DBRS Assigns Provisional Rating to Neptune Unsecured Warehouse 1 Limited

DBRS Ratings Limited (DBRS) has today assigned a provisional rating of A (sf) to the £95,675,557 Senior Facility issued by Neptune Unsecured Warehouse 1 Limited (the Warehouse or the Borrower).

The Warehouse is a special-purpose vehicle incorporated in England and Wales. The rating addresses the timely payment of interest and the ultimate payment of principal in accordance with the transaction documents.

The transaction is a non-revolving loan facility utilised by Cerberus Residential Holdings B.V. (CERH) to partially fund the purchase of a portfolio of unsecured consumer loans — originated by Northern Rock Plc — from NRAM plc. CERH will purchase the portfolio from NRAM Plc and subsequently sell the loans into the Warehouse. The sale is expected to take place on 7 December 2015. The Warehouse is permitted to dispose of the portfolio to refinance the Senior Facility subject to certain conditions being satisfied.

Northern Rock was nationalised by the UK government and taken into public ownership in February 2008. The organisation was restructured on 1 January 2010 into two separate legal entities: Northern Rock plc and Northern Rock (Asset Management) plc (NRAM) known as NRAM plc since 16 May 2014. Northern Rock plc was sold in 2012 to Virgin Money, while NRAM plc remained in public ownership with its core business in servicing. Following nationalisation the lender has been closed to new loan originations. UKAR is the holding company established to bring together the government-owned businesses of Bradford & Bingley plc (B&B) and NRAM plc.

The capital structure consists of the rated Senior Facility and a Subordinated Note. The proceeds from the Senior Facility and part of the proceeds from the Subordinated Note will be used to purchase the portfolio of unsecured loans. The remaining proceeds from the Subordinated Note will be used to establish the reserve fund and pay various fees and expenses.

Credit enhancement is provided by the Subordinated Note and the Non-Liquidity Reserve Fund. The initial size of the non-amortising Reserve Fund is equal to 2.00% of the initial collateral balance. The Reserve Fund is split into two components: the Non-Liquidity Reserve and the Liquidity Reserve. The Liquidity Reserve required amount is equal to 2.00% of the outstanding Senior Facility balance and is available to cover shortfalls in payment of senior fees and interest on the Senior Facility. The Non-Liquidity Reserve Fund, which is available to cover shortfalls in the payment of senior fees, interest on the Senior Facility and cure Principal Deficiency Ledger debits on the Senior Facility. Principal may also be used to cover shortfalls for payment of senior fees and interest on the Senior Facility.

The portfolio (£156,851,417) is comprised of unsecured Together Loan parts (£154,770,224) and de-linked unsecured loans (£2,081,193). The Together Loan product was two loans, a secured first-lien mortgage and an unsecured loan with the same interest rate. A maximum term of 35 years was available at origination for both loan parts. While the terms of each loan part were not required to be the same, in practice they tended to be equal. The secured loan had a maximum loan-to-value (LTV) of 95%. The unsecured loan part element was subject to a maximum value of £30,000 or 125% LTV when combined with the secured loan. The de-linked unsecured loans consists of an unsecured Together Loan part where the secured mortgage element has redeemed. Loans exceeding three months in arrears will be excluded from the Warehouse.

The portfolio is significantly seasoned with a weighted-average seasoning of 113 months. The majority of the portfolio was originated between 2005 and 2007 (92.83%). DBRS calculated the weighted-average current LTV (WACLTV) at 96.08%. The indexed WACLTV is calculated at 88.42%. The portfolio consists of borrowers who at the time were in full employment (96.69%) with 99.88% of the loans underwritten on a full income verification basis. DBRS calculates the weighted-average coupon generated by the mortgage loans to be 4.59%. The fixed-rate proportion of the pool is 5.56% with 94.44% of the pool linked to a standard variable rate (SVR). The interest payable on the Senior Facility is linked to three-month GBP LIBOR. For the purposes of its cash flow analysis, DBRS modelled the SVR rate at a floor that is being proposed in accordance with the transaction documents.

Servicing is currently delegated to B&B, which was placed into public ownership along with its entire mortgage business with UKAR in November 2010. B&B's servicing platform is currently undergoing a sale process, which is expected to be completed in 2016. DBRS has assessed the likely effect of proposed servicing arrangements and believes the potential for servicing disruptions to arise is minimal.

