DBRS Assigns Final Ratings to Cape Funding No. 1 Plc

DBRS Ratings Limited (“DBRS”) assigns final ratings to the following notes issued by Cape Funding No 1 Plc:

-- AAA (sf) to £ 2,500,000,000 Class A1P* variable funding note credit facility.

(*If on the exercise of the Class A1P Put Option the then outstanding rating will be discontinued-repaid and the then outstanding rating from the Class A1P note will be transferred to the Class A1R note and effective as of the transfer date.)

Cape Funding No. 1 Plc (the “Issuer”) is a securitisation of prime UK residential mortgage loans originated by TSB Bank Plc (“TSB” or “the Seller” or “Cash Manager”) including loans originated by Lloyds Bank Plc (“Lloyds”) and Cheltenham & Gloucester Plc (“C&G”) which were transferred to TSB. The loans are secured over properties located in England, Wales and Scotland. The Issuer is a bankruptcy remote special purpose vehicle incorporated in the UK. The purpose of the transaction is to raise financing by means of issuing variable funding note credit facilities (“VFNs” or “Class A1P notes, Class A2 notes and Class Z notes”).

At closing, the Class A1P, Class A2 and Class Z notes will be issued to purchase the portfolio of prime UK mortgages. Through the term of the transaction the VFNs may be drawn up to their maximum limits. The maximum drawing amount of the combined Class A1P and Class A2 facilities will be £2.5 billion. At closing, the Class A1P notes initial facility drawing will be £10 million and the initial facility drawing for the A2 notes will be 2.49 billion. The Class A1P will be subscribed by Lloyds and Class A2 and Class Z notes by TSB.

During the A1P facility commitment period Lloyds will have the obligation to subscribe further drawings of the Class A1P facility, upon request of the Issuer or the Cash Manager. After the Class A1P facility commitment period scheduled end date as of 17 December 2018, Lloyds will no longer have the obligation to subscribe further drawings of the Class A1P facility. Proceeds from Class A1P facility drawings will be used to repay the Class A2 notes. This means that as the Class A1P notes increases in size, the Class A2 notes will decrease by an equal and opposite amount. The outstanding combined value of the A1P and A2 notes cannot exceed £2.5 billion.

Following certain events, Lloyds will have the option (Class A1P Put Option) to cancel the Class A1P notes and transfer its outstanding notional amount and coupon to the Class A1R notes. Unlike the Class A1P notes, the Class A1R notes are expected to be cleared in an acceptable clearing house and listed in an acceptable market.

The purpose of the Cape Funding No 1 Plc securitisation is to provide TSB funding to fund the ‘Oldbury Portfolio’ after TSB’s IPO. The Oldbury Portfolio was transferred to TSB in March 2014 and funded by an unsecured loan provided by Lloyds. The transaction aims to replace the unsecured loan through the funding obtained from drawings under the Class A1P notes. The transaction incorporates certain triggers (“Mandatory Repayment Event”) linked to the Oldbury Portfolio. A Mandatory Repayment Event will occur (i) if the amount drawn under Class A1P (or principal outstanding amount of A1R) exceeds the outstanding performing balance of the Oldbury Portfolio or (ii) if TSB completes the sale of its beneficial economic interest in the Oldbury Portfolio. Under such circumstances ((i) and (ii)) the issuer will be obliged to repay (in part or in full) Class A1P (or Class A1R) as required. For the avoidance of doubt, the Oldbury Portfolio is not part of this securitisation.

The mortgage portfolio consists of prime first charge mortgage loans, backed by properties in England, Scotland and Wales. The initial portfolio is expected to be £ 2.92 billion. DBRS performed an analysis of the historical mortgage loan performance data and market data to assess the base case assumptions of the transaction. The portfolio is serviced by TSB.

