DBRS Finalises Provisional Ratings of Notes Issued by Kingswood Mortgages 2015-1 plc

DBRS Ratings Limited (DBRS) has today finalised its provisional ratings of the following notes issued by Kingswood Mortgages 2015-1 plc:

-- AAA (sf) to EUR 138,570,000 issuance Class A Notes
-- AA (sf) to EUR 19,220,000 issuance Class B Notes
-- A (sf) to EUR 7,390,000 issuance Class C Notes
-- BBB (sf) to EUR 5,360,000 issuance Class D Notes
-- BB (sf) to EUR 6,100,000 issuance Class E Notes

Furthermore, Kingswood Mortgages 2015-1 plc will issue Class F and Subordinated Notes, as well as a Residual Certificate. DBRS has not assigned ratings to those notes.

Kingswood Mortgages 2015-1 plc (Kingswood or the Issuer) issues Class A to E (Rated Notes) and F Notes to purchase the Initial Consideration of a portfolio of German residential mortgage loans from L2 B.V., a Dutch special-purpose vehicle 100% owned by Macquarie Bank Limited, London Branch. Furthermore, the Issuer will finance the initial balance of the Rated Notes Reserve Fund (RNRF) by the issuance of the Subordinated Notes. The Deferred Consideration will be paid to the holder of the Residual Certificate. The underlying portfolio of German residential mortgage loans was originated by Paratus AMC GmbH, which was formerly GMAC-RFC Bank GmbH (GMAC). All borrowers and respective properties are located in Germany.

The ratings address the timely payment of interest and ultimate payment of principal of the Rated Notes and are based upon the following analytical considerations:

-- The credit enhancement to the Rated Notes, consisting of (1) subordination of the notes, (2) overcollateralisation provided by the Deferred Consideration, (3) the RNRF and (4) excess spread. In relative terms, the Class A Notes will benefit from 29.9% subordination (expressed as of the total mortgage loan portfolio balance). On the same basis, the Class B Notes will benefit from 20.2%, the Class C Notes from 16.5%, the Class D Notes from 13.8% and the Class E Notes from 10.7% of credit enhancement. On top of the subordination, the Rated Notes will be supported by the RNRF, which on the basis of the total mortgage portfolio represents 0.9% and will build up through the capturing of excess spread to 3.6% as per initial Rated Note balance or 3.2% of the outstanding mortgage loan portfolio balance.

-- The main portfolio characteristics as of the April 2015 portfolio cut-off date were as follows: (1) original and current loan-to-value (LTV) ratios of 102% and 93%, respectively; (2) weighted-average seasoning of almost eight years; (3) the weighted-average interest rate of the mortgage loans (all fixed rate) was 5.9%; (4) 90.1% of the mortgage loans have an interest reset date within the next three years; (5) 50.8% of the mortgage loans were used for investment purposes, with the majority of investments made in eastern Germany; (6) 22.2% bullet loans repaying the principal at the end of each’s loan maturity; and (7) 53.9% of the properties backing the loan receivables are located in eastern Germany.

-- L2 B.V. bought the junior notes in the E-MAC DE 2009-1 B.V. transaction in April 2014 and subsequently collapsed the transaction, taking the mortgage loan portfolio on balance in August 2014. The E-MAC DE transactions (e.g., series 2005-1, 2006-1, 2006-2 and 2007-1 B.V.), all originated by GMAC, performed poorly in the past, reaching cumulative losses above 5.0% after approximately 50% of the initial portfolio amount had amortised. DBRS was provided with detailed monthly payment performance data for each borrower of the underlying mortgage loan portfolio. DBRS analysed the historical performance of the loans selected for the Kingswood portfolio for the period covering October 2010 to January 2015. DBRS found that during the observation period the maximum percentage of loans more than 90 days in arrears was 1.9%. Furthermore, most of the delinquent borrowers overcame the payment difficulties. 98.9% of the borrowers are current as of the cut-off date (30 April 2015) with none greater than 60 days in arrears. Based on the observed performance of the Kingswood portfolio together with the loan, borrowers and property characteristics, DBRS derived its default rate, loss-given-default and expected loss assumptions for the single B case.

