolio lifetime expected loss of 2.7% and MILAN credit enhancement ("MILAN CE") of 14% related to borrower receivables. The expected loss captures our expectations of performance considering the current economic outlook, while the MILAN CE captures the loss we expect the portfolio to suffer in the event of a severe recession scenario. Expected defaults and MILAN CE are parameters used by Moody's to calibrate its lognormal portfolio loss distribution curve and to associate a probability with each potential future loss scenario in the ABSROM cash flow model to rate RMBS.Portfolio expected loss of 2.7%: This is based on Moody's assessment of the lifetime loss expectation for the pool taking into account: (i) the collateral performance of the loans to date, as observed in the previously securitised portfolios; (ii) the current macroeconomic environment in the UK and the impact of future interest rate rises on the performance of the mortgage loans; and (iii) the fact that 12.3% of the pool was in arrears as of the pool cutoff date, of which 5.3% is more than 90 days in arrears.MILAN CE of 14%: This follows Moody's assessment of the loan-by-loan information taking into account the following key drivers: (i) the collateral performance of the underlying loans to date as described above; (ii) the weighted average current loan-to-value of 83.5%; (iii) the average seasoning of the pool of 14.5 years, which is significantly higher than the UK RMBS sector; (iv) interest-only loans comprise 94% of the pool; and (v) the fact that for 44% of the pool proof of income has either not been verified or the borrower has self-certified their income.The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in February 2022 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1278125. 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 AN UPGRADE OR DOWNGRADE OF THE RATINGS:Factors that would lead to an upgrade of the ratings include: (i) significantly better than expected performance of the pool together with an increase in credit enhancement of Notes; or (ii) a deleveraging of the capital structure.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 DISCLOSURESFor 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.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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. Radostina Kumchev Vice President - Senior 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 Barbara Rismondo 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. 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