The rating is based upon review by DBRS of the following analytical considerations:

• The transaction’s capital structure and the form and sufficiency of available credit enhancement; Class A1P notes’ credit enhancement consists of the subordinated £ 425 million Class Z notes, which is 14.55% of the initial outstanding amount of the notes. The £ 73 million reserve fund provides only liquidity support to cover for any shortfall in payment of senior fees and interest on the Class A1P and Class A2 notes. The reserve fund will be funded at closing by the start-up loan.

• The Seller will be able to sell new mortgages to the Issuer and substitute loans through the term of the transaction in accordance with the eligibility and substitute loan criteria. DBRS has assumed the worst case composition of the pool based on the eligibility and substitution loan criteria. The assumed characteristics of the portfolio include: (i) 70% weighted average current loan-to-value (“CLTV”);(ii) 30% of loans with a CTLV of 75%; (iii) 15% of loans with a CLTV between 75% and 80%; (iv) no loan has a CLTV greater than 90%; (v) Coupon of tracker loans is the Bank of England Base Rate (“BBR”) + 150bps; Coupon of variable rate loans is BBR+ 200bps; (vi) 20% of loans bear BBR interest rate; (vii) 45% interest only loans and (viii) 22% self-employed loans.

• The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing duties. DBRS was provided with the historical performance as well as loan level data for the initial mortgage portfolio of the transaction. Furthermore DBRS analysed market data such as delinquencies, repossessions, loss severity, losses and prepayments in respect of UK prime mortgages. Details of estimated defaults, loss given default and expected losses for the mortgage portfolio in a “AAA (sf)” stress scenario are highlighted below.

• DBRS used a combination of default timing curves (front and back-ended), rising and declining interest rates and low, mid and high prepayment scenarios in accordance with the DBRS rating methodology to stress the cash flows. DBRS has assumed additional losses though the term of the transaction which are linked to triggers associated to the Oldbury Portfolio. Given the low prepayment level observed in UK and permitted loan variation in the portfolio, DBRS also tested a scenario with zero prepayments. Furthermore, the basis risk of the transaction is unhedged. DBRS estimates basis risk to be limited as no fixed rate loans are included in the portfolio. DBRS conducted a sensitivity analysis of the historical variable rates (offered by TSB) and BBR of the collateral loans against 3 Months GBP Libor paid under the notes. According to the eligibility criteria, DBRS has assumed the portfolio to be exposed 80% variable loans and 20% tracker loans.

• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable is:
Master European Residential Mortgage-Backed Securities Rating Methodology and the UK Jurisdictional Addendum

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include Lloyds, TSB and their agents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality. The information upon which DBRS ratings and reports are based, and any other content displayed on the Site, is obtained by DBRS from sources DBRS believes to be accurate and reliable.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of a change in the transaction parameters (probability of defaults and/or loss given default) on the rating of Class A1P notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

• In respect of Class A1P notes and a rating category of “AAA (sf)”, the Probability of Default (“PD”) of 21.77%, a 25% and 50% increase on the PD.

• In respect of Class A1P notes and a rating category of “AAA (sf)”, Loss Given Default (“LGD”) of 43.80%, a 25% and 50% increase on the LGD.

DBRS concludes that for the Class A1P notes:

• A hypothetical increase of the PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A1P notes to AA (high) (sf).

• A hypothetical increase of the PD by 50%, or a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1P notes to AA (high) (sf).

• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class A1P notes to AA (high) (sf).

• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class A1P notes to AA (sf).

• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class A1P notes to AA (sf).

• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class A1P notes to AA (low) (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“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 regulations only.

Initial Lead Analyst: David Sanchez Rodriguez
Initial Final Rating Date: 20/05/2014
Initial Final Rating Committee Chair: Quincy Tang
Last Rating Date: Not applicable; no last rating date.
Lead Surveillance Analyst: Keith Gorman

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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

• Master European Residential Mortgage Backed Securities Rating Methodology and Jurisdictional Addenda
• Legal Criteria for European Structured Finance Transactions
• Operational Risk Assessment for European Structured Finance Servicers
• Unified Interest Rate Model for European Securitisations