DBRS Ratings Limited assigned provisional ratings to the notes expected to be issued by Residential Mortgage Securities 31 Plc (RMS31; the issuer) as follows:
-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (sf)
-- Class C Notes rated A (sf)
-- Class D Notes rated BBB (high) (sf)
-- Class E Notes rated BB (high) (sf)
-- Class F1 Notes rated B (sf)
-- Class X1 Notes rated C (sf)
(all the above notes together, the Rated Notes).
The ratings assigned to the Class A to F1 notes address the timely payment of interest (while each class of notes is senior-most outstanding) and ultimate payment of principal on or before the legal final maturity date.
RMS31 is a transaction from Kensington Mortgage Company Limited (KMC) that combines seasoned multiple owner-occupied and buy-to-let (BTL) non-conforming (NCF) portfolios of UK mortgages. Approximately 19% of the provisional mortgage portfolio comprises loans that have never been securitised before and the remainder were part of the Preferred Securities and Southern Pacific Securities series of UK residential mortgage-backed (RMBS) issuances. As of 31 July 2018, the aggregate outstanding balance of the mortgage loans was GBP 327.6 million. In recent years, these portfolios have seen an improvement in performance, reducing the proportion of delinquent loans with or without forbearance measures applied.
The loans were originated by Southern Pacific Mortgages Limited (48% of the mortgage portfolio), Preferred Mortgages Limited (35.5% of the mortgage portfolio), London Mortgage Company (13.2% of the mortgage portfolio), Southern Pacific Personal Loans Limited (3.2% of the mortgage portfolio), with Alliance & Leicester and Amber Homeloans Limited making up the remaining loans in the mortgage portfolio. These assets will be serviced by KMC.
The mortgage portfolio is 13.6 years seasoned on a weighted-average basis. This is considered a positive for the mortgage portfolio. Of the loans in the mortgage portfolio, 86.9% were originated in 2003, 2004 and 2005. Since the beginning of 2012, the performance history for the loans shows slightly less than half of the provisional mortgage portfolio in the three months plus arrears status on a cumulative basis; this arrears proportion is, as of the cut-off date of the mortgage portfolio, at a lower level of 19.6%. A further 19.1% of the loans in the mortgage portfolio have been through or are currently under a performance arrangement to pay an amount higher than the normal monthly repayment amount in order to catch up with prior arrears. Although the level of arrears (greater than or equal to one month) is high at 29.1%, most of these loans in arrears show a positive cash flow with a weighted-average pay rate in the last 24 months at 94.6%. DBRS expects most of these loans deep in arrears to continue paying at the observed pay rates at the prevailing low interest rates. This approach to assessing the expected performance of these loans reflects in the base case default estimates for the mortgage portfolio. The expected loss estimates also account for 63.2% of interest-only (IO) repayment loans, 44.5% of borrowers who are self-employed, 65.7% of borrowers who self-certify income at origination, 6.5% of BTL loans and 3.3% of second-lien loans in the provisional mortgage portfolio.
The mortgage portfolio is expected to be purchased by the issuer using the proceeds of the issuance of Class A, Class B, Class C, Class D, Class E, Class F1, Class F2 and Class F3 (the Collateralised Notes). The credit enhancement for the Rated Notes is provided by subordination of the junior notes and a non-amortising reserve fund which is 3% of the aggregate current balance of the mortgage portfolio at closing. The credit enhancement for the Class A notes will be at 27.25%, Class B at 23.5%, Class C at 19.25%, Class D at 15.25%, Class E at 10% and Class F1 at 7.25%.
The liquidity of the notes is supported by the reserve fund, and principal receipts which can be used to support any interest shortfalls for the most senior class of notes outstanding and excess spread (if available). Additionally, a liquidity reserve fund may get funded using principal receipts, if on an interest payment date the reserve fund amount falls below 1.5% of the Collateralised Notes outstanding. Such liquidity reserve, if created, will support the payment of senior fees and any shortfall in payment of interest on the Class A notes.
The basis risk exposure of the issuer is not hedged in the transaction. 13.7% of the loans in the mortgage portfolio pay interest linked to the Bank of England Base Rate (BBR) and most of the remainder pays interest linked to 3 months GBPLibor (86.2%). The interest rate on the notes is linked to 3 months GBPLibor, which has a reset date different from that on the loans. This gives rise to the basis risk which is not hedged. DBRS has assumed a spread between the different indices to simulate potential basis risk in the life of the notes.
DBRS has stressed the cash flows of the transactions to account for product switches which can affect up to 5% of the mortgage portfolio which could be offered a switch to paying a fixed rate of interest.
The loan sale agreement will contain representations and warranties given by Kayl PL S.a.r.l. (seller) in relation to the mortgage portfolio. The representations and warranties provided by the seller on the loans are relatively weaker as compared with some UK RMBS transactions. The relative weakness of the representations and warranties arise due ‘awareness’ qualifications on the usual set of representations and warranties provided in UK RMBS transactions as none of these loans were originated by the legal title holder and/or seller. However, these are comparable with those for securitised mortgage portfolios which have been traded before the sale of the loans to RMBS issuers. Upon breach of representations and warranties, Kayl PL S.a.r.l. is required to repurchase or indemnify the issuer against any loss. Kayl PL S.a.r.l. may have limited resources at its disposal to fund such repurchase. Given the significant seasoning of the loans in the mortgage portfolio, loans in breach of any warranties would have been expected to be identified during the earlier life of the loans. The mortgage portfolio has always been serviced by Acenden, and will be serviced by KMC in the transaction. Both Acenden and KMC are part of the Northview Group and while KMC will now be the named servicer, the servicing team is expected to remain the same for the mortgage portfolio. This largely mitigates the risk of any material loss to the issuer on account of any breach of the market standard package of representations and warranties which are common to UK RMBS transactions.
The Class X1 Notes are primarily intended to amortise using revenue funds. However, if excess spread is insufficient to fully redeem the Class X1 notes when the Class F2 Notes are paid down, principal funds will be used to amortise the Class X1 Notes in priority to the Class F3 notes. In DBRS’s cash flow analysis, the Class F3 notes are rendered partially collateralised as principal funds are diverted to amortise the Class X1 notes. Such an event leads to a PDL debit; however, DBRS’s analysis finds there is insufficient excess spread to reduce the PDL balances and ensure the Class F3 Notes are fully collateralised.
DBRS based its ratings primarily on the following analytical considerations:
-- The transaction’s capital structure, form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated portfolio default rate (PD), loss given default (LGD) and expected loss (EL) outputs on the mortgage loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Rated Notes according to the terms of the transaction documents. The transaction cash flows were analysed using PD and LGD outputs provided by the European RMBS Insight Model and using Intex DealMaker.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes.
-- The consistency of the legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the assignment of the assets to the Issuer.
All figures are in British pound sterling unless otherwise noted.
The principal methodologies applicable to the ratings are: “European RMBS Insight Methodology” and “European RMBS Insight: U.K. Addendum”.
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings include KMC and their agents.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
These ratings concern a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”): [To be included]
For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Kali Sirugudi
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 12 November 2018
DBRS Ratings Limited
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Registered in England and Wales: No. 7139960
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies
-- Derivative Criteria for European Structured Finance Transactions
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375
For more information on this credit or on this industry, visit www.dbrs.com or contact us at email@example.com.