DBRS Assigns Provisional Ratings to Towd Point Mortgage Funding 2016-Vantage1 Plc

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following Notes issued by Towd Point Mortgage Funding 2016-Vantage1 Plc (the Issuer):

-- Class A1 Notes: AAA (sf)
-- Class A2 Notes: AAA (sf)
-- Class B Notes: AA (sf)
-- Class C Notes: A (sf)
-- Class D Notes: BBB (low) (sf)
-- Class E Notes: BB (sf)
-- Class F Notes: B (sf)

Class A1 and Class A2 Notes are provisionally rated for timely payment of interest and ultimate payment of principal. The Class B Notes, Class C Notes, and Class D Notes are provisionally rated for ultimate payment of interest (subject to the net weighted-average coupon cap) and ultimate payment of principal. The Class E Notes and Class F Notes are provisionally rated only for ultimate payment of principal.

Towd Point Mortgage Funding 2016-Vantage1 Plc is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in the United Kingdom. The issued Notes will be used to fund the purchase of U.K. residential mortgage loans secured over properties located in England, Wales, Northern Ireland and Scotland.

The mortgage portfolio was initially purchased from GE Money Home Lending Limited (GEMHL) (and 12 other legal entities linked to GEMHL) by Promontoria (Vantage) Limited (Promontoria, the legal title holder) and Promontoria will sell the beneficial interest in the mortgage loans, around the closing date, to a Dutch legal entity, Cerberus European Residential Holdings B.V. (CERH; the seller). CERH in turn will sell the beneficial interest in the mortgage loans to the Issuer on the closing date.

Pepper (UK) Limited will be the servicer with Homeloan Management Limited as the back-up servicer.

As of the cut-off date (31 October 2016), the mortgage portfolio consists of reperforming owner-occupied and Buy-to-Let (BTL) residential mortgage loans originated by GE Money Home Lending Limited, First National Bank Plc and Igroup Limited. The majority of the loans were originated by GEMHL. These loans were primarily offered to customers with adverse or non-standard credit history, to self-employed borrowers and where the borrower income may have been self-certified.

Of the mortgage portfolio, 70.89% has an interest-only (IO) or Part & Part repayment profile. The high proportion of these loans is largely due to borrower affordability given the relatively low proportion of BTL loans in the portfolio (2.01%), which are typically lent at an IO basis. As of the pool cut-off date, the weighted-average seasoning of the portfolio is 10.08 years, with 73.85% of the mortgage loans originated in 2006, 2007 and 2008, the peak of the U.K. mortgage and housing market. The weighted-average current loan-to-value (WACLTV) calculated by DBRS equates to 77.44%. The indexed WACLTV is calculated at 67.18% (Nationwide HPI, Q2 2016).

The mortgage portfolio has a relatively high concentration of borrowers who had unsatisfied County Court Judgements at the time of origination (20.58%). Of mortgage loans, 40.44% have been restructured in the past. DBRS believes borrowers who have had restructuring in the recent past, particularly in the context of a low interest rate environment, would show a higher propensity to default in the event of future interest rate rises.

The weighted-average coupon generated by the portfolio is 3.06%. Approximately 98.50% of the loans pay the interest rate linked to the Bank of England Base Rate (BBR). The remaining portion of the pool is linked to a standard variable rate (SVR) set by the servicer. The interest payable on the Notes is linked to three-month GBP LIBOR. The basis risk on account of the BBR mismatch is unhedged. For the purposes of its cash flow analysis, DBRS stressed the BBR rates generated by the assets.

The interest payable on the Notes will step up on the payment date falling three years after the first interest payment date. DBRS has taken into consideration the increased interest payable via its cash flow analysis. On or after the optional redemption date, the Issuer may redeem all the Notes in full. Notes will be redeemed at an amount equal to the outstanding balance together with accrued (and unpaid) interest.

Credit enhancement is provided in the form of subordination of the junior Notes. The Class A1 Notes are expected to have a credit enhancement of 45.00%, while the Class A2 Notes have 41.00%, Class B Notes have 34.80%, Class C Notes have 27.80%, Class D Notes have 22.90%, Class E Notes have 17.40% and Class F Notes have 10.00% credit enhancement.

The liquidity for the Class A1 Notes and Class A2 Notes will be supported by a liquidity facility (1.70% of the Class A1 Notes plus Class A2 Notes balance) till the first optional redemption date (FORD). From the FORD, the liquidity facility will be replaced by the liquidity reserve fund (LRF) (2.05% of the Class A1 Notes plus Class A2 Notes’ initial balance) with the latter funded by the cash collected in a SDC ledger. The Liquidity Reserve is available to cover shortfalls in payment of interest on the Class A1 Notes and Class A2 Notes. Only from the FORD, the liquidity support for Class B, Class C, and Class D Notes is provided by an Excess Cashflow Reserve Fund (XSRF). The XSRF will get funded initially on the FORD using any surplus available funds in the SDC ledger after having funded the LRF. The LRF and the XSRF will be replenished on an ongoing basis in the revenue priority of payments.

Principal can be used to provide liquidity support to the most senior outstanding notes. As long as the Class A1 Notes and Class A2 Notes are outstanding, principal available funds can be used for meeting any interest shortfalls on both classes of Notes. A subsequent debit is made to the relevant principal deficiency ledgers when principal is used as a liquidity support mechanism.