-- The interest of the mortgage loans is fixed, whereas the interest of the notes will be floating rate (three months Euribor). The resulting fixed-floating interest rate exposure is hedged for the first eight years by a swap agreement between the Issuer and Macquarie Bank Limited, London Branch, where the issuer pays a 0.5% fixed rate on the performing portfolio (excluding loans more than 90 days in arrears) and receives three months Euribor. The swap documents do not contemplate a floor on the three months Euribor rate. In the event of a negative three months Euribor rate, the swap rate payable by the issuer might increase due to a floor of zero on the notes coupon. DBRS has assessed this risk in its cash flow analysis and determined the ratings of the notes will not be affected up to a negative three months Euribor rate of 2.5%. After the swap termination date in July 2023, the interest rate risk will be unhedged. DBRS’s Internal Assessment of the swap counterparty is consistent with the DBRS swap counterparty criteria, and the swap agreements contain downgrade provisions relating to the swap counterparty consistent with DBRS’s Derivative Criteria for European Structured Finance Transactions methodology.

-- The structure will amortise sequentially until doing so would cause the Class F and Subordinated Notes to exceed 19.9% of the notes outstanding (Retained Hold Limit). Subject to (1) the principal deficiency ledger not exceeding EUR 11.5 million and (2) the Class F PDL having a balance of zero, the structure will amortise sequentially up until the Retained Hold Limit is reached and, thereafter, the most senior class of notes will receive 80.1% of principal collections available to be applied to the Notes, while Class F and Subordinated Notes will receive their pro rata shares on a pari passu basis.

-- Over the next three years, 90.1% of the mortgage loans will reach their reset date and all mortgage loans approach their statuary termination right of ten years. As a result, there is a higher chance of prepayments in the transaction. Should the borrower opt to not terminate the loan, it is very likely that they will renew their agreement at a lower interest rate, which will be a minimum of the five-year mid-swap rate at time of reset plus a minimum margin of 300 bps, hence improving the borrower’s affordability metrics. DBRS took the potential for higher prepayment rates into account in its cash flow analysis.

-- As of the finalised rating date there is some legal uncertainty in the German mortgage market regarding the requirements to be satisfied in the wording and form of the revocation instructions given to the borrower at signing of the loan agreement, in particular for loans originated between 2004 and 2010. It cannot be ruled out that if a borrower were to challenge the disclosure language of an underlying loan agreement in front of a judge, the ruling would be in their favour. This could result in losses to the issuer which would materialise in the form of set-off. DBRS assessed the probability of the risk to be low and did not apply specific adjustment to its loss assumptions.

-- The transaction’s account bank agreement and respective replacement trigger require Deutsche Bank AG (A (high)/URN), acting as collection account bank and Citibank N.A., London Branch (DBRS Private Rating) acting as issuer account bank, to take remedial actions in case their rating should fall below BBB or “A,” respectively.

-- The servicing arrangement is in place where L2 B.V., acting as the master servicer, delegates certain servicing activities to Servicing Advisors Deutschland GmbH (SerAd) as sub-servicer. SerAd is an experienced servicer of performing and non-performing loans (NPL) in Germany. In its capacity as sub-servicer, it will be in regular contact with the master servicer to establish work-out strategies for NPLs or interest renewals following an interest reset date or renegotiations.

-- The borrowers and properties are located in Germany (AAA, Stable; R-1, Stable) which experienced a benign economic environment over the past years with unemployment rates declining and house prices increasing. The positive effect of this has been considered by DBRS in its default analysis.

-- DBRS used a combination of default timing curves (front- and back-ended), rising and declining interest rates and low, medium and high prepayment scenarios in accordance with the DBRS rating methodology to stress the cash flows. Given the prepayment risk in this transaction, DBRS also tested a scenario with 60% prepayments. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and derive the rating of the Notes.

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with DBRS’s Legal Criteria for European Structured Finance Transactions.

-- As a result of the analytical considerations, DBRS derived a base case Probability of Default (PD) of 7.8% and Loss Given Default (LGD) of 51.2%, which resulted in an Expected Loss (EL) of 4.0%.

Notes
All figures are in euros 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. In rating this transaction, DBRS applied the Jurisdictional Addendum of the United Kingdom for the purpose of the default analysis. The stresses applied in DBRS asset model are consistent with those outlined in the U.K. Addendum. For the estimation of Market Value Declines (MVD), DBRS based its projections on house price data on owner-occupied residential properties in Germany and published by Verband Deutscher Pfandbriefbanken (vdp) ranging from 2003 to 2015. The MVDs computed per rating category were 23.7% for AAA (sf), 18.8% for AA (sf), 14.8% for A (sf), 10.5% for BBB (sf) and 6.0% for BB (sf). Those MVDs were further adjusted for the observed distressed sale discount experienced for the respective portfolio and its repossessed assets. The legal analysis was based on the Legal Commentary for Germany.

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

For a more detailed discussion of the 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 Macquarie Bank International Limited, L2 B.V. and Servicing Advisor Deutschland GmbH. 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 supplied with third party assessments. However, this did not impact the rating analysis.

