DBRS Confirms Ratings of Charles Street Conduit Asset Backed Securitisation 1 Limited

DBRS Ratings Limited (DBRS) confirmed the ratings of the notes issued by Charles Street Conduit Asset Backed Securitisation 1 Limited (the Issuer) as follows:

-- Class A Notes confirmed at AA (sf)
-- Class B Notes confirmed at BBB (high) (sf)
-- Class C Notes confirmed at BB (high) (sf)

The ratings of the Class A Notes, Class B Notes and Class C Notes (together, the 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, as of the July payment date.
-- Portfolio default rate (PD), loss given default (LGD) and expected loss assumptions on the receivables.
-- Available credit enhancement to the notes to cover the expected losses at their respective rating levels.
-- No early termination events have occurred.
The Issuer is a warehouse securitisation of UK first- and second-lien residential mortgages, which include owner-occupied, buy-to-let and bridging mortgages. The mortgage loans are originated and serviced by various subsidiaries of Together Financial Services Limited (Together) including Blemain Finance Limited, Together Commercial Finance Limited (previously, Lancashire Mortgage Corporation Limited), Harpmanor Limited, Auction Finance Limited, Together Personal Finance Limited (previously Cheshire Mortgage Corporation Limited) and Bridging Finance Limited. Each subsidiary is also responsible for the servicing of the respective mortgage loans.

Until the Initial Maturity Date falling in September 2022, the Issuer may use principal receipts or available facility commitment amounts to purchase new loan receivables. Each purchased loan needs to meet the eligibility criteria and adhere to the portfolio covenants, all of which have been met to date.

The transaction was amended on 12 July 2019 where a swap was implemented to hedge the interest rate risk arising from the fixed-rate loans in the portfolio. The portfolio covenant for fixed-rate loans was also amended, where the maximum permitted fixed-rate loans was increased to 50.0% from 15.0%. At the time of the amendment, DBRS determined that the hedging arrangement had no impact on the ratings of the notes.

PORTFOLIO PERFORMANCE
As of the July 2019 payment date, loans that were two- to three-months in arrears represented 0.8% of the outstanding portfolio balance, down from 1.1% in July 2018. The 90+ delinquency ratio was 0.5%, stable since July 2018. The cumulative default ratio was 3.7%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-level analysis of the receivables based on the worst-case portfolio composition. DBRS assumes a base case PD and LGD of 8.1% and 29.1%, respectively. The assumptions continue to be based on the worst-case portfolio composition.

CREDIT ENHANCEMENT
Subordination to the notes increases with changes in the advance rate or decreases to a floor determined by the Advance Rate Caps. The Class A, Class B and Class C Notes benefit from a minimum subordination of 17.5%, 12.5% and 10.0%, respectively.

A Co-Mingling Reserve is in place to cover shortfalls in senior fees, swap payments and Class A interest. The target amount is 1.5% of the outstanding balance of the notes and is replenished through principal collections prior to the Initial Maturity Date. It is currently funded to its target balance of GBP 16.4 million.

Lloyds Bank plc acts as the account bank for the transaction. Based on the account bank reference rating of Lloyds Bank plc at AA, which is one notch below the DBRS Long-Term Critical Obligations Rating of AA (high), 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 Class A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

HSBC Bank plc acts as the swap counterparty for the transaction. DBRS's private rating of HSBC Bank plc is above the First Rating Threshold as described in DBRS's "Derivative Criteria for European Structured Finance Transactions" methodology.

The transaction structure was analysed in Intex DealMaker.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is the “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.

A review of the amended transaction legal documents and swap documentation was conducted at the July 2019 amendment.

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 and loan-level data provided by Together Financial Services Limited.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was not 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.

This is the first rating action on this transaction since the initial rating date on 14 September 2018 where DBRS assigned ratings to the Class A, Class B and Class C Notes of AA (sf), BBB (high) (sf) and BB (high) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Clare Wootton.

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 rating (the Base Case):
-- DBRS expected a lifetime base case PD and LGD for the pool based on a review of the assets. 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 of the current pool of loans for the Issuer are 8.1% and 29.1%, 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 Class A Notes would be expected to fall to A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to fall to BBB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to BBB (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (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 BBB (low) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)

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: Clare Wootton, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 14 September 2018

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom

Registered and incorporated under the laws of England and Wales: Company 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
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria 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 info@dbrs.com.