DBRS Confirms Ratings on U.K. RMBS Transactions Following Methodology Update

DBRS Ratings Limited (DBRS) has today confirmed its ratings on 34 classes of notes across 11 U.K. residential mortgage-backed securities (RMBS) transactions as follows:

-- Aggregator of Loans Backed by Assets 2015-1 Plc Class A Notes confirmed at AAA (sf)
-- Aggregator of Loans Backed by Assets 2015-1 Plc Class B Notes confirmed at AA (sf)
-- Aggregator of Loans Backed by Assets 2015-1 Plc Class C Notes confirmed at A (sf)
-- Aggregator of Loans Backed by Assets 2015-1 Plc Class D Notes confirmed at BBB (low) (sf)
-- Aggregator of Loans Backed by Assets 2015-1 Plc Class E Notes confirmed at B (sf)
-- Cape Funding No. 1 Plc Class A1P confirmed at AAA (sf)
-- Celeste Mortgage Funding 2015-1 PLC Class A Notes confirmed at AAA (sf)
-- Celeste Mortgage Funding 2015-1 PLC Class B Notes confirmed at AA (sf)
-- Celeste Mortgage Funding 2015-1 PLC Class C Notes confirmed at A (sf)
-- Celeste Mortgage Funding 2015-1 PLC Class D Notes confirmed at BBB (sf)
-- Celeste Mortgage Funding 2015-1 PLC Class E Notes confirmed at BB (sf)
-- Celeste Mortgage Funding 2015-1 PLC Class F Notes confirmed at B (sf)
-- Chestnut Financing Plc Class A Notes confirmed at AAA (sf)
-- Gemgarto 2012-1 Plc Class A1 Variable Rate Notes confirmed at AAA (sf)
-- Moorgate Funding 2014-1 Plc Class A1 Notes confirmed at AAA (sf)
-- Moorgate Funding 2014-1 Plc Class B1 Notes confirmed at AA (sf)
-- Moorgate Funding 2014-1 Plc Class C1 Notes confirmed at A (low) (sf)
-- Moorgate Funding 2014-1 Plc Class D1 Notes confirmed at BBB (low) (sf)
-- Moorgate Funding 2014-1 Plc Class E1 Notes confirmed at B (sf)
-- Mortar No. 1 Limited Senior Note Issuance Facility confirmed at AA (sf)
-- Newstone Mortgage Securities No. 1 Plc Class A Notes confirmed at AAA (sf)
-- Rochester Financing No.2 Plc Class A confirmed at AAA (sf)
-- Rochester Financing No.2 Plc Class B confirmed at AA (sf)
-- Rochester Financing No.2 Plc Class C confirmed at A (sf)
-- Rochester Financing No.2 Plc Class D confirmed at BBB (sf)
-- Rochester Financing No. 2 Plc Class E confirmed at BB (high) (sf)
-- Rochester Financing No. 2 Plc Class F confirmed at BB (low) (sf)
-- Thrones 2013-1 Plc Class A Notes confirmed at AAA (sf)
-- Thrones 2014-1 Plc Class A Notes confirmed at AAA (sf)
-- Thrones 2014-1 Plc Class B Notes confirmed at AA (sf)
-- Thrones 2014-1 Plc Class C Notes confirmed at A (sf)
-- Thrones 2014-1 Plc Class D Notes confirmed at BBB (sf)
-- Thrones 2014-1 Plc Class E Notes confirmed at BB (sf)
-- Thrones 2014-1 Plc Class F Notes confirmed at B (sf)

The rating actions are the results of a full review of each transaction following publication of DBRS’s “European RMBS Insight: U.K. Addendum” (the U.K. Addendum or Addendum) on 2 November 2016. The Addendum follows the publication of the “European RMBS Insight Methodology” (the Methodology) on 17 May 2016. The Methodology introduced a new proprietary default model (the European RMBS Insight Model or the Model) that forecasts the expected defaults and losses of portfolios of European residential mortgages. The Model combines a loan scoring approach and dynamic delinquency migration matrices to calculate loan-level defaults and losses. The loan scoring models and dynamic delinquency migration matrices are developed using jurisdictional-specific data on loans, borrowers and collateral types. In addition, the European RMBS Insight Model uses a home price model to generate market value decline rates (MVDs).