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 changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

For the Class A Notes:
A constant PD and a hypothetical increase in the LGD of 0% would lead to a rating of AAA (sf).
A constant PD and a hypothetical increase in the LGD of 25% would lead to a rating of AAA (sf).
A constant PD and a hypothetical increase in the LGD of 50% would lead to a rating of AAA (sf).
A hypothetical increase of the PD of 25% and a constant LGD would lead to a rating of AAA (sf).
A hypothetical increase of the PD of 25% and the LGD of 25% would lead to a rating of AAA (sf).
A hypothetical increase of the PD of 25% and the LGD of 50% would lead to a rating of AA (sf).
A hypothetical increase of the PD of 50% and a constant LGD would lead to a rating of AAA (sf).
A hypothetical increase of the PD of 50% and the LGD of 25% would lead to a rating of AA (sf).
A hypothetical increase of the PD of 50% and the LGD of 50% would lead to a rating of A (high) (sf).

For the Class B Notes:
A constant PD and a hypothetical increase in the LGD of 0% would lead to a rating of AA (sf).
A constant PD and a hypothetical increase in the LGD of 25% would lead to a rating of AA (low) (sf).
A constant PD and a hypothetical increase in the LGD of 50% would lead to a rating of A (sf).
A hypothetical increase of the PD of 25% and a constant LGD would lead to a rating of A (high) (sf).
A hypothetical increase of the PD of 25% and the LGD of 25% would lead to a rating of A (low) (sf).
A hypothetical increase of the PD of 25% and the LGD of 50% would lead to a rating of BBB (low) (sf).
A hypothetical increase of the PD of 50% and a constant LGD would lead to a rating of BBB (high) (sf).
A hypothetical increase of the PD of 50% and the LGD of 25% would lead to a rating of BB (high) (sf).
A hypothetical increase of the PD of 50% and the LGD of 50% would lead to a rating of BB (sf).

For the Class C Notes:
A constant PD and a hypothetical increase in the LGD of 0% would lead to a rating of A (sf).
A constant PD and a hypothetical increase in the LGD of 25% would lead to a rating of BBB (high) (sf).
A constant PD and a hypothetical increase in the LGD of 50% would lead to a rating of BBB (low) (sf).
A hypothetical increase of the PD of 25% and a constant LGD would lead to a rating of A (low) (sf).
A hypothetical increase of the PD of 25% and the LGD of 25% would lead to a rating of BBB (low) (sf).
A hypothetical increase of the PD of 25% and the LGD of 50% would lead to a rating of BB (high) (sf).
A hypothetical increase of the PD of 50% and a constant LGD would lead to a rating of BBB (low) (sf).
A hypothetical increase of the PD of 50% and the LGD of 25% would lead to a rating of BB (high) (sf).
A hypothetical increase of the PD of 50% and the LGD of 50% would lead to a rating of BB (sf).

For the Class D Notes:
A constant PD and a hypothetical increase in the LGD of 0% would lead to a rating of BBB (sf).
A constant PD and a hypothetical increase in the LGD of 25% would lead to a rating of BB (high) (sf).
A constant PD and a hypothetical increase in the LGD of 50% would lead to a rating of BB (sf).
A hypothetical increase of the PD of 25% and a constant LGD would lead to a rating of BBB (low) (sf).
A hypothetical increase of the PD of 25% and the LGD of 25% would lead to a rating of BB (sf).
A hypothetical increase of the PD of 25% and the LGD of 50% would lead to a rating of B (high) (sf).
A hypothetical increase of the PD of 50% and a constant LGD would lead to a rating of BB (high) (sf).
A hypothetical increase of the PD of 50% and the LGD of 25% would lead to a rating of BB (low) (sf).
A hypothetical increase of the PD of 50% and the LGD of 50% would lead to a rating of B (sf).

For the Class E Notes:
A constant PD and a hypothetical increase in the LGD of 0% would lead to a rating of BB (sf).
A constant PD and a hypothetical increase in the LGD of 25% would lead to a rating of B (high) (sf).
A constant PD and a hypothetical increase in the LGD of 50% would lead to a rating of B (sf).
A hypothetical increase of the PD of 25% and a constant LGD would lead to a rating of B (high) (sf).

All other remaining scenarios would lead to a rating below B (sf).

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: Sebastian Hoepfner, Vice President
Final Rating Date: 14 July 2015
Initial Rating Committee Chair: Quincy Tang, Managing Director

Lead Surveillance Analyst: Vito Natale, Senior Vice President

DBRS Ratings Limited
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United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

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

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.