DBRS Morningstar Confirms Ratings on Finsbury Square 2019-3 plc

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings on the bonds issued by Finsbury Square 2019-3 plc as follows:

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

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date. The ratings on the Class B to E Notes address the timely payment of interest, when the class of notes is most senior and ultimate payment of interest on or before the legal final maturity date otherwise, and ultimate payment of principal on or before the legal final maturity date. The rating on the Class X addresses the ultimate payment of interest and 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 September 2020 payment date.
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a securitisation collateralised by a portfolio of residential mortgage loans granted by Kensington Mortgage Company Limited (KMC) in England, Wales, and Scotland. Notable features of the portfolio are Help-to-Buy (HTB) and Right-to-Buy (RTB) mortgages; Buy-to-Let (BTL) properties; borrowers with adverse borrower features, including self-employed borrowers and borrowers with prior county court judgments; and the presence of arrears at closing, albeit in limited proportions. The purchased receivables balance increased to GBP 424,604,820 from GBP 295,769,457 between closing and the first payment date falling in March 2020 as additional loans were purchased during that period. The portfolio has been amortising since. The transaction legal final maturity is on the payment date in December 2069, with a first call date on the payment date in March 2023.

PORTFOLIO PERFORMANCE
As of the September 2020 payment date, two-to-three months arrears represented 0.3% of the outstanding portfolio balance, stable from closing; the 90+ delinquency ratio was 2.0%, up from 1.1% at closing; and total arrears were 2.6% of the outstanding portfolio balance, up from 1.8% at closing. During the same time period, two properties were repossessed, however no losses have yet been recorded, and recoveries represented 94.0% of the repossessions. As of the September 2020 payment date, 56.1% of the outstanding portfolio balance have been granted principal payment holidays with periods that vary between one and three months.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and decreased its base case PD assumption to 5.8% from 6.1% at closing and its base case LGD assumption to 19.7% from 19.8% at closing. DBRS Morningstar’s analysis factors the presence of HTB mortgages (6.1% of the outstanding portfolio balance) and BTL mortgages (31.9% of the outstanding portfolio balance) as well as a high proportion of self-employed borrowers (49.4% of the outstanding portfolio balance). DBRS Morningstar incorporated these adverse features as well as adjustments resulting from the Coronavirus Disease (COVID-19) into its analysis.

CREDIT ENHANCEMENT
As of the September 2020 payment date, the credit enhancement (CE) increased as follows since the DBRS Morningstar initial rating:

--CE to the Class A Notes increased to 16.4%, up from 15.7%;
--CE to the Class B Notes increased to 11.6%, up from 11.2%;
--CE to the Class C Notes increased to 7.9%, up from 7.7%;
--CE to the Class D Notes increased to 5.8%, up from 5.7%;
--CE to the Class E Notes increased to 5.3%, up from 5.2%; and
--CE to the Class X Notes remained at 0.0%.

The CE for the Class A to E Notes consists of the subordination of the junior notes and a General Reserve Fund (GRF).

The GRF is nonamortising and available to cover senior fees, senior swap payments, interest on the Class A to E Notes, and principal losses via the principal deficiency ledgers (PDLs) on the Class A to F Notes. The GRF was funded at GBP 9,137,500 at closing and reduced to GBP 8,500,000 at the first payment date. As of the September 2020 payment date, the GRF was its target level of GBP 8,500,000, equal to 2% of the initial Class A to F Notes. Once the Class E Notes are fully redeemed, the target balance of the GRF becomes zero. As of the September 2020 payment date, all PDLs were clear.

A Liquidity Reserve Fund (LRF) provides additional liquidity support to the transaction to cover senior fees, senior swap payments, and interest on the Class A and Class B Notes. The LRF is funded through available principal funds if the GRF balance falls below 1.5% of the outstanding Class A to F Notes. In this event, the LRF is funded to 2% of the outstanding Class A and Class B Notes balances and is replenished at each payment date.

The transaction is exposed to interest rate risk as 89.8% of the outstanding portfolio balance pays a fixed rate of interest on a short-term and a floating rate of interest indexed to three-month GBP Libor afterwards, while the rated notes are indexed to Sterling Overnight Index Average (Sonia). In addition, loans can be subject to a variation in the length of the fixed-rate period, the applicable interest rate, and maturity date through a “Product Switch” up to 20% of the Class A to F original balance. As of September 2020 payment date, Product Switch loans represented 0.4% of the Class A to F original balance.

Citibank N.A./London Branch acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Citibank N.A./London Branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar 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 Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

BNP Paribas London Branch acts as the swap counterparty for the transaction. DBRS Morningstar's private rating of BNP Paribas London Branch is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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 adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar increased the expected default rate for self-employed borrowers, incorporated a moderate reduction in residential property values, and considered reported payment holidays as well as stressed payment holiday scenarios in its cash flow analysis.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar’s 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 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 methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports provided by Deutsche Bank AG, London Branch, and loan-level data provided by Kensington Mortgage Company Ltd.

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.

The last rating action on this transaction took place on 28 October 2019, when DBRS Morningstar finalised its provisional ratings on the notes.

The lead analyst responsibilities for this transaction have been transferred to Natalia Coman.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies is available at www.dbrsmorningstar.com.

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

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current 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 5.8% and 19.7%, 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 would be expected to fall to AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A would be expected to fall to A (high) (sf).

Class A 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)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (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)

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

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

Class X Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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 Limited are subject to EU and U.S. regulations only.

Lead Analyst: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 27 September 2019

DBRS Ratings Limited
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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.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020), https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology
-- European RMBS Insight Methodology (2 April 2020),
https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology
-- European RMBS Insight: UK Addendum (9 October 2020) and European RMBS Insight Model v.4.3.1.0, https://www.dbrsmorningstar.com/research/368132/european-rmbs-insight-uk-addendum
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions
-- 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 (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions
-- 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

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.