DBRS Morningstar Finalises Provisional Ratings on Tudor Rose Mortgages 2020-1 PLC

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following notes issued by Tudor Rose Mortgages 2020-1 PLC (the Issuer):

--Class A at AAA (sf)
--Class B at AA (sf)
--Class C at A (sf)
--Class D at BBB (sf)
--Class E at BB (high) (sf)
--Class F at BB (low) (sf)
--Class X1 at BB (high) (sf)

The final ratings assigned to the Class E and Class F notes differ from the provisional rating of BB (sf) and B (sf) because of tighter initial and step-up margins on Class E and Class F notes and reduction to the swap rate in the final structure.

The transaction is collateralised by a portfolio of UK buy-to-let residential mortgage loans sold by Morgan Stanley Principal Funding, Inc. (the Seller) and granted by Axis Bank UK Ltd. (the Originator).

The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal by the final legal maturity date in June 2048. The rating on the Class B notes addresses the timely payment of interest when most senior and ultimate payment of principal. The ratings on the remaining classes address the ultimate payment of interest and principal.

The transaction features an amortising liquidity reserve fund (funded to 2.0% of the Class A and Class B notes’ outstanding balance). The reserve supports the payment of senior expenses, Class A interest, and Class B interest (subject to the Class B principal deficiency ledger (PDL) being not more than 10% of the Class B notes‘ outstanding balance). Further credit enhancement is provided through the nonliquidity reserve fund, which is equal to 2.0% of the closing balance of the collateralised notes (Class A, B, C, D, E, F, and Z) minus the liquidity reserve fund.

Credit enhancement is calculated as the overcollateralisation provided by the portfolio and the nonliquidity reserve fund. At closing, credit enhancement was at 15.7% for Class A, 10.0% for Class B, 6.2% for Class C, 3.7% for Class D, 1.5% for Class E, and 0.5% for Class F.

As of 31 May 2020, the portfolio consisted of 1,038 loans extended to 675 borrowers with an aggregate outstanding balance of GBP 303.1 million. The weighted-average (WA) seasoning of the portfolio was at 2.6 years, with a WA remaining term-to-maturity of 18.8 years. The WA indexed loan-to-value of the portfolio is at 69.8%. The portfolio primarily comprises interest-only loans (99.6%), yielding a WA coupon of 3.8%. The majority of loans (82.4%) are secured by properties located in London and the South East. As of the cut-off date, one borrower (two loans representing 0.2% of the total balance) was under litigation and five loans (0.5%) were in arrears. A small portion (0.9%) of the portfolio consists of holiday lets, which are more likely to be affected by the travel restrictions imposed due to Coronavirus Disease (COVID-19).

In response to the coronavirus, the Financial Conduct Authority published guidance on 20 March 2020 (https://www.fca.org.uk/news/press-releases/new-guidance-mortgage-providers-lenders-coronavirus) stating that mortgage borrowers facing financial difficulties due to the coronavirus, including buy-to-let mortgage holders, are able to seek payment moratoriums. As a result, most UK lenders are able to agree to a temporary payment moratorium for borrowers of buy-to-let loans provided they are up to date with their payments and if their tenants are struggling to pay rent. On 2 June 2020, this guidance was updated, this allowed borrowers who have not taken payment holidays yet to apply for it and at the same time also allowed borrowers with existing payment holidays, at the end of their deferral period and that are unable to make payments, to extend the moratorium or make partial payments. The current guidance is applicable until 31 October 2020. As of 8 June 2020, 22.4% of the portfolio was on a payment holiday of up to three months.

Most loans pay a fixed rate of interest, with the most common reset frequency (75.9%) being five years. In comparison, the notes pay an interest rate linked to daily compounded Sonia, leading to interest rate risk that will be mitigated using an interest rate swap agreement between the Issuer and BNP Paribas. Based on DBRS Morningstar’s BNP Paribas rating of AA (low) and the collateral posting provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with its “Derivative Criteria for European Structured Finance Transactions” methodology.

The Issuer account bank is Elavon Financial Services, D.A.C., UK Branch. Based on the account bank’s private ratings and the replacement provisions included in the transaction documents (the replacement time frame is longer than what is expected as per the methodology, mitigated by a higher rating trigger), DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned.

DBRS Morningstar is of the opinion that the representation and warranties outlined in the draft transaction documents are weak. In the case of a material breach of any of the representations or warranties by the Seller on the closing date, if not remedied within 30 business days, the Issuer's only remedy will be a claim to damages. Such claims are limited to 5.0% of the current balance of the relevant mortgage loan, with a minimum of claim level of GBP 5,000 per mortgage loan. If the Issuer wishes to make a claim, it must do so by sending a notice on or before 24-months from the closing date. Furthermore, a lot of representation and warranties in the draft transaction documents provided by the Seller are based on knowledge qualifiers (until issuer becomes aware). DBRS Morningstar’s commentary on traded portfolios can be found here: https://www.dbrsmorningstar.com/research/346240/dbrs-comments-on-analytical-considerations-when-analysing-securitisations-backed-by-traded-residential-mortgage-portfolios-in-europe.

DBRS Morningstar based its ratings primarily on the following analytical considerations:
--The transaction’s capital structure, including the form and sufficiency of available credit enhancement.
--The credit quality of the mortgage loan portfolio and the ability of the parties to perform servicing and collection activities.
--The portfolio default rate (PD), loss given default (LGD), and expected loss (EL) assumptions DBRS Morningstar calculated using the European RMBS Insight Model.
--The ability of the transaction to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes. The transaction cash flows were analysed using Intex DealMaker.
--The consistency of the transaction’s legal structure with the DBRS Morningstar “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.
--The relevant counterparties, as rated by DBRS Morningstar, are appropriately in line with DBRS Morningstar legal criteria to mitigate the risk of counterparty default or insolvency.
--The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.

