DBRS Assigns Final Ratings to Paragon Sixth Funding Limited Secured Credit Facility

DBRS Ratings Limited (“DBRS”) assigns the following ratings to Paragon Sixth Funding Limited (“PSFL”) Secured Credit Facility:

-- AA (sf) to the Senior Loan with a total committed amount of GBP 100 Million
--Subordinated Loan is not rated by DBRS

A credit facility is a form of commercial lending which facilitates the funding of mortgage loans. Typically a lender is not in a position to fund a vast amount of loans without using up their required capital quickly. The borrower repays the loan after a sale of mortgage loans via a securtisation or the whole loan market. The mortgages funded are used as collateral for the secure credit facility.

The Paragon Sixth Funding Credit Facility consists of Senior and Subordinated Loans. The rated Senior Loan is provided by Natixis S.A (“Lender”) with Paragon Mortgages (2010) Limited (“Paragon (2010)”) the provider of the Subordinated Loan. Paragon Mortgages (2010) Limited is also the originator of the underlying mortgage loans. The combined drawing from the Senior and Subordinated Loans enable PSFL to make periodic drawings in order to purchase UK Buy-to-Let mortgage loans originated by Paragon Mortgages (2010) Limited. Further drawings on the facility are allowed up to the facility limit provided a ‘Stop Purchase Event’ has not been triggered. ‘Stop Purchase Events’ are defined in the transaction documents but, in summary, include a breach of portfolio concentration criteria and concentration of 60 day and 90 day arrears. The rated Senior Loan will be secured against the purchased mortgage loans.

The maximum size of the rated Senior Loan provided to PSFL is GBP 100 Million (“Committed Amount”). Funds provided through the Senior Loan are available for a Period of 12 months from the commencement of the facility (“Commitment Period”). The commitment period may be extended to 24 months from the signing date provided that at least 50 per cent. of the principal amount outstanding of the Senior Loan has been repaid through a securitisation of GBP 100 Million or greater. The Committed Amount may be increased during the commitment period provided both the Senior Lender and PSFL consent to do so.

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

• The transaction’s cash flow structure and form and sufficiency of available credit enhancement. The amount advanced during the commitment period is equal to outstanding balance of the portfolio to be purchased multiplied by the advance rate (1 minus the Credit Enhancement Percentage) and as such Credit Enhancement is provided in the form of over collateralisation. The over collateralised portion of the mortgage portfolio is funded by Paragon Mortgages (2010) Limited through the Subordinated Loan. The Credit Enhancement percentage is dynamic and is calculated on a monthly basis.

In accordance with the transaction documents, DBRS calculates the minimum credit enhancement level as GBP 10 Million until the outstanding amount of the Senior Loan has reached GBP 66.6 Million, at which point the minimum level of subordination is calculated as 15% of the outstanding amount of the Senior Loan.

Liquidity coverage is provisioned through a Contingency Amount, funded from the outset, covering three months of Senior Liabilities and interest payments on the rated Senior Loan. The contingency amount is calculated as the maximum of zero and the projected senior liabilities plus three months of interest payable on the Senior Loan based on the current rate. Principal funds may also be utilised to cover interest shortfalls on the Senior Loan. The Contingency Amount is calculated periodically and funded to the required level via excess spread. If there are insufficient funds, the Subordinated Loan can be used to fund the Contingency Amount up to the required level. The over collateralisation may also help to provide liquidity.

• The credit quality of the Buy-to-Let mortgages that are anticipated to be sold into PSFL secured against the Senior Loan and the ability of the servicer to perform collection activities on the collateral. A default probability and Loss Given Default assessment was made on the underlying collateral expected to be purchased. DBRS stressed the loan by loan data in accordance with the portfolio concentration criteria defined in the transaction documents and the underwriting practices of Paragon (2010).

