DBRS Assigns Ratings to Mortar No.1 Limited Following Restructuring

DBRS Ratings Limited (DBRS) assigned the following ratings to Mortar No. 1 Limited’s (Mortar, Issuer) Committed Subscription Facility (the Facility) of GBP 200 million represented by Senior A Notes and Senior B Notes (the notes):

--Senior A Notes rated at AA (sf)
--Senior B Notes rated at A (sf)

The combined outstanding amounts of the notes equal the drawdown under the Facility. The issuance of the notes is a restructure of the Mortar warehouse where the Senior Note Issuance Facility was rated AA (low) by DBRS. Under the restructuring, the Senior Note Issuance Facility ceased to exist and DBRS ratings were concurrently withdrawn.

The Facility, which is provided by Compartment 2015-021-Semper of MAnaGed and ENhanced TAp (MAGENTA) Funding S.T. and Sumitomo Mitsui Banking Corporation, Brussels Branch (Lenders), is used to fund the purchase of buy-to-let (BTL) and owner-occupied mortgage loans originated by Paratus AMC Limited (Paratus AMC or the Seller). Paratus AMC originates mortgage loans under the secured lending brand of Foundation Home Loans (FHL). The mortgages funded secure the amounts drawn under the Facility.

In the restructuring, the Facility limit increased to GBP 200 million from GBP 163 million. The Facility is expected to be entirely drawn down within the commitment period of two years from the closing of the transaction on 1 December 2017. Three years from the closing date, if the Facility is still outstanding, the Facility lenders have the option to request the sale of the mortgage portfolio such that the entire Facility outstanding along with accrued interest is paid back.

At closing and at each instance of drawdown of the Facility, Paratus AMC, as the noteholder of the junior notes, will fund to a minimum of 6% of the aggregate amount of loans sold to the Issuer. The extent of such funding by Paratus AMC will reflect in the outstanding amount of the junior notes. This minimum junior notes’ size condition would change depending upon the Portfolio Gross Loss number as calculated by a Dynamic Advance Rate Model (Mortar Model) and will hence determine the advance rate under the Facility. For example, the minimum junior notes’ size of 6% (hence an advance rate of 94%) will apply as long as the Portfolio Gross Loss number falls in the range of 0% to 11%. For a Portfolio Gross Loss number between 11% to 11.50%, the minimum junior notes’ size will be higher at 7%. The transaction documents include a table which contains the minimum junior notes’ size (called Senior B Notes Minimum Subordination) corresponding to Portfolio Gross Loss Number ranging up to 32.50%, beyond which the stop purchase event would be triggered.

The outstanding amount under the Facility will be represented as the aggregate of the notes outstanding under the Senior A Notes and Senior B Notes. Excluding the Senior B Notes Minimum Subordination condition, as described above, an additional minimum subordination condition of 20%, at closing, and at each instance of drawdown of the Facility, will apply to the Senior A Notes. This will be called the Senior A Notes Minimum Subordination and will vary per the Portfolio Gross Loss number. Any failure to maintain the Senior B Notes Minimum Subordination and Senior A Notes Minimum Subordination will trigger the Advance Rate Default status where no further loans would be purchased by Mortar.

The loans sold to Mortar will satisfy a set of six portfolio tests to limit the credit risk of Mortar’s purchased mortgage portfolio. At each month-end, DBRS will be provided the pool cut of the loans sold to Mortar, the Mortar Model with the Portfolio Gross Loss Number (defaults and loss severity for the month-end pool cut), and the Senior B Notes Minimum Subordination and Senior A Notes Minimum Subordination based on the Portfolio Gross Loss Number.

At closing, DBRS has assessed the risk of the following:
-- The mortgage portfolio based on the six portfolio tests; and
-- The ability of the Issuer to meet its liabilities on the Facility outstanding for each variant of the Senior B Notes Minimum Subordination and Senior A Notes Minimum Subordination. DBRS tested 27 of such variants to the Senior B Notes Minimum Subordination and Senior A Notes Minimum Subordination levels.

The monthly reporting will enable DBRS to assess the credit risk of the actual portfolio periodically using its “European RMBS Insight methodology: UK Addendum” methodology which will determine the defaults and loss given default (LGD) of the month-end portfolio at various rating stress levels. DBRS will use these defaults and LGD stresses to test the cash flows of the transaction structure.

The loans sold to Mortar will include those paying a fixed-interest-rate during the teaser period, which can be up to a maximum of five years, after which the interest rate on the loans would switch to a floating rate linked to three-month GBP Libor. In comparison, the interest rate payable on the notes outstanding will be linked to three-month GBP Libor; therefore, during the teaser period of the loans, Mortar would be exposed to fixed/floating interest-rate-risk, which is hedged by a swap provided by Natixis S.A., London Branch. DBRS has considered such hedge in its cash flow analysis.

The ratings are further based upon a review by DBRS of the following analytical considerations:
-- The transaction’s account bank agreement and its replacement rating trigger are in accordance with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.
-- The transaction’s hedge agreement and replacement of the hedge provider and/or posting of swap collateral are based on rating triggers in accordance with DBRS’s “Derivative Criteria for European Structured Finance Transactions”.
-- The legal structure and presence of legal opinions are deemed consistent with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology.
-- The servicing capabilities of Paratus AMC as assessed by DBRS through its operational risk review of the entity.

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

The principal methodology applicable to the rating is: “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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the closing mortgage portfolio and will continue to be monitored using the month-end mortgage portfolios and the Mortar Model submitted to DBRS on a monthly basis as 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 Natixis, Global Structured Credit & Solutions and Paratus AMC.

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 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 on this transaction took place on 19 October 2017, when the Senior Note Issuance Facility rating was downgraded to AA (low) (sf) as a result of the change in portfolio conditions for purchase of new loans.

The lead analyst responsibilities for this restructure of the transaction have been transferred to Kali Sirugudi. The regular surveillance and monitoring of the transaction will continue to be performed by Kevin Ma.

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”):

In respect of the Senior A Notes, the portfolio default (PD) of 23.82% and LGD of 53.53%, corresponding to an AA (sf) stress scenario, where the Portfolio Gross Loss (per Mortar Model) is expected to be in the range of 0% to 11%, were stressed assuming 25% and 50% increase on the PD and LGD; this sensitivity testing also assumes that the Minimum Subordination levels for Senior A Notes do not change:

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

The remaining stress scenarios of higher PD and LGD do not result in any change in the ratings of the Senior A Notes.

In respect of the Senior B Notes, the PD of 19.86% and LGD of 47.25%, corresponding to an A (sf) stress scenario, where the Portfolio Gross Loss (per Mortar Model) is expected to be in the range of 0% to 11%, were stressed assuming 25% and 50% increase on the PD and LGD; this sensitivity testing also assumes that the Minimum Subordination levels for Senior B Notes do not change:

-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to BBB (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, 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: Kali Sirugudi, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 7 December 2015

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.

-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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.