DBRS Assigns Final Ratings to Newstone Mortgage Securities No. 1 Plc

DBRS Ratings Limited (“DBRS”) assigns final ratings to the following notes issued by Newstone Mortgage Securities No 1 Plc:

-- AAA (sf) to £ 208,500,000 Class A Notes

Newstone Mortgage Securities No. 1 Plc (“Newstone” or the “Issuer”) represents a securitisation of non-conforming UK mortgage loans originated by Beacon Homeloans Ltd. The loans were purchased by Redstone Mortgage Ltd (Redstone) and were sold to the Issuer at closing. Redstone is a wholly owned subsidiary of UniCredit Bank AG since March 2011, and was established in 2004 as a special purpose vehicle to warehouse UK non-conforming mortgage portfolios.

The mortgage portfolio consists of non-conforming first charge mortgage loans, backed by properties in England, Scotland and Wales, with an aggregate current balance of £242.54 million. DBRS performed an analysis of the historical performance of the mortgage portfolio and concluded that the performance is better than the average UK non-conforming RMBS pools from similar vintages. The portfolio is serviced by Homeloan Management Limited.

If 60 days prior to the optional redemption date the Issuer has not given notice of its intention to redeem the notes, the Noteholders of the Class A Notes will have the option, but not the obligation, to put their notes, via the Issuer, to UniCredit Bank AG, London Branch (“UniCredit”) at the optional redemption date in 15 June 2019. Upon exercise of the put option, UniCredit Bank AG is expected to repurchase the notes at par less any outstanding balance on the principal deficiency ledger of the rated notes. If the Issuer does not receive the purchase price from UniCredit and as a consequence the Issuer is not able to repurchase the notes at the optional redemption date, the failure by the Issuer to repurchase the notes at the optional redemption date does not constitute an event of the default under the terms and conditions of the Class A notes.

The rating is based upon review by DBRS of the following analytical considerations:

• The transaction’s capital structure and the form and sufficiency of available credit enhancement; Class A Notes’ credit enhancement consists of the subordinated loan, which is 14.03% of the portfolio balance. The Class A Notes benefit from a fully sequential amortisation with no payment of principal under the subordinated loan until Class A Notes are redeemed in full. The transaction structure will also benefit from a reserve fund of £4.17 million. This reserve fund provides only liquidity support to cover for any shortfall in payment of senior fees and interest on the rated notes. The reserve is fully funded at closing by the subordinated loan.

• The main characteristics of the portfolio include: (i) 64.65% weighted average Indexed current loan-to-value (“CLTV”); (ii) 44.88% interest only loans, 50.73% repayment and 4.39% part and part repayment loans; (iii) 65.53% remortgaged loans; (iv) 37.88% of loans concentrated in the South of England; (v) 97.49% of loans originated in 2007, 2008 and 2009; (vi) 100% surveyor valuations; (vii) 38.74% self-certified income borrowers and (viii) 38.48% self-employed borrowers at loan origination. The portfolio is 5.6 years seasoned.
• The credit quality of the mortgages backing the Notes and the ability of the servicer to perform its servicing duties. DBRS was provided with the historical performance as well as loan level data for the mortgage portfolio in the transaction. Details of estimated defaults, loss given default and expected losses for the mortgage portfolio at “AAA (sf)” stress scenarios are highlighted below.
• DBRS used a combination of default timing curves (front and back-ended), rising and declining interest rates and low, mid and high prepayment scenarios in accordance with the DBRS rating methodology to stress the cash flows. Given the low prepayment level observed in UK and permitted loan variations for the portfolio, DBRS also tested a scenario with zero prepayments. Furthermore, the basis risk of the transaction is unhedged. DBRS estimates basis risk to be limited as the assets and liabilities reference the 3 Months GBP Libor index, which is reset on a quarterly basis but on different dates.
• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.
Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable is:
Master European Residential Mortgage-Backed Securities Rating Methodology and the UK Jurisdictional Addendum

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

For a more detailed discussion of 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 information used for this rating include Redstone Mortgage Limited and their agents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality. The information upon which DBRS ratings and reports are based, and any other content displayed on the Site, is obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances.

This is the first rating action since the Initial Rating Date of April 23, 2014. This is the first final DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of a change in the transaction parameters (probability of defaults and/or loss given default) on the rating of Class A Notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• In respect of Class A Notes and a rating category of “AAA (sf)”, the Probability of Default (“PD”) of 33.31%, a 25% and 50% increase on the PD.
• In respect of Class A Notes and a rating category of “AAA (sf)”, Loss Given Default (“LGD”) of 38.44%, a 25% and 50% increase on the LGD.

DBRS concludes that for the Class A Notes:
• A hypothetical increase of the PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
• A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (sf).
• A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to maintain the Class A Notes to AA (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class A Notes to AA (low) (sf).
• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to downgrade the Class A Notes to A (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to A (sf).
• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to downgrade the Class A Notes to BBB (high) (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“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.

Initial Lead Analyst: David Sanchez Rodriguez
Initial Rating Date: 23 April 2014
Initial Rating Committee Chair: Claire Mezzanotte (Group Managing Director, Head of Global Structured Finance)
Last Rating Date: 23 April 2014 (Provisional Rating)
Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Claire Mezzanotte

DBRS Ratings Limited
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United Kingdom

Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at:
http://www.dbrs.com/about/methodologies

• Master European Residential Mortgage Backed Securities Rating Methodology and Jurisdictional Addenda
• Legal Criteria for European Structured Finance Transactions
• Operational Risk Assessment for European Structured Finance Servicers
• Unified Interest Rate Model for European Securitisations