The servicer collections are currently deposited into the collection account bank held with National Westminster Bank Plc (Natwest). The funds credited to the collection account are swept on a daily basis to the transaction account held in the name of the Borrower with Citibank N.A., London Branch. A declaration of trust over the collection account has been provided in favour of the Borrower. Following the sale of NRAM, the collection account will be held in the name of StayCo, which will own the assets not being transferred as part of the sale to CERH. A new collection account is expected to be established in the name of NRAM Plc, with transfer of funds to the Borrower collection account continuing to occur on a daily basis. With the majority of borrowers paying via direct debit payment and the liquidity support available to the transaction, the risk of payment disruptions is considered to be minimal.

DBRS received performance history data for the securitised portfolio on a loan-by-loan basis, covering January 2010 until October 2015. Prior to 2008 under CCA (1974) a consumer credit agreement was regulated if under £25,000. Additionally under s.77A, periodic statements had to be provided under a regulated agreement. Where a creditor fails to give such statement, the Borrower will have no liability to pay interest or default sums during the period of non-compliance by the lender. NRAM did not implement s.77A correctly, and became aware of such cases in 2012, as they did not state the amount of credit originally provided to the Borrower. For borrowers who had regulated agreements, NRAM provided updated statements and re-credited borrowers with amounts they paid during the period. This credit was applied as reductions in arrears amounts and balance adjustments. DBRS has assessed the impact of CCA remediations in its analysis of historical performance data and applied an adjustment to its default probability.

The loan sale agreement contains representations and warranties given by CERH in relation to the portfolio. Upon breach of representation of warranties CERH is required to repurchase or indemnify the borrower. CERH may have limited resources at its disposal to fund such repurchase. Given the significant seasoning of the loans in the mortgage portfolio, loans in breach of warranties would have been expected to be identified during the earlier life of the loans. There have been well publicised cases of NRAM not being in compliance with CCA regulation in the past and as part of the issues related to CCA, the subsequent remediation processes and an assessment of the controls put in place, DBRS expects a future breach of representation and warranty to be limited.

Following a breach of certain conditions (Liquidation Events) the senior agent will serve the Borrower with a sale demand notice, at which point the Borrower will endeavor to sell the loans. The sale shall only be completed if the proceeds of such sale, together with all other amounts available to the Borrower, will be sufficient to repay the Senior Facility in full together with all other amounts due. Liquidation Events broadly consist of failure to repay the facility by the loan period end date and breaches of CERH obligations under the transaction documents.

The assignment of rating is based on the DBRS “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.” Though the unsecured loan provider does not have a charge on the properties, based on assessment of the unique linkage between unsecured Together Loans and the underwriting processes, DBRS analysed the loan portfolio on the basis of the unsecured loans as a second lien to the secured together loan part. However it should be noted there is no legal right for such cash flows to repay the loan outstanding, as such DBRS assessed recoveries rates against observed recoveries by NRAM on unsecured loan defaults.

The assignment of a provisional rating on the Senior Facility is based upon the following analytical considerations:

-- The transaction cash flow structure and form and sufficiency of available credit enhancement. Credit enhancement available to the Senior Facility is in the form of subordination of the Subordinated Note up to the amount used to purchase the loan portfolio (39.00%) and the Non-Liquidity Reserve portion (0.78%). Figures are expressed as a percentage of collateral balance.
-- The credit quality of the unsecured loan portfolio that secures the Senior Facility and the ability of the servicer to perform collection activities. DBRS calculated probability of default, loss given default and expected loss outputs on the unsecured loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Senior Facility according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and loss given default outputs for the unsecured loan portfolio provided by the DBRS European RMBS Default Model.
-- 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

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release. These may 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 source of information used for this rating is Morgan Stanley Principal Funding, Inc.

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 the 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):

The Probability of Default (PD) of 36.26% and Loss Given Default (LGD) of 98.60% corresponding to the A (sf) rating scenario, were stressed assuming a 25% and 50% increase on the base case PD and LGD.

DBRS concludes the following impact on the rated Senior Facility:

-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Senior Facility to BB (high) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead to maintaining the ratings of the Senior Facility at A (sf).
-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Senior Facility to BBB (high) (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead to maintaining the ratings of the Senior Facility at A (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 Senior Facility to BBB (high) (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 Senior Facility 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 Senior Facility to BBB (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 Senior Facility to BB (high) (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: Asim Zaman
Initial Rating Date: 27 November 2015
Initial Rating Committee Chair: Diana Turner

Lead Surveillance Analyst: Kevin Ma

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 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
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model for European Securitisations
-- Legal Criteria for European Structured Finance Transactions

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