Virgin Money Up with First U.K. RMBS of 2016

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U.K. bank Virgin Money Plc plans to offer the first UK RMBS of 2016.

The transaction – called Gosforth Funding 2016-1 – will offer ‘Aaa’ rated class A notes that are backed by a £1.97 billion ($2.86 billion) portfolio of prime U.K. mortgages.

Moody’s Investors Service assigned preliminary ratings to the notes that are unsized as of press time. The trust will also offer a class M tranche that will be rated ‘Aa2’. The notes are all due on February 2058 and benefit from 10% subordination on the senior notes and 6% subordination on the class M notes. 

Citibank, Deutsche Bank and Merrill Lynch are the lead managers

The loans in the portfolio pool are 1.6 years seasoned and have a remaining life of 21.6 years; 44.3% of the loans were originated in 2014.  The loans have a weighted average LTV of 62.5%.

All of the loans are current; however the deal’s revolving structure means that the credit profile could change over the life of the transaction, as new loans are added to the pool. Moody’s said in the presale report that the addition of new loans brings the risk that the asset quality could worsen compared to the pool at closing and could generate additional losses.

“The added assets may yield less spread and there may also be an increased risk of interest rate mismatch between the new loans added and the notes if an inappropriate hedging mechanism is in place,” said Moody’s.

New loans would also be underwritten in a changing housing environment. “The added assets could have less seasoning and less house price appreciation/more house price depreciation than the assets currently in the transaction,” the rating agency said.

However, the Gosforth structure only allows for fully performing loans to be added to the pool; loans with even one month of delinquency, over a 12 month period, can’t be added to the mix.

Although 87.3% of the loans in the transaction pool are fixed rate at closing, all will revert to Virgin Money’s Standard Variable Rate (SVR)at some point during the loan’s term. The notes issued from the Gosforth trust pay three months LIBOR plus a margin which leads to an interest rate mismatch between what the notes and loans pay.

Virgin will provide the interest rate swap to hedge the interest rate mismatch between the interest paid on the notes and the loans.

The sponsor has issued six previous transactions from the Gosforth series that have performed better than the average deal in the U.K. prime RMBS sector; however only limited performance information is available since the first Gosforth transaction closed in January 2010.

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