DBRS Assigns Provisional Ratings to Celeste Mortgage Funding 2015-1 PLC

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following notes issued by Celeste Mortgage Funding 2015-1 PLC (the Issuer):

-- Class A to GBP 106,905,000 at AAA (sf)
-- Class B to GBP 29,275,000 at AA (sf)
-- Class C to GBP 23,929,000 at A (sf)
-- Class D to GBP 10,692,000 at BBB (sf)
-- Class E to GBP 9,164,000 at BB (sf)
-- Class F to GBP 4,382,000 at B (sf)

The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the U.K. The mortgage portfolio consists of U.K. Buy-to-Let (BTL) and a small proportion of non-conforming residential mortgage loans originated by Basinghall Finance Limited (BFL; 96.80%) and GMAC-RFC Limited (3.20%). The legal title holder of the mortgage portfolio is BFL. Using the proceeds of the Class A to Class H notes, the Issuer will purchase the beneficial title to the mortgage loans from Basinghall Mortgage Finance No.1 Limited (the Seller), a wholly owned subsidiary of BFL.

BFL is responsible for servicing the mortgage portfolio; however, day-to-day servicing responsibilities have been delegated to Homeloan Management Limited (HML) in accordance with the transaction documents. Special servicing responsibilities will remain with BFL. HML will also undertake the role of back-up servicer. DBRS conducted a review of servicing operations of BFL and HML.

BFL was established by WestLB AG in 2005 with the aim of acquiring and originating mortgage loans in England and Wales. In 2008, WestLB AG applied for German state aid, at which point BFL was instructed to cease all new originations. In late 2010, Erste Abwicklungsanstalt, a winding up agency under German law, took full ownership of BFL from WestLB. BFL was acquired by the Bluestone Group on 12 December 2014, following the U.K.’s Financial Conduct Authority approval of the change in control.

As of 31 Decemebr 2014, 98.95% of the mortgage portfolio has an interest only repayment profile. This is largely a consequence of the BTL loans in the portfolio (94.7%). The weighted-average seasoning of the portfolio is 86.5 months, with 98.7% of the mortgage loans originated in 2006, 2007 and 2008, the peak of the U.K. mortgage and housing market. The weighted-average current loan-to-value of the portfolio is 83.1%. Based on Nationwide House Price Index (Q4 2014), DBRS calculates 0.07% of the portfolio is in negative equity. Self-employed borrowers comprise 59.14% of the portfolio with a small proportion of the mortgage balance (2.75%) origintaed on a self-certified basis.

Loans that have been restructured in the past comprise 3.86% of the portfolio. All such loans in the portfolio are classified as performing indicating one-time adverse events took place that affected borrowers’ ability to maintain regular mortgage payments. The 90-plus days arrears level is 0.38%, with 1.17% of the portfolio granted to borrowers with adverse credit history at the time of originations.

The weighted-average coupon generated by the mortgage loans is 2.67%. All the loans have come off their teaser periods and the majority of the loans (67.05%) pay an interest rate linked to the Bank of England Base Rate (BBR), 28.56% pay interest linked to three-month GBP LIBOR and 4.38% pay interest linked to the lender’s Standard Variable Rate (SVR). The weighted-average margin, over three-month GBP LIBOR, is equal to 2.15%. The interest payable on the notes is linked to three-month GBP LIBOR. For the purposes of its cash flow analysis, DBRS stressed the BBR and SVR rates generated by the assets.

Credit enhancement is provided in the form of subordination of the junior notes and the Credit Reserve equal to 0.8% of the rated note balance. The subordinated notes will be used to establish the reserve fund at closing, which equates to 1.5% of the rated note balance. Excess spread, where available, can be utilised to increase the reserve fund to 2.25% of the initial balance of the rated notes. The Reserve Fund is split into two components; the Credit Reserve and the Liquidity Reserve. The Liquidity Reserve portion will be formed by 0.7% of the current outstanding rated note balance and is available to cover shortfalls in payment of senior fees and interest on the rated notes, subject to Principal Deficiency Ledger and Defaulting Loan triggers.

The DBRS rating of the notes addresses the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the notes. DBRS based the ratings primarily on:

-- The transaction's capital structure and the form and sufficiency of available credit enhancement. Relevant credit enhancement for each rated class of notes is provided in the form of subordination of the respective junior notes and the Credit Reserve (0.8% of the rated note balance). The Class A Notes are supported by 37.15% of credit enhancement (as a percentage of collateral balance), the Class B Notes are supported by 25.65% of credit enhancement, the Class C Notes are supported by 16.25% of credit enhancement, the Class D Notes are supported by 12.05% of credit enhancement, the Class E Notes are supported by 8.45% of credit enhancement and the Class F notes are supported by 6.75% of credit enhancement.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents. All classes of rated notes pass DBRS stresses for timely payment of interest and ultimate payment of principal.

-- BFL’s capabilities with respect to originations, underwriting, servicing and financial strength.

-- The credit quality of the collateral and ability of the BFL and HML to perform collection activities on the collateral.

-- 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” methodology.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable is Master European Residential Mortgage-Backed Securities Rating Methodology and the Jurisdictional Addenda (January 2015).

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

These 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 BFL and their representatives. DBRS considers the information available to it for the purposes of providing this rating of satisfactory quality. In addition, DBRS also sourced data from Intex, CML and LSL Property Services plc to assess relative performance.

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 the changing the transaction parameters on the rating of the Class A, Class B, Class C, Class D, Class E and Class F Notes, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- In respect of the Class A Notes, the Probability of Default (PD) of 39.25% and Loss Given Default (LGD) of 50.65%, corresponding to a AAA stress scenarios, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class B Notes, the PD of 32.99% and LGD of 43.61%, corresponding to a AA stress scenarios, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class C Notes, the PD of 28.75% and LGD of 40.81%, corresponding to an “A” stress scenarios, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class D Notes, the PD of 23.81% and LGD of 36.51%, corresponding to a BBB stress scenarios, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class E Notes, the PD of 17.25% and LGD of 31.19%, corresponding to a BB stress scenarios, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class F Notes, the PD of 11.55% and LGD of 27.26%, corresponding to a B stress scenarios, were stressed assuming a 25% and 50% increase on the PD and LGD.

DBRS concludes the following impact on the rated notes:

Class A Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would maintain the Class A Notes at AAA (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (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 (high) (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 AA (high) (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 AA (low) (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 AA (low) (sf).

Class B Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (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 B Notes to A (high) (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 B Notes to A (low) (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 B Notes to A (low) (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 B Notes to BBB (high) (sf).

Class C Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (low) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (low) (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 C Notes to BBB (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 C Notes to BB (high) (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 C Notes to BB (high) (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 C Notes to BB (sf).

Class D Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (low) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (high) (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 D Notes to BB (high) (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 D Notes to BB (low) (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 D Notes to BB (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 D Notes to BB (low) (sf).

Class E Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to BB (low) (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 E Notes to B (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 E Notes to below B (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 E Notes to B (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 E Notes to below B (sf).

Class F Notes:
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to below B (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to B (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 F Notes to below B (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 F Notes to below B (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 F Notes to below B (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 F Notes to below B (sf).

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

Lead Analyst: Asim Zaman
Rating Date: 11/03/2015
Rating Committee Chair: Quincy Tang
Lead Surveillance Analyst: Vito Natale

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.