DBRS Morningstar Finalises Provisional Ratings on Finsbury Square 2020-1 plc

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following notes issued by Finsbury Square 2020-1 plc (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at BBB (high) (sf)
-- Class X Notes at BB (high) (sf)

The final rating of the Class X notes, BB (high) (sf), is higher than the provisional rating of B (low) (sf) because of the tightening of the notes margins across the structure once the transaction priced. In addition to the benefit of paying a lower interest rate on Class X Notes, the lower margins paid on the Class A to D notes create more excess spread that can be used to repay the Class X Notes principal.

The rating on the Class A Notes addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date in 2070. The ratings on the Class B, C, and D notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. The rating on the Class X Notes addresses the ultimate payment of interest and repayment of principal by the final maturity date. DBRS Morningstar does not rate the Class E Notes or Class Z Notes in this transaction.

The Issuer is a securitisation collateralised by a portfolio of owner-occupied (70.6% of the portfolio balance) and buy-to-let (29.4%) residential mortgage loans granted by Kensington Mortgage Company Limited (KMC) in England, Wales, and Scotland.

Five tranches of the mortgage-backed securities (i.e., the Class A Notes to Class E Notes) funded the purchase of the initial portfolio and the prefunding principal reserve. Additionally, the proceeds of two classes of noncollateralised notes (i.e., the Class X Notes and Class Z Notes) funded the general reserve fund and the prefunding revenue reserve as well as covered initial costs and expenses. The Class X Notes are primarily intended to amortise using revenue funds; however, if excess spread is insufficient to fully redeem the Class X Notes, principal funds will be used to amortise the Class X Notes in priority to the Class E Notes.

The structure includes a prefunding mechanism where the Issuer may buy further mortgages originated by KMC. The acquisition of these assets shall occur before the first payment date using the proceeds standing to the credit of the prefunding reserves.

The general reserve fund, funded at closing with GBP 13,975,000 (equivalent to 2.15% of the balance of the Class A Notes to the Class E Notes), is available to provide liquidity and credit support to the Class A to Class D Notes. From the first payment date onwards, the required balance of the general reserve fund will be 2.0% of the balance of the Class A Notes to the Class E Notes and, if its balance falls below 1.5% of the balance of the Class A Notes to Class E Notes, principal available funds will be used to fund the liquidity reserve fund to a target of 2.0% of the balance of the Class A Notes and Class B Notes. The liquidity reserve fund will be available to cover interest shortfalls on the Class A Notes and Class B Notes as well as senior items on the preenforcement revenue priority of payments. The availability for paying interest on the Class B Notes is subject to a 10% principal deficiency ledger condition.

As of 31 January 2020, the portfolio consisted of 2,987 with an aggregate principal balance of GBP 4890.0 million. According to DBRS Morningstar’s calculations, loans in arrears for longer than one month accounted for 4.1% of the initial portfolio.

The initial portfolio includes 6.1% of help-to-buy (HTB) loans, whose borrowers are supported by government loans (i.e., the equity loans, which rank in a subordinated position to the mortgages). HTB loans are used to fund the purchase of new-build properties with a minimum deposit of 5% from the borrowers. The weighted-average current loan-to-value ratio of the initial portfolio is 72.8%, which increased to 74.5% in DBRS Morningstar’s analysis to include the HTB equity loan balances.

The majority of the initial portfolio (77.5%) relates to a fixed-to-floating product, where borrowers have an initial fixed-rate period of one to five years before switching to floating-rate interest indexed to three-month Libor. Interest rate risk is expected to be hedged through an interest rate swap. Approximately 9.5% of the initial portfolio-by-loan balance comprises loans originated to borrowers with at least one prior County Court Judgment and 32.8% are either interest-only loans for life or loans that pay on a part-and-part basis.

The Issuer entered into a fixed-floating swap with BNP Paribas, London Branch (BNP London) to mitigate the fixed-interest rate risk from the mortgage loans and Sterling Overnight Interbank Average Rate (Sonia) payable on the notes. Based on the DBRS Morningstar private rating of BNP London, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to BNP London to be consistent with the ratings assigned to the rated notes as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

Citibank, N.A., London Branch (Citibank London) holds the Issuer’s transaction account, the general reserve fund, the liquidity reserve fund, the prefunding reserves, and the swap collateral account. Based on the DBRS Morningstar private rating of Citibank London, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to Citibank London to be consistent with the ratings assigned to the rated notes as described in DBRS Morningstar's “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure as well as form and sufficiency of available credit enhancement to support DBRS Morningstar-projected expected cumulative losses under various stressed scenarios.
-- The credit quality of the portfolio and DBRS Morningstar’s qualitative assessment of KMC’s capabilities with regard to originations, underwriting, and servicing.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes.
-- The transaction parties’ financial strength to fulfil their respective roles.
-- The transaction’s legal structure and its consistency with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology as well as the presence of the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AAA with a Stable trend as of the date of this press release.

DBRS Morningstar analysed its transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
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 Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include loan-by-loan data as of 31 January 2020 provided by KMC.

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

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar 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 Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

The following scenarios constitute the parameters used to determining the ratings (the Base Case):
-- In respect of the Class A Notes, the probability of default (PD) and loss given default (LGD) at the AAA (sf) stress scenario of 23.4% and 46.8%, respectively.
-- In respect of the Class B Notes, the PD and LGD at the AA (high) (sf) stress scenario of 21.4% and 43.7%, respectively.
-- In respect of the Class C Notes, the PD and LGD at the A (high) (sf) stress scenario of 17.0% and 37.0%, respectively.
-- In respect of the Class D Notes, the PD and LGD at the BBB (high) (sf) stress scenario of 12.8% and 30.4%, respectively.
-- In respect of the Class X Notes, the PD and LGD at the BB (high) (sf) stress scenario of 8.6% and 24.6%, respectively.

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

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

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

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

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

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 January 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Derivative 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

A description of how DBRS Morningstar 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.