DBRS Assigns Provisional Ratings to Thrones 2014-1 Plc

DBRS Ratings Limited (‘DBRS‘) assigns provisional ratings to the following notes to be issued by Thrones 2014-1 Plc:

-- AAA (sf) to Class A Notes
-- AA (sf) to Class B Notes
-- A (sf) to Class C Notes
-- BBB (sf) to Class D Notes
-- BB (sf) to Class E Notes
-- B (sf) to Class F Notes

The ratings assigned to the Class A, B, C and F notes addresses timely payment of interest and ultimate payment of principal. The ratings assigned to Class D & E notes addresses ultimate payment of interest and ultimate payment of principal.

Thrones 2014-1 Plc (‘Thrones’ or the ‘Issuer’) represents a securitisation of a portfolio of first ranking UK non-conforming residential mortgages to be funded through the issuance of Class A, B, C, D, E and F mortgage-backed notes and Residual Certificates. The mortgages were originated by Victoria Mortgage Funding Limited (dissolved) and Edeus Mortgages Creators Limited (in liquidation).

On the closing date, the Issuer is expected to purchase the beneficial interest of the mortgage portfolio from Raphael Mortgages Limited (‘Raphael’), with the legal title of the mortgage portfolio held by Mars Capital Finance Limited (‘Mars Capital’). The mortgage portfolio will be serviced by Mars Capital. Homeloan Management Limited (‘HML’) will be the back-up servicer. The Edeus originated mortgage loans were recently acquired by Mars Capital and Raphael and therefore Target Group will assume the role of sub servicer for these mortgage loans for a transition period expected to last approximately three months after closing of the transaction.

The Thrones provisional mortgage portfolio has .6.7 years of seasoning. The loans were originated towards the peak of the UK housing market with 99.72% of the mortgages originated in 2007 and 2008 with the weighted average current Loan-to-Value (‘WACLTV’) at 82.43%. Based on Nationwide house price index DBRS calculates 8.63% of the portfolio in negative equity. The non-conforming characteristics of the mortgage portfolio include 86.51% interest-only (‘IO’) loans and 26.27% buy-to-let (‘BTL’) loans. The portfolio includes borrowers who have self-certified income 46.93% and a proportion of borrowers with adverse credit history; CCJs 10.32%, BO/IVAs 1.95%. Given the seasoning of the mortgage portfolio, the key drivers of credit risk going forward include the nature of the mortgage products, i.e. IO and BTL loans, self–employed borrowers and the historical performance of the mortgage portfolio till date. Whilst non-conforming originations in the UK for the 2006 to 2008 vintages have been the worst performing, the mortgage portfolio, in DBRS’s view, relative to these vintages, represents a positive selection.

The expected credit enhancement to the Class A notes is supported by subordination of the Class B, Class C, Class D, Class E and Class F notes, the Residual Certificates and a non amortising reserve fund. The majority of the assets are linked to Bank of England (‘BoE’) base rate (‘BBR’); 63.83%. The liabilities of the Issuer are linked to 3 months GBP LIBOR. This basis risk is not hedged. DBRS has performed an analysis of the historical differential between BBR and 3 months GBP LIBOR and for the analysis of the transaction’s cash flows applied a stress in order to account for the unhedged basis risk.

The ratings are based upon review by DBRS of the following analytical considerations:

• The transaction’s capital structure and the form and sufficiency of available credit enhancement; The Class A notes are expected to be supported by 41.00% of credit enhancement, Class B notes by 30.50% of credit enhancement, Class C notes by 21.00% of credit enhancement, Class D notes by 13.50% of credit enhancement, Class E notes by 8.00% of credit enhancement and the Class F notes by 6.50% of credit enhancement.

• The credit quality of the mortgages backing the Notes and the ability of the servicer to perform its servicing obligations. DBRS was provided with the historical performance as well as loan level data for the provisional mortgage portfolio in the transaction. Details of estimated defaults, loss given default and expected losses for the mortgage portfolio in different stress scenarios are highlighted below.
• A stress to the transaction cash flows. 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. Given the low prepayment level observed in UK, DBRS also tested scenarios with zero prepayments.
• 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.

The non amortising reserve fund will be financed at closing via a subordinated loan to an amount equal to 1.5% of the collateral balance. The reserve fund can grow up to 3.2% of the initial collateral balance utilising excess spread if available.
The rated notes also benefit from a liquidity reserve which is initially available to meet interest shortfalls on the Class A notes. Once the Class A notes have paid down in full, the liquidity reserve may be used to cover interest shortfalls on the most senior outstanding class of notes. The liquidity reserve will be funded at closing via a subordinated loan to an amount equal to 1.5% of the collateral balance. Principal is also available to initially cover interest shortfalls on the Class A and B notes subject to Class B PDL trigger, while Class A remains outstanding. After Class A has paid down in full, principal is available to provide liquidity support to the most senior outstanding class.

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 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 Mars Capital and Citibank N.A., London Branch. 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 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 A, B, C, D, E and F Notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the ’Base Case’):
• In respect of Class A Notes, the Probability of Default (’PD’) of 50.73%, and Loss Given Default (’LGD’) of 50.69% corresponding to ‘AAA’ stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD.
• In respect of Class B Notes, the PD of 44.08%, and LGD of 43.78% corresponding to ‘AA’ stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD.
• In respect of Class C Notes, the PD of 39.39%, and LGD of 40.93% corresponding to ‘A’ stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD.
• In respect of Class D Notes, the PD of 33.69%, and LGD of 36.66% corresponding to ‘BBB’ stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD.
• In respect of Class E Notes, the PD of 25.70%, and LGD of 31.45% corresponding to ‘BB’ stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD.
• In respect of Class F Notes, the PD of 17.86%, and LGD of 27.59% corresponding to ‘B’ stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD.

DBRS concludes the following impact on ratings of the rated notes:

Class A Notes:

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

Class B Notes:

• 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 B Notes to A (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 B Notes to A (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 B Notes to BBB (low) (sf).

Class C 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 C Notes to BBB (sf).
• A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
• A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to maintain the Class C Notes to BBB (low) (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 C Notes to BB (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 C Notes to BB (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 C Notes to BB (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 C Notes to B (high) (sf).

Class D 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 D Notes to BBB (low) (sf).
• A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (sf).
• A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to maintain the Class D Notes to BB (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 D Notes to BB (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 D Notes to BB (low) (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 D Notes to BB (low) (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 D Notes to B (high) (sf).

Class E 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 E Notes to B (high) (sf).
• A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (sf).
• A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to maintain the Class E Notes to B (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 E Notes to B (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 E Notes to below B (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 E Notes to below B (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 E Notes to below B (sf).

Class F Notes:

• A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to below B (sf).
• A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to maintain the Class F Notes to below B (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 F Notes to below B (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 F Notes to below B (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 F Notes to below B (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 F Notes to below B (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: Asim Zaman
Initial Provisional Rating Date: 23/07/2014
Initial Provisional Rating Committee Chair: Quincy Tang
Last Rating Date: Not applicable
Lead Surveillance Analyst: Dylan Cissou

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