Fitch Assigns Paragon Mortgages (No. 19) plc Final Ratings

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March 20 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Paragon Mortgages (No.19) plc's notes final ratings, as follows:

GBP313,200,000 Class A: 'AAAsf', Outlook Stable

GBP15,800,000 Class B: 'AAsf', Outlook Stable

GBP14,000,000 Class C: 'A+sf', Outlook Stable

GBP7,000,000 Class D: Not rated

The transaction is a securitisation of UK prime buy-to-let (BTL) and owner-occupied mortgages.

KEY RATING DRIVERS

The ratings reflect the credit enhancement available for each class of rated notes. Credit enhancement for the class A notes is 10.56%, provided by the subordination of the class B notes (4.5%), class C notes (4%), the unrated class D notes (2%), the reserve fund excess amount (0.06%), and excess spread.

The issuer has established a non-amortising first loss fund at closing of 3% of the initial total collateral balance to provide cover for interest shortfalls and principal losses. This can step up to 4% of the initial total collateral balance if 60+ days arrears exceed 3% of the outstanding note balance or if cumulative losses exceed 2%.

A portion of this first loss fund is being held aside for liquidity. This amount is sized at 3% of the outstanding rated notes, therefore, only 2% (or 0.06% of the total collateral balance) of the first loss fund is available as credit enhancement at close. The liquidity amount will reduce in line with the rated notes, and as such, the excess funds available for credit enhancement are designed to increase as the rated notes amortise. The excess funds are also subject to a principal deficiency ledger trigger which stops them being used to pay class B or C note interest, once losses have breached a certain threshold.

Fitch expects the final pool of loans backing the notes at the end of the pre-funding period to consist of 80.9% UK prime BTL residential mortgages originated by Paragon Mortgages (2010) Limited (Paragon (Xetra: PGN.DE - news) ) and 19.1% BTL and owner-occupied mortgages originated or acquired by Mortgage Trust Limited (MTL). About 97.9% of the portfolio consists of BTL loans. Fitch continues to stress the portfolio's default rates beyond those of a prime owner-occupier portfolio at all rating levels, despite historically lower arrears of past Paragon deals. Up to GBP28.3m of additional Paragon-originated loans will be added by the first principal determination date 31 July 2014. Any balance remaining to the credit of the pre-funding ledger after this period, not used to purchase additional loans, will be used to pay down the notes sequentially. Fitch has run analysis based on expected pool composition at the first principal determination date of 80.9% Paragon-originated loans and 19.1% MTL loans.

The MTL loans are part of the Fitch-rated First Flexible No. 4 Plc transaction. The loans have performed strongly, with low arrears. The pool is well-seasoned, at over 150 months. Fitch has factored the strong performance into in its analysis.

The rating triggers for the issuer account bank, qualified investments, collection account bank and derivative counterparties in the transaction documents have specific reference to Fitch criteria, which creates a degree of uncertainty regarding future counterparty arrangements.

RATING SENSITIVITIES

Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case expectations, which in turn may result in rating actions on the notes. Fitch's analysis revealed that a 30% increase in the weighted average (WA) foreclosure frequency along with a 30% decrease in the WA recovery rate would result in a model-implied downgrade of the class A notes to 'AA-sf'.

More detailed model implied ratings sensitivity can be found in the new issue report which is available at www.fitchratings.com.

Paragon provided Fitch with a loan-by-loan data template, cumulative loan book losses, and 90+ days arrears data. Fitch considers that the data available for the analysis is of sound quality.

Fitch was provided with data on loans repossessed by Paragon between 2001 and 2013 to determine the originator's experienced loss severity rate and quick sale adjustment (QSA). The QSA, calculated using the repossession data provided by the originators, was about 36% for the Paragon loans and 32% for MTL loans. As the QSA figures are higher than Fitch's criteria assumption of 22%, Fitch has increased the assumptions for the QSA to 36% for the Paragon portion of the pool and 32% for the MTL portion.

Fitch reviewed the results of an agreed-upon procedures report, which was conducted by Deloitte. Fitch did not make any additional adjustments to its analysis as a result of this report.

To analyse the credit enhancement levels, Fitch evaluated the collateral using its default model ResiEMEA. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. The cash flow tests showed that each class of notes could withstand loan losses at a level corresponding to the related stress scenario without incurring any principal loss or interest shortfall and can retire principal by the legal final maturity.

A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for that asset class is available by accessing the appendix that accompanies the new issue report (see "Paragon Mortgages (No.19) Plc - Appendix", at www.fitchratings.com).

Link to Fitch Ratings' Report: Paragon Mortgages (NO.19) PLC

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741416