DBRS Assigns Ratings to Mortar No.1 Limited Senior Note Issuance Facility

DBRS Ratings Limited (DBRS) has today assigned the following ratings to Mortar No.1 Limited (Mortar, Issuer, Borrower) Senior Note Issuance Facility (Facility):

-- AA (sf) to the Senior Issuance Facility
-- The junior note is not rated by DBRS

The Facility is provided by MAnaGed And ENhanced TAp (MAGENTA) Funding S.T. (Lender) which will facilitate the funding of buy-to-let (BTL) mortgage loans originated by Paratus AMC Limited (Paratus AMC, Seller) under the secured lending brand of Foundation Home Loans (FHL) and Landbay Partners Limited (Landbay). The mortgages funded are used as collateral for the Facility. The loans originated by Landbay are and will be funded and underwritten in partnership with Paratus AMC using different product criteria than that of FHL. The beneficial interest of loans originated by Landbay will reside in a Landbay Trust and such beneficial interest will be transferred to Paratus AMC. Paratus AMC, as the Seller, will then transfer the beneficial interest of the loans originated by itself and Landbay to Mortar under the mortgage sale agreement.

The BTL loans sold to the Issuer are expected to follow at least a predetermined schedule of the amount of loans sold to the Issuer such that the Facility is entirely drawn down within the commitment period of two years from closing of the transaction. At the end of the third anniversary from closing date if the Facility is outstanding, the noteholder under the Facility has the option to request the sale of the mortgage portfolio such that the entire Facility outstanding along with accrued interest is paid back.

At closing and at each instance of draw-down of the Facility, Paratus AMC, as the noteholder of the junior note, will subscribe up to a minimum subordination level of 15% of the aggregate amount of loans sold to the Issuer.

Drawings on the Facility are allowed 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 loans in 90 days plus in arrears and/or loans in default. Some of these events after an initial breach can cure which then allows the Issuer to resume purchase of further loans.

The committed amount may be increased during the commitment period provided both the Lender and Paratus AMC consent to do so, or any additional amounts may be provided by new lenders.

The rating on the Facility 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 including the loans to be purchased multiplied by the advance rate (1 minus the minimum subordination of 15%) and as such credit enhancement is provided in the form of subordination. The minimum subordination is funded by Paratus AMC through the subscription of the junior note.

A reserve fund, 1% of the aggregate of the mortgage loans outstanding, will provide liquidity support to meet the payment of senior fees and interest payment on the Facility.

During the commitment period, the transaction structure has separate interest and principal waterfalls. In the post commitment period or a stop purchase event (whichever is earlier), when the notes begin amortisation, the liabilities of the Issuer will be paid using a combined interest and principal waterfall. This feature will allow all excess spread to turbo the repayment of the Facility outstanding.

The transaction structure includes a fixed-floating swap to hedge the risk of the assets paying a fixed rate of interest in comparison to the floating rate of interest paid on the Facility.

• The credit quality of the BTL mortgages that are and/or anticipated to be sold into Mortar secured against the Facility and the ability of Paratus AMC as 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 simulated the loan by loan data in accordance with the portfolio concentration criteria defined in the transaction documents. DBRS also considered the origination criteria of Paratus AMC and Landbay and the underwriting practices of the former.

As Paratus AMC recently launched the BTL offer in the UK mortgage market in February 2015, the originations to date have limited performance history. DBRS benchmarked the origination criteria of Paratus AMC used for its own lending and those used by Landbay for its origination partnership with Paratus AMC against other established BTL lenders in the UK market. BTL performance is typically influenced by the rental coverage ratio, loan-to-value ratio and landlord experience. BTL properties are also exposed to the possibility that the property will remain vacant and without a tenant for a period of time, in which case the landlord may need to rely on alternative sources of income to service the mortgage loan. DBRS considers the BTL products offered by Paratus AMC and Landbay under its partnership with Paratus AMC to be comparable in their features to standard BTL mortgage loan products offered in the UK market and hence the expected performance of the Mortar mortgage portfolio can be compared to the publicly rated BTL mortgage portfolios in the United Kingdom. DBRS, therefore, has used the performance history of publicly rated UK BTL mortgage portfolios reported in investor reports that are available in Intex.

There is no back-up servicer appointed, at closing, for the transaction in the event of servicer termination. DBRS believes that in an event of servicer termination, the BTL portfolio may be transferred to another UK servicer with minimal disruption. DBRS believes the availability of highly experienced BTL providers and/or third party mortgage servicers further mitigates any risk associated with an event of servicer termination.

• 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 U.K. 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 Facility.

DBRS assumed the receipts of interest and principal on the assets based on the portfolio conditions on the proportion of fixed rate loans which can be sold to the Issuer as well as conditions on the minimum interest coupon expected on the 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.

The collection accounts will be held with Barclays Bank Plc and National Westminster Bank PLC, both rated by DBRS with the latter rated privately. The Issuer transaction account is held with Elavon Financial Serviced Limited, U.K. Branch and is privately rated by DBRS. The swap provider to the Issuer is Natixis S.A., London Branch. All the above counterparties are appropriately rated per DBRS criteria to mitigate the risk of counterparty default or insolvency.

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
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
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 Paratus AMC Limited, Intex, publicly available investor reports of BTL and prime mortgage portfolios in UK.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

• DBRS was not supplied with third party assessments as the transaction will purchase BTL loans for a period of two years from closing. However, this did not impact the rating analysis.

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

This rating involves a note issuance facility which will be drawn down for the sale of newly originated BTL loans and hence the historical data is limited at closing of the transaction. However DBRS was able to rely on the historical performance of comparable BTL loan portfolios publicly rated in the United Kingdom covering five to ten years of performance history.

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 the change in 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 (PD) Rates Used: Base Case PD of 31.29%, at the AA stress level, a 25% and 50% increase on the base case PD.
-- Loss Given Default (LGD) Used: Base case LGD of 37.39% at the AA stress level, a 25% and 50% increase in the base case LGD.

DBRS concludes that a hypothetical
-- increase of the base case PD by 25%, with no increase in base case LGD or
-- increase in base case LGD by 25% or 50% with no increase in base case PD
will not affect the rating of the Facility.

-- increase in the base case PD by 50% with no increase in the base case LGD or
-- increase in the base case PD by 25% and the base case LGD by 25%
will lead to a downgrade to the Facility rating to AA (low).

-- increase in the base case PD by 25% and the base case LGD by 50% will lead to a downgrade to the Facility rating to ‘A’.
-- increase in the base case PD by 50% and the base case LGD by 25% will lead to a downgrade to the Facility rating to A(low).
-- increase in the base case PD by 50% and the base case LGD by 50% will lead to a downgrade to the Facility rating to BBB(high).

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
Initial Rating Date: 30 November 2015
Initial Rating Committee Chair: Diana Turner

Lead Surveillance Analyst: Kevin Ma

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
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 analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375