DBRS Assigns Provisional Ratings to Aggregator of Loans Backed by Assets 2015-1 Plc

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following notes to be issued by Aggregator of Loans Backed by Assets 2015-1 Plc (Alba 2015-1 or the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (low) (sf)
-- Class E Notes at B (sf)

The ratings assigned to the above notes address timely payment of interest and ultimate payment of principal.

Alba 2015-1 represents a securitisation of a portfolio of first-ranking U.K. non-conforming residential mortgage loans expected to be funded through the issuance of Classes A, B, C, D, E and Z mortgage-backed notes. The loans were originated by Edeus Mortgage Creators Limited (52.39%), GMAC-RFC Limited, currently known as Paratus AMC Limited (44.99%), Amber Homeloans Limited (1.73%) and Kensington Mortgage Company Limited (0.89%).

The provisional mortgage portfolio for Alba 2015-1 was part of the Alba 2013-1 Plc RMBS transaction, which was called in January 2015.

On the closing date, the Issuer is expected to purchase the beneficial interest of the mortgage portfolio from Ertow Holdings Limited (Ertow). The legal title to the mortgage portfolio is held by Pepper (UK) Limited (Pepper), who is also the servicer of the mortgage portfolio.

The Alba 2015-1 provisional mortgage portfolio has 7.89 years of seasoning. The majority of the loans were originated pre-crisis in 2006 (27.11%) and 2007 (71.09%). The weighted-average current loan-to-value (WACLTV) is 84.57%; 77.38% of the loans have a current loan-to-value greater than or equal to 80%. Though the mortgage portfolio is more than seven years seasoned, amortisation is low as 87.60% of the loans repay on an interest-only (IO) basis. Based on using the Nationwide house price index, DBRS calculates the WACLTV indexed of the mortgage portfolio at 76.16%. The other non-conforming characteristics of the mortgage portfolio include 35.10% buy-to-let (BTL) loans, 11.65% of the borrowers having adverse credit history at the time of origination of the loans and 36.57% of loans where borrowers have self-certified income. Considering the seasoning of the mortgage portfolio, the key drivers of credit risk going forward include the nature of the mortgage products, i.e., IO and BTL loans, self–employed borrowers (34.64%) and the historical performance of the mortgage portfolio to date.

DBRS was provided with performance history data of the mortgage portfolio from January 2009. DBRS compared the performance against other non-conforming mortgage portfolios with similar characteristics to assess the credit risk profile of the Alba 2015-1 mortgage portfolio. The performance history shows cumulative arrears for more than or equal to three months is equal to 20.19%. Over the last 24 months, this has improved with the cumulative level exhibited at 9.80%. The proportion of these delinquent loans as of 31 December 2014 equates to 3.67%. The trend indicated from the above figures demonstrates an improvement in performance. This improvement in performance can be linked to the forbearance measures implemented by Pepper for delinquent loans. Since January 2009, 25.69% of the loans have been provided an ATP or restructuring at least once. DBRS considers borrowers in this mortgage portfolio who enter arrears on a recurring basis, particularly in the context of the low interest rate environment, to be susceptible to a higher propensity to default following an interest rate rise. Since January 2009, 50.47% of the mortgage portfolio has never been in arrears. DBRS has accounted for the performance history of the mortgage portfolio in assessing the expected defaults for the mortgage portfolio.

A handful of loans in the provisional portfolio are excluded under specific representations and warranties provided by the seller, Ertow. These loans are expected to be sold to the Issuer at closing. DBRS has assessed the nature of the exclusion in each case and made conservative assumptions where deemed appropriate. Please refer to the presale report for Alba 2015-1 for the details.

The expected credit enhancement to the Class A Notes is provided by subordination of the Class B, Class C, Class D, Class E and Class Z Notes and overcollaterisation aggregating to 34.54%, plus an amortising reserve fund equal to 3% of the aggregate collateral balance. The credit enhancement for Class B Notes is expected to be at 29.86%, for Class C Notes at 22.18%, Class D Notes at 15.59% and Class E Notes at 7.92%.

The interest payments on the rated notes are expected to be supported by the reserve fund and principal receipts subject to trigger conditions. The interest margin on the Class A Notes is expected to step up on the optional redemption date (five years from closing of the transaction). There are additional interest payments envisaged for the subordinated notes; however, such additional payments will be made after replenishment of the reserve fund in the revenue waterfall. DBRS’s cash flow analysis has not tested the payment of the additional interest on the junior notes and thus DBRS’s provisional ratings on the notes exclude the Issuer’s ability to meet such payments.

Of the loans, 78.58% pay interest linked to the Bank of England base rate (BBR). In comparison, the interest rate paid on the notes is linked to one-month GBP LIBOR. This basis risk is unhedged. Based on the historical spread between BBR and one-month GBP LIBOR, DBRS has stressed the interest receipts from the mortgage portfolio as part of the cash flow analysis.

The ratings are based upon review by DBRS of the following analytical considerations:

-- The transaction’s capital structure and the form and sufficiency of available credit enhancement.

-- The credit quality of the mortgages backing the notes and the ability of Pepper as the servicer to perform its servicing obligations. Pepper has been servicing this mortgage portfolio since the beginning of 2010 and overall has extensive exposure to servicing mortgages in the U.K. non-conforming sector. There is no back-up servicing arrangement proposed. However, this is not a concern. DBRS considers the mortgage servicing sector in U.K. and the servicing practices of the players in the sector to be mature and competent to deal appropriately and timely with takeover of servicing of a non-conforming portfolios DBRS was provided with the historical performance as well as loan-level data for the provisional mortgage portfolio in the transaction. Details of estimated defaults, loss given default and expected losses for the mortgage portfolio in different stress scenarios are highlighted below.
-- A stress to the transaction cash flows. 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 the U.K., DBRS also tested scenarios with zero prepayments.
-- 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 Jurisdictional Addenda.

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

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

For a detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include Pepper (UK) Limited, Credit Suisse Securities (Europe) Limited and Intex. 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 these financial instruments.

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 Classes A, B, C, D and E 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 50.62%, and Loss Given Default (LGD) of 51.59% corresponding to a AAA stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD, respectively.
-- In respect of the Class B Notes, the PD of 43.97%, and LGD of 44.82% corresponding to a AA stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD, respectively.
-- In respect of the Class C Notes, the PD of 39.27%, and LGD of 42.08% corresponding to an “A” stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD, respectively.
-- In respect of the Class D Notes, the PD of 31.56%, and LGD of 35.57% corresponding to a BBB (low) stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD, respectively.
-- In respect of the Class E Notes, the PD of 17.78%, and LGD of 29.09% corresponding to B stress scenario were stressed assuming a 25% and 50% increase on the PD and LGD, respectively.

DBRS concludes the following impact on ratings of the rated notes:

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

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

Class C 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 C Notes to BBB (low) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of 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 a downgrade of 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 a downgrade of the Class C Notes to BB (sf).

Class D 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 D Notes to BB (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 D Notes to B (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 D Notes to B (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 D Notes to B (sf).

Class E Notes:
-- A hypothetical increase of the PD and LGD by 25% or higher, ceteris paribus, would lead to a downgrade of the Class E 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.

Initial Lead Analyst: Kali Sirugudi
Initial Provisional Rating Date: 7/04/2015
Initial Provisional Rating Committee Chair: Erin Stafford
Last Rating Date: Not applicable
Lead Surveillance Analyst: Not Applicable

DBRS Ratings Limited
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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