Moody’s Ratings (“Moody’s”) has today placed on review for downgrade the rating of one note in Canada Square Funding 7 PLC. The rating action reflects lower than anticipated yield generated by the pool of mortgage loans.

….GBP 2.82M Class D Notes due December 2051, Baa2 (sf) Placed On Review for Downgrade; previously on Oct 13, 2022 Definitive Rating Assigned Baa2 (sf).

RATINGS RATIONALE

The rating action is prompted by lower than anticipated yield generated by the pool of mortgage loans which led to a build-up in principal deficiency leading to the deterioration in the level of available credit enhancement for the affected tranche.

Decrease in Available Credit Enhancement and lower than anticipated portfolio yield

The increase in constant prepayment rate (CPR) was a significant factor in the observed lower than anticipated portfolio yield and the resulting underperformance of the excess spread within the transaction. This scenario resulted in a principal deficiency ledger (PDL) build-up and consequently the deterioration in the level of available credit enhancement for Junior notes. The sustained period of excess spread underperformance culminated in the PDL surpassing the critical 10% threshold for Class D Notes preventing further use of principal to pay interest on these notes. Since September 2023, Class D Notes has been deferring interest, with interest accruing on unpaid interest.

Available credit enhancement for Class A, B, C and E Notes remains commensurate with the current rating to cover modelled projected losses as well as credit risk from other relevant qualitative considerations.

The rating review will be concluded following a detailed analysis in the next quarters with updated performance, level of excess spread and prepayment, evolution of PDL and loan-by-loan data.

Key Collateral Assumptions:

As part of the rating action, Moody’s reassessed its lifetime loss expectation for the portfolio reflecting the collateral performance to date.

The performance of the transaction has remained broadly stable since closing. Total delinquencies have increased slightly in the past year, but remained low, with 90 days plus arrears currently standing at 1.44% of current pool balance. Cumulative losses currently stand at 0.02% of original pool balance.

Moody’s decreased the expected loss assumption to 1.63% as a percentage of current pool balance, which  corresponds to 1% as a percentage of original pool balance from 1.25%.