Although the Seller will provide loan warranties and representations, the Seller was not the originator of the mortgage loans and consequently certain warranties are qualified by reference to awareness. The Issuer is entitled to bring a contractual claim in damages against the Seller in respect of any breach of any loan warranties.

Following the transfer of beneficial interest, borrowers will pay into a collection account held in the name of the Issuer at Barclays Bank Plc. There is a daily sweep of funds from the collections account into the Issuer account bank.

The Issuer will maintain its transaction account with Elavon Financial Services D.A.C., UK Branch. The account bank is privately rated by DBRS. The account bank downgrade and replacement language is compliant with DBRS legal criteria for the assigned ratings to the Notes.

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

--The transaction’s cash flow structure and form and sufficiency of available credit enhancement. At closing, credit enhancement for the Class A1 Notes (45.00%) is provided in the form of subordination by the junior notes. Credit enhancement for the Class A2 Notes (41.00%) is provided in the form of subordination of the notes junior to the Class A2 Notes. Credit enhancement for the Class B Notes (34.80%) is provided in the form of subordination via the notes junior to Class B Notes. Credit enhancement for the Class C Notes (27.80%) is provided in the form of subordination via the notes junior to Class C Notes. Credit enhancement for the Class D Notes (22.90%) is provided in the form of subordination via the notes junior to Class D Notes. Credit enhancement for the Class E Notes (17.40%) is provided in the form of subordination via the notes junior to Class E Notes. Credit enhancement for the Class F Notes (10.00%) is provided in the form of subordination via the Class Z Notes.

--Liquidity coverage provided through the aforementioned Liquidity Facility, Liquidity Reserve Fund, XSRF and principal available funds.

--The credit quality of the expected mortgage loans that the rated Class A1 Notes to Class F Notes are secured against and the ability of the servicer to perform collection activities on the collateral. DBRS calculated probability of default, loss given default and expected loss outputs on the mortgage loan portfolio provided by the DBRS European RMBS Insight Model. In addition, DBRS analysed the historical loan-level payment history of the underlying borrowers. DBRS also reviewed the servicing practices of Pepper (UK) Limited.

--The ability of the transaction to withstand stressed cash flow assumptions and repay the rated Notes. The transaction cash flows were modelled in Intex DealMaker using portfolio default rates and loss given default outputs for the loan portfolio. DBRS assesses the structure to be sensitive to interest rate fluctuations and will monitor the transaction as part of its surveillance process.

--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” methodology.

--The relevant counterparties as rated by DBRS appropriately in line with DBRS legal criteria to mitigate the risk of counterparty default or insolvency.

Notes:
All figures are in British Pounds Sterling unless otherwise noted.

The principal methodology applicable is: European RMBS Insight Methodology and European RMBS Insight: UK Addendum.

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. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the 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 Credit Suisse, Pepper (UK) Limited and FirstKey.

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

DBRS was supplied with third-party assessments. DBRS haircut the original valuations of the properties by 5% based on the estimated errors in the audit report.

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 changing the transaction parameters on the rating of the Class A, Class B, Class C, Class D and Class E Notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- In respect of the Class A1 Notes and Class A2 Notes, the Probability of Default (PD) of 77.55% and Loss Given Default (LGD) of 46.83%, corresponding to a AAA stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class B Notes, the PD of 74.81% and LGD of 42.93%, corresponding to a AA stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class C Notes, the PD of 70.63% and LGD of 36.83%, corresponding to an “A” stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class D Notes, the PD of 62.11% and LGD of 29.32%, corresponding to a BBB stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class E Notes, the PD of 54.62% and LGD of 25.98%, corresponding to a BB (high) stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class F Notes, the PD of 45.89% and LGD of 21.62%, corresponding to a BB (low) stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.

DBRS concludes the following impact on the rated notes:

Class A1 Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to AA (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade of the Class A1 Notes to A (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to AA (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade of the Class A1 Notes to AA (low) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to A (low) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BBB (high) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BBB (high) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BBB (low) (sf).

Class A2 Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to A (high) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade of the Class A2 Notes to A (low) (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to A (high) (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade of the Class A2 Notes to A (high) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to A (low) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to BBB (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to BBB (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to BB (high) (sf).

Class B Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade of the Class B Notes to A (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).

Class C Notes:
-- 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 downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade of the Class C Notes to BBB (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of 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 a downgrade of the Class C 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 a downgrade of the Class C 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 a downgrade of the Class C Notes to B (high) (sf).

Class D Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (low).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade of the Class D Notes to BB (low) (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (high) (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade of the Class D Notes to A (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (low) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to CCC (sf) rating.

Class E Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B.
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade of the Class E Notes to B (high) (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to BB (low) (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade of the Class E Notes to BB (low) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of 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 a downgrade of the Class E Notes to CCC (sf) rating.
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to CCC (sf) rating.
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to CCC (sf) rating.

Class F Notes:
A hypothetical increase of PD and/or LGD by 25% or 50%, either on its own or together would result in the ratings of Class F notes to CCC (sf) rating.

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.

Lead Analyst: Kali Sirugudi
Rating Date: 5 December 2016
Rating Committee Chair: Quincy Tang
Lead Surveillance Analyst: Andrew Lynch

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M3BY
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

-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- 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