DBRS Ratings Limited (DBRS) confirmed the ratings of the Senior A Notes and the Senior B Notes (together, the Rated Notes) issued by Mortar No. 1 Limited (the Issuer) at AA (sf) and A (sf), respectively.
The ratings of the Senior A Notes and the Senior B Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.
The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the revolving collateral portfolio.
-- Current subordination available to the Rated Notes to cover the expected losses at the respective rating levels.
The Facility, which is provided by Compartment 2015-021-Semper of Managed and Enhanced Tap (Magenta) Funding S.T. and Sumitomo Mitsui Banking Corporation, Brussels Branch, is used to fund the purchase of buy-to-let (BTL) and owner-occupied mortgage loans originated by Paratus AMC Limited (Paratus AMC). Paratus AMC originates mortgage loans under the secured lending brand of Foundation Home Loans. The mortgages funded secure the amounts drawn under the Facility. Paratus AMC is also the servicer in this transaction.
As of the December 2018 payment date, loans that were in arrears for one month represented 0.2% of the outstanding portfolio balance. The December 2018 payment date was the first payment since the Initial Rating Date whereby loans entered into arrears. None of the loans in the current portfolio have defaulted; therefore, the losses on the portfolio amount to zero.
DBRS maintained its base case PD and LGD assumptions at 6.9% and 26.1%, respectively.
DYNAMIC ADVANCE RATE
At closing and at each instance of drawdown of the Facility, Paratus AMC, as the noteholder of the junior notes, will fund a minimum of 6.0% of the aggregate amount of loans sold to the Issuer. The extent of such funding by Paratus AMC is reflected in the outstanding amount of the junior notes. This minimum junior notes’ size condition would change depending upon the Portfolio Gross Loss number as calculated by a Dynamic Advance Rate Model (Mortar Model) and will hence determine the advance rate under the Facility. For example, the minimum junior notes’ size of 6.0% (hence an advance rate of 94%) will apply as long as the Portfolio Gross Loss number falls in the range of 0% to 11.0%. For a Portfolio Gross Loss number between 11.0% to 11.50%, the minimum junior notes’ size will be higher at 7.0%. The transaction documents include a table that contains the minimum junior notes’ size corresponding to Portfolio Gross Loss numbers ranging up to 32.5%, beyond which the stop purchase event would be triggered.
The minimum junior notes’ size of 6.0% means that the minimum subordination level for the Senior B Notes is 6.0%. As the size of the Senior B Notes is fixed at 14.0% of the total notes’ issuance, the minimum level of subordination for the Senior A Notes is 20.0%. As of the December 2018 payment date, the subordination of the Senior A Notes is 21.8% and the subordination of the Senior B Notes is 8.1%. The subordination levels for the Senior A Notes and the Senior B Notes are greater than their respective required minimum, given that the Portfolio Gross Loss from the Mortar Model is below 11.0%.
The transaction benefits from an amortising reserve fund, which is currently at its target amount of GBP 6.4 million, and is available to cover shortfalls in senior fees, swap payments and interest on the Rated Notes. Moreover, the reserve fund also provides credit support as it can be used to reduce the Principal Deficiency Ledger balance.
Elavon Financial Services DAC, U.K. Branch (Elavon) acts as the account bank for the transaction. Based on the DBRS private rating of Elavon, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Senior A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.
Natixis S.A., London Branch (Natixis), is the Swap Counterparty in the transaction. The DBRS private rating of Natixis is above the first rating threshold as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the rating assigned to the Senior A Notes.
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
DBRS conducted a review of the amended transaction legal documents following an amendment to the transaction eligibility criteria in November 2018. The other transaction legal documents remain unchanged since the last rating action.
An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the closing mortgage portfolio and will continue to be monitored using the month-end mortgage portfolios and the Mortar Model submitted to DBRS on a monthly basis as set forth in the transaction legal documents.
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/333487/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings include investor reports provided by U.S. Bank Trustees Limited and loan-level data provided by Paratus AMC.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, 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 these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 18 January 2018, when DBRS assigned its ratings of AA (sf) and A (sf) to the Senior A Notes and Senior B Notes, respectively, following a restructuring of the transaction.
The lead analyst responsibilities for this transaction have been transferred to Andrew Lynch.
Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the ratings (the “Base Case”):
-- DBRS expected a base case PD and LGD for the revolving collateral pool based on a review of the current assets as well as the transaction’s eligibility and replenishment criteria. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD assumptions for the revolving collateral pool are 6.9% and 26.1%, respectively.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Senior A Notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Senior A Notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Senior A Notes would be expected to be downgraded to A (high) (sf).
Senior A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
Senior B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
For further information on DBRS historic default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Andrew Lynch, Assistant Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 7 December 2015
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.
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- Interest Rate Stresses for European Structured Finance Transactions
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.