DBRS Confirms Rating on Chestnut Financing Plc

DBRS Ratings Limited (DBRS) has today confirmed the Class A Notes issued by Chestnut Financing Plc (the Issuer) at AAA (sf).

The confirmation of the rating on the Class A 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 A Notes to cover the expected losses at the AAA (sf) rating level.

The transaction is an issuance of residential mortgages advanced to high net worth individuals originated by EFG Private Bank Limited and collateralised by properties with larger than average valuations.

The portfolio consists of mainly interest-only loans with a maximum maturity of five years. The transaction is still in its three-year revolving period during which principal repayments and prepayments may be used to purchase additional assets in line with the portfolio concentration criteria. To date, none of the triggers have been activated.

As of the February 2015 payment date, the outstanding mortgage balance was GBP 357,258,141.74 with 225 borrowers within the portfolio. The weighted-average seasoning and weighted-average remaining terms to maturity were 28.51 months and 25.86 months, respectively. The entire portfolio consists of interest-only loans, 99.51% pay a floating rate of interest and the remaining 0.49% a fixed rate of interest.

The properties are largely concentrated around the London area and in particular 67.04% of the pool is concentrated in prime central London, 18.13% in other areas of London and 14.83% outside of London. The WACLTV is below the UK average and it has slightly decreased to 50.42% from 50.71% in March 2014.

As of February 2015 payment date, there were no loans in arrears nor in default.

Credit enhancement to the Class A Notes is mainly provided by the subordination of the Class Z Variable Funding Note (VFN). Class A Notes credit enhancement has slightly increased over the year to 28.45% in February 2015, up from 28.09%. This is due to the increase of the collateralised Class Z VFN balance.

A non-amortising Cash Reserve is available to meet the payments of senior fees and interest payable on the Class A Notes. At closing the balance of the Cash Reserve was equal to 2.39% of the current portfolio balance. As of February 2015, the Cash Reserve was at the target level of GBP 8,554,661.12. In addition, principal available funds may also be utilised to cover interest shortfalls on the Class A Notes.

BNP Paribas Securities Services, London Branch holds the Transaction Account for the transaction. The DBRS private rating of BNP Paribas Securities Services, London Branch complies with the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

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 provided by BNP Paribas Securities Services. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

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 3.46% and 4.36%, respectively. At the AAA (sf) rating level, the corresponding PD is 26.90% and the LGD is 35.13%.
-- 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 A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (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: Alastair Bigley
Initial Rating Date: 30 May 2014
Initial Rating Committee Chair: Quincy Tang

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

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.

-- 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)