Charter Court Financial Services (CCFS), operating under its trading name of Precise Mortgages, plans to issue £224.75 million ($352.38 million) of securities backed entirely by buy-to-let residential mortgage loans, according to a presale report from Moody’s Investor Service.
Precise Mortgage Funding 2015-2B is the issuer’s first fully buy-to-let deal, which is a British term that describes properties purchased in order to be rented out. The issuer’s two previous transactions are backed by a mixed pool of residential mortgages that included non-conforming, owner-occupied and buy-to-let mortgage loans.
The latest deal offers £180.9 million of class A notes rated Aaa,’ £5.6 million of class B notes also rated Aaa,’ £18 million of class C notes rated Aa2,’ £12.9 million of class D notes rated Baa3,’ and £6.2 million of class E notes rated Ba3.’ There is also an unrated class Z tranche of £1.2 million of notes that are not being offered.
The class A, B, C, D, and E notes benefit from 22.4%, 19.9%, 11.9%, 6.15%, and 3.4% total credit enhancement, respectively. All of the loans have been originated since May 2014.
The pool consists of 100% prime borrowers, which Moody’s cites as a key strength of the deal. The loans have a weighted average (WA) loan-to-value ratio of 72.44%, which is considered to be low leverage. The mortgages have a WA seasoning of 1.5 years and WA remaining term of 20.02 years. Moody’s also notes that CCFS has proved to be a strong servicer, and currently manages £2 billion of UK legacy and specialist mortgage assets.
Precise has only been lending since 2010 and has a limited operating history when compared to other lenders in the U.K. market. Moody’s considers this to be a key risk of the deal.
Buy-to-let mortgages are also at risk of greater losses relative to owner-occupied mortgages, since distressed borrowers may be more likely to default on a loan that isn’t secured by a primary residence. However one important mitigating factor to this risk is that the foreclosure process is quicker for buy-to-let loans than for owner-occupied properties because tenants can be more easily evicted than owner-occupiers. The repossession process through the courts is also shorter.
In the event of repossession, buy-to-let properties can be appointed a receiver of rent, which collects rents from paying tenants and passes it to the lender. Although the rental income stream keeps a steady cash flow to the transaction, this arrangement could also expose the deal to greater loss severities in a stressed housing market. Moody’s stated in the presale report that “should the house prices weaken significantly then this could lead to an increase in loss severities as in a severe recession a receiver of rent may be unable to successfully re-let a vacant property and so repossession would occur in any case but with a lag and an increased loss severity.”
J.P. Morgan Securities is the lead arranger on the deal; Bank of America Merrill Lynch, JPMorgan, and Lloyds Bank are serving are joint lead managers. The transaction is expected to price next week.