DBRS Confirms Ratings Assigned to Belmont Green Funding 3 Limited Warehouse Facility Following Amendment

DBRS Ratings Limited (DBRS) confirmed the ratings assigned to Belmont Green Funding 3 Limited (BGF3) following an amendment to the transaction executed on 12 January 2018 and the completion of a full review cycle.

The transaction is a secured funding facility provided by Macquarie Bank Limited to BGF3. DBRS initially rated the Class A1 and A2 notes (together, the Class A notes) at A (sf) in June 2017. The Class A2 notes hold the total commitment of the Facility, increased to GBP 172.5 million, and issuance will be used to fund the purchase of residential mortgage loans. The Class A2 notes will be initially held by Macquarie Bank Limited, which can instruct BGF3 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 proceeds. 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 amendment can be summarised with the following changes to the transaction documents:
-- Modify concentration limits to permit the inclusion of second-ranking mortgage loans, a higher portion of portfolio landlords (more than eight investment properties) and more owner-occupied interest-only mortgages into the collateral portfolio.
-- Amend the borrowing base mechanism to provide a dynamic advance rate that fluctuates depending on the second-lien concentration. The advance rate for first-lien mortgages will be unchanged, at 90%, whereas a maximum advance rate of 75% will be permitted for second-lien mortgages.
-- Reduce the excess spread concentration limit to 2.75% from 3%.
-- Extend the commitment period such that the funds are available for two years following the execution date.

The most notable of the amendments is the inclusion of second-ranking mortgages. As per the concentration limits, BGF3 may now purchase (originate) the greater of 12.5% of the portfolio balance and GBP 8,000,000 of second liens. These loans must not have an original loan-to-value (LTV) above 70% (inclusive of the prior balance, when the second-lien balance exceeds GBP 10,000,000), and no more than 20% of the second liens (or GBP 600,000, if higher) can have an LTV above 70%.

To account for the variance in risk profile, the transaction has been structured to include a dynamic advance rate. This provides that when BGF3 purchases second-lien mortgages, the advance rate decreases, and the credit enhancement increases. DBRS has tested multiple scenarios to assess the sufficiency of the credit enhancement with various concentrations of second-lien mortgages.

The collateral portfolio has been modelled in line with DBRS’s “European RMBS Insight Methodology and UK Addendum”. Therefore, the increase in portfolio landlords (classified as those with more than eight investment properties) results in an increase in the portfolio default rate (PD) – resulting from a migration to higher-risk segments during the scoring process. The increase in owner-occupied interest-only loans has a similar effect on the credit analysis.

Further incremental changes were made to the transaction documents, and considered in DBRS’s analysis.

BGF3 can purchase residential mortgage loans originated by Belmont Green Funding Limited (BGFL), trading as Vida Homeloans. All mortgages are sourced, or are to be sourced, through a network of intermediaries. BGFL is the 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. 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 (Barclays) 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 transaction account. The collection account declaration of trust provides that interest in the collection account is in favour of BGF3 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. The funding and collection accounts are held with Barclays, and the 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 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 BGF3 one-month GBP LIBOR on a monthly basis, and BGF3 will pay RBS a weighted average of the swap rates. RBS assigns swap rates to each fixed-rate loan 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.

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

The principal methodology applicable to the rating is the “European RMBS Insight Methodology and UK Addendum”.

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

An asset and a cash flow 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.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf

The sources of data and information used for these ratings include Belmont Green Finance Limited and Macquarie Bank Limited.

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

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

DBRS was supplied with one or more third-party assessments. This did not impact the 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.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Lloyd Morrish-Thomas.

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”):

If the maximum portion (12.5%) of second-lien mortgages are purchased, at a ‘A’ stress level, a PD and LGD of 29.0% and 49.9%, respectively.

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.

DBRS concludes the following impact on the Class A1 notes:

-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (High) (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (High) (sf).

DBRS concludes the following impact on the Class A2 notes:

-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (High) (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade 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, Senior Financial Analyst, RMBS
Rating Committee Chair: Vito Natale, Senior Vice President, Head of European RMBS and CBs
Initial Rating Date: 14 June 2017

DBRS Ratings Limited
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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 (28 September 2017)
Interest Rate Stresses for European Structured Finance Transactions (18 December 2017)
Operational Risk Assessment for European Structured Finance Originators (12 October 2017)
Operational Risk Assessment for European Structured Finance Servicers (12 October 2017)
Derivative Criteria for European Structured Finance Transactions (9 October 2017)

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.