DBRS Assigns Final Ratings to Chestnut Financing Plc

DBRS Ratings Limited (“DBRS”) assigns the following ratings to Chestnut Financing Plc:

-- AAA (sf) to GBP 266,300,000 Class A Notes
-- Class Z VFN is not rated by DBRS

The transaction is an issuance of residential mortgage and secured loans to high net worth individuals originated by EFG Private Bank Limited (“Originator” or “EFGPB”) and collateralised by properties with larger than average valuations, with 56.54% of the properties concentrated in the prime central London area (Cut-off date March 2014).

EFGPB is a UK based entity that provides banking services, advisory, financial planning and secured facilities to private banking clients consisting of high net worth individuals. EFGPB is a wholly owned subsidiary of EFG International AG (“EFG AG”), an international private banking and asset management group based in Zurich, Switzerland. Under the terms of the transaction documents, EFG AG will guarantee the timely payment of interest on the Class A Notes and the payment of principal outstanding at the scheduled maturity date or following a note event of default. For the purposes of its analysis, DBRS has not given credit to the guarantee provided.

The capital structure consists of the rated Class A Notes and the Class Z VFN issued by Chestnut Financing Plc (“the Issuer”). The Issuer is a bankruptcy remote special purpose vehicle incorporated in the UK. The originator will declare a trust over the initial portfolio of loans in favour of the Issuer. The purchase of the beneficial trust in the portfolio will be financed through the issuance of the Class A Notes (“the rated notes”) and the Class Z VFN purchased by EFG Finance Guernsey Limited (“EFG Guernsey”).

The assets collateralising the rated notes consist of mortgages and secured loans to high net worth individuals or corporate entities associated with such individuals. Where the borrower is a corporate entity, its obligations are guaranteed by the individual(s) associated or by their corporate or trust entities. The residential loans are backed by properties located in prime London and counties in England. Additional collateral is also available in the form of cash deposits, bonds, investment portfolios and additional (non-residential) property. DBRS has not given credit to this additional collateral.

The portfolio consists of mainly interest only loans with a maximum maturity of five years. The transaction has a revolving period of three years during which principal repayments and prepayments may be used to purchase additional assets in line with the portfolio concentration criteria. The balance of the portfolio is GBP 396,143,004.64 with 240 borrowers within the portfolio (as of March 2014).

The originator has the option to redeem the Class A notes provided that the balance of the Class A Notes is less than or equal to 10% of the outstanding balance at closing.

The rating on the Class A Notes is based upon the review by DBRS of the following analytical considerations:

• The transaction’s cash flow structure and form and sufficiency of available credit enhancement. Credit Enhancement is provided in the form of subordination via the Class Z VFN in an amount equal to the funds provided to purchase the loans from the portfolio. In addition, the balance of Class Z VFN will fund the Cash Reserve. At closing, DBRS calculates the credit enhancement level at 28.06%. Excess spread is also available, however the availability of excess spread is determined by the performance of the portfolio.

Liquidity coverage is provided through the Cash Reserve. At closing the balance of the Cash Reserve will be equal to 2.3% of the cut off portfolio balance and is available to meet the payments of senior fees and interest payable on the Class A Notes. Principal funds may also be utilised to cover interest shortfalls on the Class A Notes. The Cash Reserve will not amortise until the Class A Notes have been repaid in full and will be funded to the required level via excess spread.

If certain triggers are breached, an early amortisation will take place which prevents the issuer from purchasing additional loans into the portfolio. Following an early amortisation event or the end of the revolving period, excess spread will be utilised to repay the Class A Notes after the replenishment of the Cash Reserve.

• The credit quality of the mortgage portfolio and the ability of the servicer to perform collection activities on the collateral. A default probability assessment was made on the underlying collateral and the loans expected to be purchased during the revolving period, DBRS stressed the loan-by-loan data in accordance with the portfolio concentration criteria defined in the transaction documents. EFGPB provided historical performance data on their London mortgage book, which DBRS used to assess the performance of originations relative the UK mortgage and securitisation market.

The mortgage portfolio consists of mortgage loans originated from Q4 2008 onwards. The weighted average seasoning is 21.6 months (as of March 2014) and the weighted average remaining term to maturity is 27.79 (as of March 2014) months. The entire portfolio consists of interest only loans with 99.63% at floating interest rates, linked to GBP Libor 3M (99.46%) and GBP 6M Libor (0.17%). The remaining 0.37% are fixed rate loans. Given the nature of the borrowers, the loan size and property valuations are larger than those typically observed in UK RMBS transaction.

