-- Daniel FlattLudgate 2006-1FF1 U.K. will almost certainly draw further on its reserve fund in the next quarter, Fitch Ratings has said. Mortgages Plc, servicer of the loans in the residential mortgage-backed securitization, recently reported a drawing of £600,000 ($1.2 billion) of its £1.5 billion ($3 billion) reserve pool, one of the largest reserve draws in percentage terms known to the U.K. RMBS market (TS 5/12).
The initial draw was prompted because of the widening spread between the Bank of England Base Rate, which is the basis on which Ludgate receives payments from borrowers, and LIBOR, which is the basis on which Ludgate pays money to investors. At the time the deal was structured, LIBOR was 17 bps higher than BBR; recently it has been as high as 85 bps. The transaction contains no hedge to protect against this risk.
According to Fitch Ratings, yesterday’s Bank of England rate cut to 5.5% will place additional stress on the transaction over the next quarter as the majority of the loans in the portfolio are variable rates that will reset monthly, while the LIBOR rate on the notes has already been fixed for the next three months. "If the continued dislocation of LIBOR and BBR continues for an extended period, the available excess spread to the transaction will be reduced, which could result in further reserve fund draws beyond next quarter and the reserve fund being fully utilized," Fitch said.
As a result, the agency has downgraded the BB- Class S notes to B and placed the class D and E notes, rated BBB and BB, respectively, on outlook negative on the non-conforming deal originated by Freedom Funding . All other notes were affirmed with stable outlook.
Calls to Mortgages Plc were not immediately returned.