DBRS was provided with historical performance data of Paragon (2010), Paragon Mortgages Limited (“PML”) and Mortgage Trust Limited (“MTL”) mortgage originations. BTL performance is generally influenced by the rental coverage ratio, LTV ratio and landlord experience. BTL properties are also exposed to the possibility that the property will remain untenanted for a proportion of time, in which case the landlord may have to rely on an alternative source of income to service the mortgage loan.

DBRS assessed the performance of Paragon originations and securitisations relative to the UK mortgage and securitisation market. DBRS analysis of historical performance data indicates Paragon mortgage originations and securitisations have demonstrated a stronger performance than most elements of the UK Prime and Buy-to-Let markets. As of the cut of date of the data provided, Paragon (2010) mortgage originations have not entered into 90+ arrears or exhibited losses. As of the 31-mar-2014, collateral securitising PM16, PM17 and PM18 transactions has not entered into 90+ arrears or exhibited losses. PM16, PM17 and PM18 are solely collateralised by Paragon (2010) originations. This is a factor of the strong underwriting and servicing practices, rise in average rental price arising from an increase in demand for rental properties and the low interest rate environment.

Paragon (2010) Limited will act as the Administrator with Homeloan Management Limited (“HML”) in place as the back-up Administrator. In the event of the replacement of Paragon Mortgages (2010) Limited as the administrator by HML, is not expected to result in any significant servicing disruptions.

• The ability of the transaction to withstand stressed cash flow assumptions and repay the lender according to the terms of the transaction documents. DBRS utilised front and back loaded default timing curves, rising and declining interest rates and low, mid and high prepayment scenarios. As the recently exhibited prepayment rates in UK mortgage sector are below 5%, DBRS also tested for a scenario with 0% prepayments. DBRS cash flow analysis tested for the repayment of timely interest and ultimate principal on the Senior Loan.

In accordance with the portfolio criteria, fixed rate Buy-to-Let mortgage loans can be purchased. The interest rate payable on Senior Loan and as such the transaction is exposed to interest rate risk. It is expected the fixed period will last for approximately two years. PSFL will enter into hedging agreements with Natixis S.A, for each origination, to mitigate the interest rate risk.

• 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.

PSFL transaction account is held with National Westminster Bank PLC (“NatWest”), privately rated by DBRS. The private rating is below the expected level for account banks in structured for the rating level of the Senior Loan as per DBRS European Legal Methodology. DBRS assessed the impact on the transaction cash flows following a theoretical default by NatWest to be limited to a potential loss of a month’s collections of principal and interest receipts plus the contingency amount available during the period. Mortgage payments by underlying borrowers are made at the month end and transferred within one business day from the originator collection account to the company transaction account. The interest payment date is the 8th day of the month, effectively exposing interest collections for a period of eight days. DBRS believes there will be sufficient credit enhancement in the form of subordination to mitigate the loss. In addition Barclays Bank Plc rated AA(low) is available as the back-up transaction account bank.

Notes:
All figures are in GBP unless otherwise noted.
The principal methodology applicable is:
Master European Residential Mortgage-Backed Securities Rating Methodology and
Jurisdictional Addenda

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

The sources of information used for this rating include: a loan-by-loan data tape of recent Buy-to-Let residential mortgage originations by Paragon, repossession data, historical performance data of Paragon mortgage originations, historical performance data of Paragon Mortgages Limited and Mortgage Trust Limited mortgage originations, all of which has been provided by Paragon. Performance data of Paragon Securitisations was sourced from Investor reports and Intex.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

This rating concerns a newly provided secured credit facility. This is the first DBRS rating on this secured credit facility.

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

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: Asim Zaman, Senior Financial Analyst
Initial Rating Date: The closing date as defined under the transaction documents.
Initial Rating Committee Date: 7th April 2014
Initial Rating Committee Chair: Claire Mezzanotte, Managing Director Global Structured Finance
Lead Surveillance Analyst: Keith Gorman, Senior Vice President

DBRS Ratings Limited
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United Kingdom

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

The methodologies applicable are:

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