The average loan size per borrower is GBP 1,650,595.85 (as of March 2014) with the average property valuation at GBP 2,398,780. The WACLTV is 50.71%, lower than typically observed in UK RMBS transactions. This is considered a strength as there is a positive correlation between LTV ratios and risk of default. The properties are largely concentrated around the London area with 56.54% concentrated in prime central London, 26.66% concentrated within other areas of London and 16.80% concentrated in other counties in England (outside of London). 42.78% of the portfolio has additional collateral pledged in the form of Cash Deposits, Portfolio Securities, Retail properties, office properties and guarantees. For the purposes of its analysis, DBRS has not given credit to the additional collateral pledged. For the avoidance of doubt, LTV ratios referenced do not include the additional collateral.

48.31% of the properties are classed as residential investment properties, with a sub-classification of Buy-to-Let or those where the borrower plans to enhance the value of the property (by renovation, enfranchisement, and planning gain) with a view to a future sale. DBRS treated 60% of the residential investment properties as Buy-to-Let as the originator was unable to provide data to distinguish loans within the portfolio within the two sub classifications.

Given the leverage ratios within the portfolio, the key drivers of credit risk are seasoning, interest only nature of the loans, residential investment properties and the size of the loans and property valuations. To address these risk factors, DBRS applied adjustments for Interest Only, Buy-to-Let and an adjustment for loan size in accordance with its European RMBS methodology. In addition, the market value declines applied were increased to take into consideration the larger than average property valuations and the reduced liquidity for the market in which they are bought and sold.

• The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and loss given default outputs provided by the DBRS default model. DBRS utilised front and back loaded default timing curves covering a period of 28 months as a consequence of the maturity of the loans, rising and declining interest rates and low, mid and high prepayment scenarios. As the recently exhibited prepayment rates in UK mortgage sector are below 5%, DBRS also tested for a scenario with 0% prepayments.

In accordance with the portfolio criteria, fixed rate mortgage loans can be purchased by the issuer up to a limit of 5% of the outstanding balance of the portfolio and as such the transaction is exposed to interest rate risk. The transaction does not have hedging contracts in place to mitigate the interest rate risk. DBRS has stressed the transaction cash flows in accordance with its unified interest rate model.

The transaction documents allow for repayments and prepayments on the loans to be held for a period of 12 months - during the revolving – before being used to purchase additional loans. During the 12-month period the cash is placed in the Transaction Bank Account. To assess for the negative carry, DBRS simulated the scenario of withholding principal receipts for a period of 12 months, during which time the interest rate received is applicable to the interest received on the Transaction Bank Account.

• 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
Jurisdictional Addenda

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

The sources of information used for this rating include: a loan-by-loan data tape of the mortgage portfolio originated by EFGPB, default and repossession data covering a period of five years, historical dynamic performance data of mortgage originations all of which was provided by the originator.

The following data was requested but not received:

Cumulative 90+ levels, data on the BTL property, industry from which the borrower generates their wealth. Although requested, we gain comfort from EFGPB origination practices and performance and therefore non receipt is not considered to be of significance to the recommended rating. Overall, DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

This rating concerns a newly issued financial instrument. This is the first 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, the Probability of Default (“PD”) of 26.90%, and Loss Given Default (“LGD”) of 35.13% corresponding to ‘AAA’ stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.

DBRS concludes the following impact on the rated notes:

• A hypothetical increase of the PD by 25% or a hypothetical increase in the LGD of 25%, cetirus paribus, would lead to an assignment of AAA (sf) to the Class A Notes

• A hypothetical increase of the PD by 50% or a hypothetical increase in the LGD by 50%, cetirus paribus, would lead to an assignment of AAA (sf) to the Class A Notes.

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: Alastair Bigley, Senior Vice President
Initial Rating Date: 23rd May 2014
Initial Rating Committee Chair: Quincy Tang, Managing Director
Lead Surveillance Analyst: Keith Gorman, Senior Vice President

Last Rating Date: 1st May 2014 (Provisional Ratings)
Rating Committee Chair: Quincy Tang, Managing Director
Lead Surveillance Analyst: Keith Gorman, Senior Vice President

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
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

The methodologies applicable are:

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