DBRS Assigns Ratings to Belmont Green Funding 1 Limited Warehouse Facility

DBRS Ratings Limited (DBRS) assigned the following ratings to the GBP 275 million commitment, represented by the Class A1 and Class A2 notes (together, the Class A notes) that can be issued by Belmont Green Funding 1 Limited (the Debtor or the Facility):

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

The ratings assigned to the Class A notes represents 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 transaction is a secured funding facility provided by the Royal Bank of Scotland plc (trading as NatWest Markets, NWM, long-term Critical Obligations Rating (“COR”): A, long-term Issuer rating BBB (high) – stable) to Belmont Green Funding 1 Limited. The transaction initially closed in October 2016, and was subsequently amended in March 2017 and again in October 2017 (the latter being the Amendment Date).

The Debtor can purchase residential mortgage loans originated by Belmont Green Finance Limited (BGFL, not rated by DBRS), through their Vida Homeloans brand. All mortgages are sourced, or are to be sourced, through a network of intermediaries. BGFL is a specialist lender in the U.K. that offers a full suite of mortgage products: owner-occupied, buy-to-let (BTL), adverse credit, interest-only and second charge. BGFL began lending in Q3 2016, after receiving Financial Conduct Authority approval.

The Facility is structured to permit a maximum advance rate of 87%, hence providing a minimum level of credit enhancement for the Class A notes equal to 13%. Credit enhancement is provided by subordination of the subordinated loan (provided by BGFL) and mezzanine Class B notes, which can be issued in the future, if the Debtor is requested to do so by the BGFL.

The Class A2 notes will hold the initial commitment. The Class A1 notes may be issued in the future. If issued, the proceeds of a Class A1 note issuance will be applied to redeem the Class A2 notes. The proceeds of a Class B note issuance will be utilised to either purchase further mortgages, or repay the subordinated loan. The Class B notes and the subordinated loan are not rated by DBRS.

The transaction is structured so 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 term of the Facility is 24 months from the Amendment Date, with possibility for an initial extension to 36 months and a further final extension option to 48 months. The coupon due on the Class A notes will step-up by 0.5% 24 months after the amendment date and a further 0.5% 12 months thereafter. DBRS has assumed that the Facility is fully drawn on the final step-up date, and subsequently begins to amortise, as per the transactions documents. The ratings address the timely payment of interest and repayment of the Class A notes by the legal final maturity date in October 2061. No credit is given to asset disposals, including securitisation exits, in DBRS’s analysis; although they are provisioned for in the transaction documentation including that the assets must be sold for a price that is sufficient to repay the Class A notes and accrued, but unpaid interest on them.

The commitment, GBP 215 million as of the Amendment Date, will be increased to GBP 275 million 30 days from the Amendment Date. DBRS’s ratings address the likelihood of full repayment of the commitment, as at the Amendment Date, by the legal final maturity date (falling in October 2061).

In order to estimate the probability of default (PD) and loss given default (LGD) of the mortgage portfolio, DBRS has opted to simulate a collateral portfolio that represents the worst-case credit characteristics given the eligibility criteria and the portfolio concentration limits.

Drawings on the Facility are permitted, provided that 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 (0.75%), a delinquency-based trigger (three-month plus exceeding 2.5%), insufficient credit enhancement, and insolvency of BGFL. An initial breach can be cured, allowing the Debtor to purchase further loans. The Debtor must oblige with the portfolio concentration limits at all times, once the mortgage portfolio exceeds GBP 60 million in size.

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 BGFL to undertake these activities. In DBRS’s opinion, HML hasextensive experience in servicing mortgage products similar to those BGFL is originating.

Monthly mortgage receipts are deposited into the collections account held with Barclays Bank PLC (Barclays). Funds are held on trust by the legal title holder in accordance with the collection account declaration of trust and subsequently credited to the collection account and swept on a daily basis to the applicable 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 downgrade trigger.

The transaction has two named account banks: Elavon Financial Services DAC, UK branch (Elavon) and 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 for a maximum advance rate of 87% for the Class A notes. Credit support is provided through subordination of the subordinated loan, and/or the Class B notes – if issued.

The Class A notes benefit from liquidity support from a liquidity reserve fund, which is initially sized at 1% of the ultimate commitment (GBP 2.75 million). The liquidity reserve fund is to be replenished from the revenue priority of payments. Liquidity in the transaction is further supported by the ability to apply available principal funds 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. Excess spread will be applied to clear PDL balances. An accelerated redemption feature is used at the earlier of a draw stop event or upon completion of the commitment period, 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. Under the swap agreement, the Debtor will receive one-month GBP London Interbank Offered Rate (LIBOR) on a monthly basis, and the Debtor will pay the swap provider a weighted average of the swap rates. Swap rates are assigned to each fixed-rate loan by NWM 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 PD of 27.2% and an LGD of 44.6% at the ‘A’ level 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 12 cash flow scenarios were applied to test the capital structure and ratings of the notes. Four additional scenarios without prepayments were analysed, however the structure is more sensitive to fast prepayment speeds.

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 pound 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.

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

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 BBB (low) (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in PD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (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 BB (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 BB (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 BBB (low) (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in PD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (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 BB (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 BB (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 and US regulations only.

Lead Analyst: Lloyd Morrish-Thomas, Financial Analyst, RMBS
Rating Committee Chair: Quincy Tang, Managing Director, Head of US RMBS
Initial Rating Date: 4 October 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.

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