DBRS Downgrades Senior Note Issuance Facility of Mortar No. 1 Limited

DBRS Ratings Limited (DBRS) downgraded the Senior Note Issuance Facility (Senior Note or Facility) of Mortar No. 1 Limited (Mortar 1) to AA (low) (sf) from AA (sf).

The rating action followed an annual review of the transaction and analysis on the execution of waivers on certain portfolio test covenants and amendments to the transaction documents on 18 October 2017. The amendments changed the Facility’s Commitment Termination Date to 25 January 2018 from 30 November 2017 and reduced the required weighted-average interest rate of the Fixed Rate Mortgage Loans to 3.50% from 3.75%.

The waivers have mainly resulted in the removal of concentration limits on the underlying portfolio’s top ten loans and top ten borrowers, and will remain effective until the Commitment Termination Date. Nevertheless, the balance of each mortgage loan purchased into the portfolio will be capped at GBP 1 million. The average loan balance will continue to be equal to or less than GBP 250,000 and the average total loan amount to each borrower will continue to be equal to or less than GBP 300,000. When the portfolio size is over GBP 150,000,000, the maximum total loan amount per borrower is GBP 3 million.

As a result of the waivers, the transaction’s exposure to loan and borrower concentration risks has significantly increased despite the limit on the maximum loan balance, the average loans size and the average total loan amount per borrower. In addition, the increase in the portfolio’s loan or borrower concentrations will no longer result in a Stop Purchase Event of the Facility.

To reflect the portfolio’s increased concentration risks, DBRS increased the portfolio default (PD) rate assumption by 20%, which is the portfolio’s most likely concentration exposure amount. Consequently, the base-case PD assumption increased to 9.6% from 8.0%. The loss given default (LGD) rate assumption remains at 27.8%. The increased PD assumption, as a result of the increased concentration risks, prompted the downgrade of the Senior Note to AA (low) (sf) from AA (sf).

Elavon Financial Services DAC, U.K. Branch, is the Account Bank in the transaction and has a DBRS private rating that complies with the Account Bank Minimum Institution Rating criteria, given the ratings assigned to the Senior Note, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Natixis S.A., London Branch, is the Swap Counterparty in the transaction and has a DBRS private rating that complies with the first rating threshold, given the rating assigned to the Senior Note, as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology.”

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

An asset and a cashflow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

A review of the transaction amendment deed was conducted. Other legal documents have remained unchanged since the most recent rating action.

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 data and information used for this rating action include the investor reports provided by U.S. Bank Trustees Limited and the amendment deed provided by Natixis S.A., London Branch.

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

At the time of the initial rating, DBRS was not 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 these ratings to be of satisfactory quality.

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

The last rating action took place on 20 December 2016, when DBRS confirmed the Senior Note at AA (sf).

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”):

-- The base case PD and LGD assumptions for the revolving collateral pool are 9.58% and 27.78%, respectively. At the AA (low) (sf) rating level, the corresponding PD and LGD are 29.45% and 55.28%, respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating on Senior Note would be expected to be at A (low) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on Senior Note would be expected to be at BBB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on Senior Note would be expected to be at BB (high) (sf).

Senior Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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: Kevin Ma, Assistant Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 7 December 2015

DBRS Ratings Limited
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United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of these transactions 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.