DBRS Confirms Rating on Paragon Sixth Funding Limited Secured Credit Facility

DBRS Ratings Limited (DBRS) has today confirmed its rating of the Senior Loan under the Paragon Sixth Funding Limited (PSFL) Secured Credit Facility at AA (sf).

The confirmation of the rating on the Senior Loan is based on the following analytical considerations, as described more fully below:

-- The transaction’s cash flow structure.
-- 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.
-- The form and sufficiency of available credit enhancement to the Senior Loan to cover the expected losses at the AA (sf) rating level.

The Paragon Sixth Funding Credit Facility consists of Senior and Subordinated Loans. The rated Senior Loan is provided by Natixis S.A. (Senior Lender) while Paragon Mortgages (2010) Limited (Paragon-2010) provides the Subordinated Loan. Paragon-2010 is also the originator of the underlying mortgage loans. The combined drawing from the Senior and Subordinated Loans enables PSFL to make periodic drawings in order to purchase UK Buy-to-Let mortgage loans originated by Paragon-2010. 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% of the principal amount outstanding of the Senior Loan has been repaid through a securitisation of GBP 100 million or greater. Such condition is met. The Committed Amount may be increased during the commitment period provided both the Senior Lender and PSFL consent to do so.

The amount advanced during the commitment period is equal to the 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 overcollateralisation. The overcollateralised portion of the mortgage portfolio is funded by Paragon-2010 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 overcollateralisation may also help to provide liquidity.

As at the reporting date of 20 April 2015, there were no advances outstanding under the Senior Loan. A GBP 10 million drawing was requested on 21st April 2015.

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. 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.

Paragon-2010 acts as the Administrator with Homeloan Management Limited (HML) in place as the back-up Administrator. The assumed replacement of Paragon-2010 as the administrator by HML, is not expected to result in any significant servicing disruptions.

In accordance with the portfolio criteria, fixed rate Buy-to-Let mortgage loans can be purchased. The interest payable on the Senior Loan is indexed to GBP Libor. As such the transaction may be exposed to interest rate risk. According to the transaction documentation, PSFL will enter into hedging agreements with Natixis S.A., for each origination, to mitigate the interest rate risk.

PSFL transaction account is held with National Westminster Bank PLC (NatWest), privately rated by DBRS. The private rating of NatWest is below the level that would be expected for account banks, given the rating level of the Senior Loan, as per DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. DBRS assessed the impact on the transaction cash flows following an assumed 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) Under Review with Negative Implications) is available as the back-up transaction account bank.

Notes:
All figures are in GBP unless otherwise noted. The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”.

Due to the inclusion of a revolving period in the transaction, the collateral was initially modelled based on the worst-case replenishment criteria set forth in the transaction legal documents. These assumptions have not changed and consequently no asset or cash flow analysis was conducted.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Investor Reports from Natixis and performance data on UK Prime and Buy-to-Let RMBS transactions.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

An ideal portfolio based on worst-case replenishment criteria was used. Hence, no data checks were performed and DBRS did not apply additional cash flow stresses in its scenarios.

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 is the first rating action since the Initial Rating Date.

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):

-- DBRS expected a lifetime base case probability of default (PD) and loss given default (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 mortgages for the Issuer are 2.43% and 22.48%, respectively. At the AA (sf) rating level, the corresponding PD is 25.65% and the LGD is 47.78%.
-- 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 Senior Loan would be expected to be downgraded to A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Senior Loan would be expected to be downgraded to A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Senior Loan would be expected to be downgraded to BBB (high) (sf).

Senior Loan 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 (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (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, Senior Financial Analyst, EU RMBS, Global Structured Finance
Initial Rating Date: 4 June 2014
Initial Rating Committee Chair: Claire Mezzanotte, Managing Director Global Structured Finance

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane
London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

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

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

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375