DBRS currently rates 35 tranches from 12 U.K. RMBS transactions that are now analysed using the new methodology and introduction of the European RMBS Insight Model. Charles Street Conduit Asset Backed Securitisation 1 Limited’s Senior Variable Funding Notes are currently being reviewed, and appropriated rating action will follow. Another two transactions that fell under the scope of the Addendum -- Neptune Unsecured Warehouse 1 Limited, Senior Facility, and Neptune Unsecured Warehouse 2 Limited, Facility A and Facility B -- had their ratings discontinued on 19 December 2016, following the repayment in full of the rated debt on 15 December 2016.

The U.K. Addendum is the second jurisdictional addendum published for the Methodology. Analysis of U.K. residential mortgages per the Addendum includes indexation of the underlying property values for the determination of both frequency of default and severity of losses. The U.K. Addendum details the U.K. Mortgage Scoring Model (U.K. MSM), which was constructed using a logistic regression with 27 parameters from 14 variables determined to assess the relative credit risk of U.K. residential mortgages. The U.K. MSM includes variables to assess the relative risk of the three primary mortgage types observed in the U.K. market: prime, buy-to-let and non-conforming.

In addition, 12 risk segments were estimated based on scoring of the universe of eligible loans (per defined DBRS criteria) used to construct the U.K. MSM, with a delinquency migration matrix estimated for each risk segment based on the observed roll rates. Rating scenario MVDs are determined for each of the 12 regions of the U.K. (and the national level) using the non-seasonally adjusted Nationwide House Price Index to calculate losses.

Along with the material changes introduced by the Methodology, all the rating actions are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies and defaults.
-- The default, recovery and loss assumptions on the remaining collateral pool.
-- Current credit enhancement (CE) available to the notes to cover the expected losses at each tranche’s respective rating levels.

Each portfolio was analysed using the European RMBS Insight Model. Cash flow stresses were undertaken on each class of notes to test the ability of the transaction to pay principal and interest consistently with the terms and conditions of the notes and the assigned ratings, given the assumptions in terms of frequency of defaults and severity of losses in a given rating scenario.

Notes:
All figures are in British pounds unless otherwise noted.

The principal methodologies applicable are European RMBS Insight Methodology, European RMBS Insight: U.K. Addendum and Master European Structured Finance Surveillance Methodology.

DBRS has applied the principal methodologies consistently and conducted a review of the transactions in accordance with the principal methodologies.

For those transactions that include a revolving period, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action for each transaction.

The rating confirmed on the Celeste Mortgage Funding 2015-1 PLC Class F Notes materially deviates from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by a quantitative model that is a substantial component of a rating methodology; in this case, the rating also reflects the sensitivity of the rating to changes in probability of default (PD) or loss given default (LGD) assumptions, interest rate stresses and timing of defaults.

Other methodologies referenced in these transactions 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 the European DataWarehouse GmbH and the parties involved in the ratings, including but not limited to the originators, the issuers and their agents.

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

DBRS was not supplied with third-party assessments in the context of these reviews. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be 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.

Please see the attached disclosure “DBRS Confirms Ratings on U.K. RMBS Transactions Following Methodology Update – Disclosures” for the following information related to each rating action:

-- Initial Rating Date
-- Last Rating Action Date
-- Lead Surveillance Analyst
-- Rating Committee Chair
-- Portfolio Default Rate (PDR) and Loss Given Default (LGD)
-- Risk Sensitivity Analysis

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

For further information on DBRS historic default rates published by the European Securities and Markets Authority (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.

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London EC3M 3BY
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
-- Master European Structured Finance Surveillance Methodology
-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Unified Interest Rate Model for European Securitisations
-- Derivative Criteria for European Structured Finance Transactions

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.