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UK subprime lender Kensington graduates to prime in £214.9M RMBS

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Near-prime U.K. mortgage lender Kensington Mortgage Co. is readying its first securitization of prime loans, a £214.9 million (US$284.3 million) transaction.

Unlike recent near-prime deals underwritten by KMC, the privately held originator and servicer this time is selling bonds through its Gemgarto 2018-1 PLC trust vehicle, backed by 1,210 mortgages that are considered prime by Moody’s Investors Service and DBRS. Almost all of the 1,210 loans in the pool were originated in 2018 and finance owner-occupied properties. There are no loans financing rental properties, self-certified or non-income-verified (or “fast track”) loans, according to rating agency presale reports.

Both Moody’s and DBRS stated there is a sizable concentration (14.6%) of “help-to-buy” mortgages which are originated under a U.K. government program allowing a five-year interest free period at the start of the loan.

Although considered prime loans, the borrower base still carries risks above standard prime loan securitizations. About 33.8% of the borrowers are first-time buyers and 36.8% are either self-employed, retired or unclassified, the presale reports state. Another 9.8% have had court judgments against them.

Kensington has to date only acquired 70% of the initial collateral; it will acquire the remaining 30% prior to the first interest payment. The deal will have also have a four-year replenishment period in which principal funds beyond what is needed to amortize the Class A notes can be applied to purchase more mortgage loans.

Six classes of notes will be issued in the transaction, including a senior tranche of Class A notes expected to be rated triple-A by both Moody’s Investors Service and DBRS that benefits from initial 18% credit enhancement.

There will also be two classes of notes (X and Z) that are not collateralized by mortgage loans but by the excess spread (based on the average weighted loan interest rate of 4.1% and the portfolio paying the equivalent of 3.5% that will initially amortize from revenue funds).

Kensington is a former subprime lending specialist that was sold to Blackstone and TPG Sixth Street Partners in 2015 before being integrated with the Northway Group and mortgage servicer Ascenden Ltd.

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RMBS U.K. Europe