DBRS Assigns Ratings to Belmont Green Funding 3 Limited Warehouse Facility

DBRS Ratings Limited (DBRS) has today assigned the following ratings to the GBP 100 million commitment, represented by the Class A1 and Class A2 notes (together, the Class A notes or the Facility) that can be issued by Belmont Green Funding 3 Limited (the Debtor):

-- Class A1 notes rated A (sf)
-- Class A2 notes rated A (sf)

The ratings assigned to the Class A notes represent the timely payment of interest to the noteholders on every monthly payment date and the ultimate payment of principal by the legal final maturity date. The ratings assigned do not address the payment of the Class A1 or Class A2 subordinated fees.

The transaction is a secured funding facility provided by Macquarie Bank Limited to Belmont Green Funding 3 Limited. The Class A2 notes hold the total commitment of the Facility, GBP 100 million, and issuance will be used to fund the purchase of mortgage loans. The Class A2 notes will be initially held by Macquarie Bank Limited, which can instruct the Debtor to issue Class A1 notes. If issued, the Class A1 notes are used to redeem the Class A2 notes, either partially or in full, by an amount equal to the Class A1 note issuance. The structure provides that the Class A1 and A2 notes will have the same credit enhancement and receive both principal and interest on a pro rata and pari passu basis. DBRS’s analysis considers the Class A notes fungible in all material aspects.

The debtor can purchase residential mortgage loans originated by Belmont Green Funding Limited (BGFL or Belmont Green), trading as Vida Homeloans. All mortgages are sourced, or are to be sourced, through a network of intermediaries. BGFL, which was granted Financial Conduct Authority approval in September 2016, is a specialised lender in the U.K. that offers a full suite of mortgage products: owner-occupied, buy-to-let, adverse credit, interest-only and second charge. In order to estimate the probability of default and loss given default of the mortgage portfolio, DBRS has opted to simulate a collateral portfolio that represents the worst-case credit characteristics possible given the eligibility criteria and the concentration limits.

Drawings on the Facility are allowed provided a Draw Stop Event has not been triggered. Such events are defined in the transaction documents, which include, among others, a cumulative net loss trigger, a default-based trigger, insufficient credit enhancement and insolvency of BGFL. An initial breach can be cured, allowing the Debtor to resume purchase of further loans. The Debtor must oblige with concentration limits at all times.

BGFL is the initial servicer of the mortgage portfolio but delegates all servicing activities to Homeloan Management Limited (HML). HML has a full mandate for primary and special servicing of the assets and requires no approval from Belmont Green to undertake these activities. HML is deemed to have extensive experience in servicing mortgage products similar to those BGFL is originating.

The monthly mortgage receipts are deposited into the collections account at Barclays Bank PLC and held in trust by the legal title holder in accordance with the collection account declaration of trust. The funds credited to the collection account are swept on a daily basis to the funding account or the Debtor’s account. The collection account declaration of trust provides that interest in the collection account is in favour of the Debtor over the seller. Commingling risk is considered mitigated by the collection account declaration of trust and the daily sweep of funds. The collection account bank is subject to a DBRS investment-grade downgrade trigger.

The transaction has two named account banks: Elavon Financial Services DAC, UK branch (Elavon) and Barclays Bank PLC (Barclays). The funding and collection accounts are held with Barclays, and the Debtor’s transaction account is held with Elavon. The transaction documents include account bank rating triggers and downgrade provisions that lead DBRS to conclude that both account banks satisfy DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The transaction’s cash flow structure has been analysed by DBRS with consideration of the form and sufficiency of available credit enhancement. The transaction structure provides a minimum level of credit enhancement for the Class A notes through subordination, which shall be at least equal to the maximum of the balance of the ten largest loans, GBP 7,500,000 and an amount equal to one-ninth of the outstanding Class A note balance.

The Class A notes benefit from liquidity support from a liquidity reserve fund, which is initially sized at GBP 500,000. The liquidity reserve fund is to be replenished from the revenue priority of payments up to an amount equal to the higher of 0.25% of the outstanding Class A notes or GBP 500,000. Liquidity in the transaction is further supported by Principal Advance Amounts, which are available principal collections that can be used to pay senior fees, swap payments and Class A interest. Such amounts are used subject to a debit to the Principal Deficiency Ledger (PDL), which will also track realised losses. The PDL allows for excess spread to be used as principal collections in order to provision for realised losses. An accelerated redemption feature is used at the earlier of a draw stop event or October 2018, which allows for the conversion of revenue to principal in order to accelerate the redemptions of the Class A notes.

The structure benefits from interest rate hedging in the form of a fixed to floating balance guaranteed swap. The Royal Bank of Scotland plc (RBS) will pay the Debtor one-month GBP LIBOR on a monthly basis, and the Debtor will pay RBS a weighted-average of the swap rates. Swap rates are assigned to each fixed-rate loan by RBS when assigned to the Facility. The notional of the swap is the outstanding balance of the fixed-rate mortgages as determined by a pre-calculated amortisation schedule at origination of each loan.

DBRS has applied two default timing curves (front-ended and back-ended), its prepayment curves (low, medium and high assumptions) and interest rate stresses as per the DBRS “Unified Interest Rate Model for European Securitisations” methodology. DBRS applied an additional 0% constant principal repayment stress. The cash flows were analysed using Intex DealMaker.

As a result of the analytical considerations, DBRS derived a Base Case probability of default (PD) of 29.56% and loss given default (LGD) of 35.81%, which resulted in an expected loss of 10.59% using the European RMBS Insight Model. DBRS’s cash flow model assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and ratings of the notes.

The legal structure and presence of legal opinions are deemed consistent with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology.

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

The principal methodology applicable to the rating is the European RMBS Insight: U.K. 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a ramp-up period in the transaction, the analysis is based on the worst-case asset portfolio given the eligibility criteria and concentration limits set forth in the transaction legal documents.

The sources of data and information used for this rating include Belmont Green Finance Limited, other U.K. RMBS transactions rated by DBRS and investor reports on U.K. RMBS transactions available in Intex.

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

DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

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

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This rating concerns a newly issued financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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):

Class A1:
-- A hypothetical increase in both PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus, would not lead to a rating action.
-- A hypothetical increase in PD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).

Class A2:
-- A hypothetical increase in both PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus, would not lead to a rating action.
-- A hypothetical increase in PD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).

For further information on DBRS historical 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.

Lead Analyst: Kali Sirugudi, Vice President, RMBS
Rating Committee Chair: Vito Natale, Head of EU RMBS and CBs
Initial Rating Date: 5 June 2017

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