In DBRS Morningstar’s cash flow results, Classes A to F showed some tranche write-down for the target rating scenarios when applying 20% constant prepayment rate from day one and back-loaded default timing. However, lender data showed that, due to combination of the low teaser rate and the applicability of early repayment charges (ERC) while loans are in a fixed-rate teaser period, historically, prepayment rates have been low during the fixed teaser period and then have increased substantially around the reversion date, when loans reset to a higher interest rate and no ERCs are applicable. Since most of the loans are currently in the teaser period, the scenarios where prepayments are assumed to be 20% from day one was deemed remote. Instead, DBRS Morningstar tested a lower 15% constant prepayment rate from day one. DBRS Morningstar also ran additional cash flow sensitivities to test prepayment behaviour as indicated by historical data (i.e., low prepayment during fixed-rate periods and high prepayments around the reversion date) to assign its ratings.

The Class X1 notes would have achieved a higher rating using the cash flow assumptions outlined in DBRS Morningstar’s “European RMBS Insight Methodology” and “European RMBS Insight: UK Addendum”. However, the rating of the Class X1 notes was limited because the Class X1 notes are very sensitive to the level of payment holidays in the portfolio, prepayment rates, and default timings, since the payment of interest and principal relies on the level of excess spread.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and additional adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction DBRS Morningstar has assumed a moderate decline in residential property prices and considered extended payment holidays in its cash flow analysis.

The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies applicable to the ratings are the “European RMBS Insight Methodology” (2 April 2020) and the “European RMBS Insight: UK Addendum” (8 November 2019).

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 at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include historical performance (loan-level payment and arrears history was provided from July 2015 to January 2020) and loan-level data as at 31 January 2020, provided by Morgan Stanley & Co. International plc (Arranger).

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

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.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

In respect of the Class A notes, the PD and LGD at the AAA (sf) stress scenario of 24.1% and 61.0%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.
In respect of the Class B notes, the PD and LGD at the AA (sf) stress scenario of 20.8% and 55.8%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.
In respect of the Class C notes, the PD and LGD at the A (sf) stress scenario of 17.0% and 48.4%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.
In respect of the Class D notes, the PD and LGD at the BBB (sf) stress scenario of 12.7% and 40.9%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.
In respect of the Class E notes, the PD and LGD at the BB (high) (sf) stress scenario of 9.1% and 35.8%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.
In respect of the Class F notes, the PD and LGD at the BB (low) (sf) stress scenario of 7.4% and 31.7%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.
In respect of the Class X1 notes, the PD and LGD at the BB (high) (sf) stress scenario of 9.1% and 35.8%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

Risk sensitivity when the PD is stressed by 25.0%:
--The Class A rating is AA (high) (sf)
--The Class B rating is A (high) (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is BB (sf)
--The Class F rating is B (high) (sf)
--The Class X1 rating is B (high) (sf)

Risk sensitivity when the PD is stressed by 50.0%:
--The Class A rating is AA (low) (sf)
--The Class B rating is A (low) (sf)
--The Class C rating is BBB (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is BB (low) (sf)
--The Class F rating is B (sf)
--The Class X1 rating is B (sf)

Risk sensitivity when the LGD is stressed by 25.0%:
--The Class A rating is AA (high) (sf)
--The Class B rating is A (high) (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BBB (low) (sf)
--The Class E rating is BB (high) (sf)
--The Class F rating is BB (low) (sf)
--The Class X1 rating is BB (low) (sf)

Risk sensitivity when the LGD is stressed by 50.0%:
--The Class A rating is AA (sf)
--The Class B rating is A (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is BB (sf)
--The Class F rating is B (high) (sf)
--The Class X1 rating is B (high) (sf)

Risk sensitivity when both the PD and the LGD is stressed by 25.0%:
--The Class A rating is AA (low) (sf)
--The Class B rating is A (low) (sf)
--The Class C rating is BBB (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is BB (low) (sf)
--The Class F rating is B (sf)
--The Class X1 rating is B (sf)

Risk sensitivity when the PD is stressed by 50% and the LGD is stressed by 25.0%:
--The Class A rating is A (high) (sf)
--The Class B rating is BBB (high) (sf)
--The Class C rating is BB (high) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is B (high) (sf)
--The Class F rating is B (low) (sf)
--The Class X1 rating is B (low) (sf)

Risk sensitivity when the PD is stressed by 25% and the LGD is stressed by 50.0%:
--The Class A rating is A (high) (sf)
--The Class B rating is BBB (high) (sf)
--The Class C rating is BBB (low) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is B (high) (sf)
--The Class F rating is B (sf)
--The Class X1 rating is B (sf)

Risk sensitivity when the PD is stressed by 50% and the LGD is stressed by 50.0%:
--The Class A rating is A (low) (sf)
--The Class B rating is BBB (sf)
--The Class C rating is BB (high) (sf)
--The Class D rating is BB (sf)
--The Class E rating is B (sf)
--The Class F rating is B (low) (sf)
--The Class X1 rating is B (low) (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: Hrishikesh Oturkar, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 June 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

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.dbrsmorningstar.com/about/methodologies.

-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v. 4.2.2.0, https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (8 November 2020),
https://www.dbrsmorningstar.com/research/352573/european-rmbs-insight-uk-addendum
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019),
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/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.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.