DBRS Confirms Ratings to Charles Street Conduit Asset Backed Securitisation 1 Limited

DBRS Ratings Limited (DBRS) has today confirmed its rating of AA (sf) to the increased £675 million secured credit facility provided through the purchase of Senior Variable Funding Notes (Senior VFNs) issued by Charles Street Conduit Asset Backed Securitisation 1 Limited (CABS or the Issuer). The credit facility amount until the increase was £435 million. The notes were initially issued on 12 November 2007 and the credit facility as of now is completely drawn down with the current outstanding amount at £435 million (current outstanding Senior VFN amount).

The committed amount available to CABS is now provided, in part, by an additional special-purpose entity based in the U.K., taking the total number of the facility providers to four. Two of the facility providers are special-purpose entities and the rest banks, which are also the noteholders of the Senior VFNs. The revolving commitment period has been pushed out by a year so that it now expires after 31 January 2018, or following the occurrence of a sale demand event, an event of default or an early amortisation event, whichever is earlier. CABS will continue to purchase the mortgage loans originated by six wholly owned subsidiaries of Jerrold Holdings Limited (Jerrold), thus providing the originators with funding to make new originations.

Jerrold is a specialist lender offering first and second charge mortgage loans secured mostly by residential and semi-commercial properties. Mortgage loans are typically offered to borrowers who would otherwise be unable to obtain credit from a mainstream mortgage lender either on account of their adverse credit history or as a consequence of the nature of the mortgage product which suits the specific requirement of the borrower, such as bridge loans, commercial purpose loans and second charge loans.

Credit enhancement is provided in the form of Subordinated variable funding notes (Subordinated VFNs) plus the amount in the commingling reserve account. The subordination level is dynamic and is calculated on a quarterly basis with a floor equal to 22%. The commingling reserve will always be 1.50% of the Senior VFNs. The subordination to the Senior VFNs as of October 2014 was 25.95%.

The interest margin payable on the Senior VFNs has been reduced to 2.875% p.a. from 3.50% p.a. However, if the rating for the Senior VFNs falls a notch below the current ratings, the interest margin payable will step up to 3.375%. The overall reduction of the interest liability for the Issuer is positive for the cash flows of the transaction. DBRS has stressed the interest liability for notes at the step-up interest rate and the margin cap of 4.375% for 25.93% of the Senior VFNs. The stressed weighted average interest margin for the Issuer on the Senior VFNs is thus 3.63% p.a., down from 3.80% p.a.

Some of the portfolio covenants for the purchase of new loans during the commitment/revolving period of the facility have been changed. Some of these changes tighten the purchase conditions and are considered positive. The purchase conditions to increase the proportion of commercial loans and bridge loans by 5% each would mean a marginal increase in credit risk of the mortgage portfolio. Commercial loans can now increase to 50% of the mortgage portfolio and the maximum proportion of bridge loans allowed is 27.50%. DBRS has stressed the probability of default (PD) for the mortgage portfolio on account of this potential increase in commercial and bridge loans in the mortgage portfolio.

The early amortisation trigger has been changed and is now linked to a breach of the rating level of AA (low) for the Senior VFNs. The trigger is also linked to such a downgrade continuing for a period of three months from the downgrade date of the rating.

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

• Credit Quality of the Mortgage Portfolio: The mortgage loans sold to the Issuer are subject to eligibility criteria and portfolio covenants which mitigate the risk of credit deterioration of the mortgage portfolio.

To assess the change in portfolio characteristics and impact on defaults and losses during the revolving period, DBRS stressed the current mortgage portfolio in accordance with the portfolio covenants applicable for purchase of new loans during the commitment/revolving period of the facility.

