DBRS Confirms Rating on Cape Funding No. 1 Plc

DBRS Ratings Limited (DBRS) has today confirmed the Class A1P variable funding note credit facility issued by Cape Funding No. 1 Plc (the Issuer) at AAA (sf).

The confirmation of the rating on the Class A1P notes is based on the following analytical considerations, as described more fully below:

-- Portfolio performance, in terms of delinquencies and defaults, as of the February 2015 payment date.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement to the Class A1P note to cover the expected losses at the AAA (sf) rating level.

Cape Funding No. 1 Plc is a securitisation of a portfolio of prime UK residential mortgage loans originated by TSB Bank Plc (TSB), including loans originated by Lloyds Bank Plc (Lloyds) and Cheltenham & Gloucester Plc (C&G) and transferred to TSB. The transaction is currently in its revolving period.

The purpose of the transaction is to raise financing by means of issuing variable funding note credit facilities (VFNs or Class A1P notes, Class A2 notes and Class Z notes). Through the term of the transaction, the VFNs may be drawn up to their maximum limits. The maximum drawing amount of the combined Class A1P and Class A2 facilities will be GBP 2.5 billion. As of the February 2015 payment date, the Class A1P drawing is GBP 10 million and the Class A2 drawing is GBP 2.49 billion.

The Class A1P is subscribed by Lloyds, and the Class A2 and Class Z by TSB. Following certain events, Lloyds has the option (Class A1P Put Option) to cancel the Class A1P notes and transfer its outstanding notional amount and coupon to the Class A1R notes. Unlike the Class A1P notes, the Class A1R notes are expected to be cleared in an acceptable clearing house and listed in an acceptable market.

During the Class A1P facility commitment period, Lloyds has the obligation to subscribe further drawings of the Class A1P facility upon request by the Issuer or by TSB on its behalf as Cash Manager. The Class A1P facility commitment period is scheduled to end on 17 December 2018. Drawings on the Class A1P facility will be used to redeem the Class A2 notes.

As of February 2015, 2-3 month arrears were at 0.04% and there were no loans in higher delinquency buckets. The current cumulative default ratio is at zero.

Credit enhancement to the Class A1P notes has been stable at 14.53% since the DBRS initial rating due to the revolving period. Credit enhancement to the Class A1P notes consists of subordination of the Class Z notes.

As of February 2015, the Reserve Fund was at the target level of GBP 73 million. It was initially funded at 2.50% of the initial balance of the notes, and covers senior fees and interest shortfall on the Class A1P and A2 notes.

Lloyds Bank Plc holds the Transaction Account for the transaction. The DBRS public rating of Lloyds Bank Plc at AA (low) complies with the Minimum Institution Rating given the rating assigned to the Class A1P Notes, as described in DBRS’s “Legal Criteria for European Structured Finance.”

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”, which 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.

Due to the inclusion of a revolving period in the transaction, the collateral was initially modelled based on the worst-case replenishment criteria set forth in the transaction legal documents. These assumptions have not changed and consequently an updated cash flow analysis was not conducted.

The sources of information used for this rating include investor reports and loan-level data provided by TSB Bank Plc. 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 is the first rating action on the transaction since the Initial Rating Date.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
-- DBRS expected a lifetime base case probability of default (PD) and loss given default (LGD) for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of mortgages for the Issuer are 1.54% and 18.48%, respectively. At the AAA (sf) rating level, the corresponding PD is 21.77% and the LGD is 43.80%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A1P notes would be expected to fall to AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A1P notes would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A1P notes would be expected to fall to AA (low) (sf).

Class A1P Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (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: David Sanchez Rodriguez
Initial Rating Date: 22 May 2014
Initial Rating Committee Chair: Quincy Tang

Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Diana Turner

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.

-- Legal Criteria for European Structured Finance Transactions (December 2014)
-- Master European Structured Finance Surveillance Methodology (April 2015)
-- Operational Risk Assessment for European Structured Finance Servicers (January 2015)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (January 2015)
-- Unified Interest Rate Model for European Securitisations (January 2013)