Reuters logo
Fitch: Disclosure, Calculation Key for WAC Caps in European SF
February 24, 2017 / 12:15 PM / 10 months ago

Fitch: Disclosure, Calculation Key for WAC Caps in European SF

(The following statement was released by the rating agency) LONDON, February 24 (Fitch) Excluding the interest due on European structured finance notes from our rating analysis when it exceeds a net weighted average coupon (WAC) cap would result in lower breakeven credit enhancement for the same rating level, Fitch Ratings says. But we would only do so providing there is no credit component in determining the cap, suitable disclosures are made to investors in the transaction documentation, and investors in the relevant market are familiar with WAC caps. An increasing number of UK RMBS featuring WAC caps have emerged over the past 12 months. In a traditional RMBS structure, the risk of an interest shortfall is borne first by the lowest ranking noteholder. WAC caps should therefore be carefully reviewed by investors, who may be exposed to more risks than in a traditional structure through potential subordination of interest amounts above a WAC cap. This is negative for mezzanine noteholders, but benefits the lower ranking note classes. Our ratings would only address the likelihood of payments up to the cap. The closing of another UK RMBS transaction that features WAC caps shows that investors may be more familiar with the product. Towd Point Mortgage Funding 2017 - Auburn 11 Plc, a securitisation of mostly buy-to-let UK mortgages, closed on 21 February. Fitch rated two classes of class A notes at 'AAAsf'. Fitch did not rate the five junior tranches, all of which feature a net WAC cap. The concept of a net WAC cap is more established in the US, but has appeared in European transactions in recent months. Auburn 11 is the sixth European SF deal to feature a net WAC cap since April 2016. All of these deals feature unhedged basis risk between the reference interest rates on the underlying mortgages and the notes. Unlike in some US transactions, senior notes in the six European deals have not, to date, featured a WAC cap. In Auburn 11, for example, nearly all the mortgage loans track the Bank of England base rate, while the notes pay three-month Libor plus a margin. If the spread between the reference rates widens and mortgage yields fall relative to the note obligations, the net WAC cap feature spreads the impact across different classes of notes. Should expected mortgage interest receipts be insufficient to pay the stated Libor plus the margin coupon to the most junior noteholders, payments to all noteholders other than the senior notes will be capped. Capped payments are then made in order of seniority. Amounts above the cap are deferred and subordinated in the priority of payments. They are repaid, if possible, from excess future revenue funds, or when the notes are paid in full. In Fitch's stresses, it is far from certain that deferred interest payments above the cap would ultimately be recovered. The calculation of the WAC is crucial to Fitch's analysis, as reduced interest payments due to credit-related issues would likely result in rating caps, according to our Criteria for Rating Caps and Limitations in Global Structured Finance Transactions. In Auburn 11, the WAC calculation includes expected interest from mortgages, whether performing, delinquent or defaulted. The WAC is set with reference to the total interest accrued on the mortgage loans (after senior fees and regardless of whether this has been collected) and the notes outstanding as a percentage of the mortgage pool. In other words, the WAC cap could reduce over time, only because of a rising spread between reference rates on the liabilities compared to the assets, and not due to asset underperformance. Contact: Duncan Paxman Director, RMBS +44 203 530 1428 Fitch Ratings Limited 30 North Colonnade London E14 5GN Alessandro Pighi Senior Director, RMBS +44 203 530 1794 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 (Disclosure Statement): The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below