• The transaction’s cash flow structure and form and sufficiency of available credit enhancement:

The subordination provided by the Subordinated VFNs can vary based on the lower of the advanced rate per an advance rate model or an advance rate table based on the weighted average current loan to value ratio (WACLTV) of the mortgage portfolio. DBRS does not give any credit to the advance rate model in the cash flow analysis for the transaction. The minimum subordination for the Senior VFNs is 22% (corresponding to WACLTV of 62% in the advance rate table). For the cash flow analysis, DBRS has stressed the mortgage portfolio based on the variance of WACLTV and tested 14 different scenarios of subordination per the advance rate table. It should be noted that as per the advance rate table the maximum subordination available will be 28.5%, corresponding to a WACLTV of 75%.

• The ability of the transaction to withstand stressed cash flow assumptions and repay the Senior VFNs according to the terms of the transaction documents: For each of the 14 scenarios mentioned above, DBRS utilised front- and back-loaded default timing curves, rising and declining interest rates and low, mid and high prepayment scenarios. DBRS cash flow analysis tested for the repayment of timely interest and ultimate principal on the Senior VFNs.

The transaction includes a commingling reserve equal to 1.5% of the Senior VFNs (1.17% of the collateral balance) and is available to provide liquidity to the Senior VFNs in the form of payments of interest/commitment fees. This commingling reserve has been built up to the required level using principal receipts from the mortgage portfolio. The reserve is amortising and the amounts released will form part of the available funds to pay the liabilities under the revenue waterfall. The commingling reserve account is maintained with Lloyds Bank Plc (rated AA (low) with a Stable trend/rated R-1 (middle) with a Stable trend).

• The legal structure: The transaction 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 has been assessed.

A Sale Demand Event linked to the breach of delinquencies level at 15% has been added, with the Event of Default linked to delinquencies being maintained at 18%. The transaction includes several Sale Demand Events or conditions, a breach of which results in the sale of the mortgage portfolio. The sale of the portfolio is conditional on the recovery proceeds from the sale being enough to pay the entire outstanding of the Senior VFNs along with accrued interest. DBRS considers the addition of the delinquencies trigger as a Sale Demand Event to be positive overall for the Issuer.

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 the mortgage loans portfolio currently owned by the issuer; recovery data, historical performance data of loans currently with the issuer, those repurchased by Jerrold from the issuer, and loans which are eligible to be sold to the issuer during the revolving period; a transaction report for CABS as of September and October 2014 and historical performance of non-conforming seasoned UK mortgage portfolios rated by DBRS.

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 the existing financial instrument. This is the first rating action since the Initial Rating Date.

The last rating action on this transaction took place on 28 October 2014, when the Senior VFNs were first rated by DBRS.

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

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

• Probability of Default Rates Used: Base Case PD of 49.34% (corresponding to the AA rating stress level, a 25% and 50% increase on the base case PD.
• Loss Given Default (LGD) Used: Base Case LGD of 61.64% (corresponding to AA rating stress level, a 25% and 50% increase on the base case LGD.

DBRS concludes that a hypothetical increase of the base case PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would each lead to a downgrade of the transaction to A (low) (sf) and A (sf), respectively. A scenario combining both an increase in the PD and LGD by 25% would lead to a downgrade of the Senior VFNs to BBB (sf). The scenario where the PD is increased by 50% and LGD by 25% would lead to a downgrade of the Senior VFNs to BB (high) (sf). The scenario where the PD is 25% and the LGD is 50% higher would lead to a downgrade of the Senior VFNs to BB (high) (sf). The scenario where the PD and LGD are 50% higher would lead to a downgrade of the Senior VFNs to BB (sf). The scenario where only the LGD is increased by 50% and, separately, only the PD is increased by 50% would lead to a downgrade of the Senior VFNs to a BBB (sf) rating in each case.

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: Kali Sirugudi, Vice President
Initial Rating Date: 28 October 2014
Initial Rating Committee Chair: Erin Stafford
Lead Surveillance Analyst: Vito Natale
Rating Committee Chair for the current Rating Action: Erin Stafford

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
Operational Risk Assessment for European Structured Finance Servicers
Unified Interest Rate Model for European Securitisations