DBRS Assigns Ratings to Rochester Financing No.2 Plc

DBRS Ratings Limited (DBRS) has today assigned ratings to the following Notes issued by Rochester Financing No.2 (Issuer):

-- AAA (sf) to £259,000,000 Class A Notes
-- AA (sf) to £33,300,000 Class B Notes
-- A (sf) to £19,000,000 Class C Notes
-- BBB (sf) to £16,200,000 Class D Notes
-- BB (high) (sf) £13,300,000 Class E Notes
-- BB (low) (sf) £8,600,000 Class F Notes
--The Class G Notes, Class P Certificates and the Class R certificates are unrated.

Rochester Financing No.2 PLC (Issuer) is a bankruptcy remote Special-Purpose Vehicle (SPV) incorporated in the United Kingdom. The issued notes will be used to fund the purchase of UK residential mortgage loans secured over properties located in England, Wales, Northern Ireland and Scotland.

The mortgage portfolio was initially purchased from DB UK Bank Limited (DB UK) & Odin Mortgages Limited (Odin) by Rochester Mortgages Limited (Rochester, Seller), an SPV wholly owned by OneSaving Bank (OSB). Rochester will subsequently sell the beneficial interest in the mortgage loans to the Issuer SPV. On the account transfer date (28 March 2016), DB UK (the sole holder of legal title at closing) will transfer legal title to the Seller. OSB will retain a material net economic interest of not less than 5% in the transaction through a holding of randomly selected mortgage loans which would otherwise have been securitised. The principal activities of OSB are to provide retail savings products, residential mortgages, Buy-to-Let/SME mortgages and personal loans.

OSB will assume the role of Master Servicer with day-to-day servicing delegated to Target Servicing Limited (Target). From closing, there will be an interim period of one month where DB UK will be in place as an Interim Servicer with servicing activities delegated to Target. Home Loan Management (HML) has been appointed as the back-up servicer.

As of the cut-off date (31 October 2015), the £403,215,540 mortgage portfolio consists of owner-occupied and Buy-to-Let (BTL) residential mortgage loans originated by DB UK (68.76%), Money Partners Limited (MPL) (29.34%) and Edeus Mortgage Creators Limited (1.81%). DB UK offered mortgages in the specialist and non-conforming sectors through their network of brokers and packagers and ceased mortgage lending in 2008. MPL offered a range of mortgage products (fixed, variable, and discounted) and flexible secured loans. MPL and Edeus primarily offered mortgages to customers with adverse or non-standard credit history.

83.18% of the mortgage portfolio has an Interest Only (IO) repayment profile. The high proportion of IO loans is largely due to borrower affordability given the relatively low proportion of BTL loans in the portfolio (17.20%), which are typically lent at an IO basis. As of the pool cut-off date, the weighted-average seasoning of the portfolio is 98.73 months, with 97.80% of the mortgage loans originated in 2007 and 2008, the peak of the UK mortgage and housing market. The Weighted-Average Current Loan-to-Value (WACLTV) calculated by DBRS equates to 74.18%. The Indexed WACLTV is calculated at 68.25% (Nationwide HPI, Q4 2015).

The mortgage portfolio has a relatively high concentration of borrowers who had unsatisfied County Court Judgements at the time of origination (22.69%). 42% of mortgage loans have been modified since origination, with approximately 10% restructured in the last 24 months. DBRS believes borrowers who have had restructuring in the recent past, particularly in the context of a low interest rate environment, would show a higher propensity to default in the event of future interest rate rises.

The Weighted-Average Coupon generated by the portfolio is 3.29%. Approximately 17.41% of the loans pay the interest rate linked to the Bank of England Base Rate (BBR). The remaining portion of the pool is linked to 3-Month GBP Libor. The interest payable on the notes linked to 3-Month GBP LIBOR. The basis risk on account of the BBR mismatch is unhedged. For the purposes of its cash flow analysis, DBRS stressed the BBR rates generated by the assets.

The mortgage loans comprising the portfolio on the closing date will consist of loans remaining following discharge from the cut-off date to the closing date, and the removal of a sub-portfolio of loans randomly selected and held by OSB in accordance with the risk retention requirements.

The interest payable on the notes will step up on the payment date falling five years after the first interest payment date. DBRS has taken into consideration the increased interest payable via its cash flow analysis. On or after the optional redemption date, the issuer may redeem all the Notes in full. Notes will be redeemed at an amount equal to the outstanding balance together with accrued (and unpaid) interest.

Credit enhancement is provided in the form of subordination of the junior Notes and the General Reserve. The General and Liquidity Reserves are initially funded at an amount equal to to 1.88% of the initial Class A to F Notes. Excess spread, where available, can be utilised to increase the reserve funds to 3.00% of the initial balance of the Class A to F Notes. The General Reserve Fund will form part of the available revenue funds and is available to cover shortfalls in payment of senior fees, interest on Class A to F notes, and cure Principal Deficiency Ledger (PDL) debits on the Class A to F notes. As the size of the combined General Reserve and Liquidity Reserve is linked to 3.00% of the initial Class A to F note balance, and the target balance of the Liquidity Reserve component is linked to the outstanding balance of the Class A to D Notes, all else being equal, the General Reserve amount is expected to increase, while the Liquidity Reserve amount reduces as the Class A to D Notes amortise.

The Liquidity Reserve is sized at 2% of the outstanding Class A to D Note balance, with remaining amounts forming part of the General Reserve. The Liquidity Reserve is available to cover shortfalls in payment of Senior Fees and Class A to D interest. Payment on the Class B, C and D notes are subject to a 25% PDL trigger. The Class E and F Notes benefit from a Junior Liquidity Reserve equal to 0.45% of the Class A to F Notes. Support provided to the Class F notes is subject to the PDL being less than 50% of the outstanding Class balance.

Principal can be used to provide liquidity support to the most senior outstanding note. Principal can also provide liquidity support to the mezzanine and junior notes (Class B to Class E Notes) subject to a PDL trigger of 25%. Principal as liquidity support is available to the Class F notes subject to a 50% PDL trigger. Principal can also be used to replenish the Liquidity Reserve up to the required amount to the extent it has not been replenished via the revenue waterfall. A subsequent debit is made to the relevant PDL when principal is used as a liquidity support mechanism.

Although the Seller will provide loan warranties and representations, the Seller was not the originator of the mortgage loans and consequently certain warranties are qualified by reference to awareness. The Issuer is entitled to bring a contractual claim in damages, subject to warranty limitations, against the Seller in respect of any breach of any loan warranties. It is anticipated that the Seller would seek to rely on a back-to-back contractual claim for damages against DB UK pursuant to the terms of the Original Mortgage Sale Agreement. However, the right of the Seller to bring a claim for contractual damages against DB UK under the Original Mortgage Sale Agreement is subject to the same limitations as the issuer. The key limitations are an expiry date of two years from the mortgage sale agreement and the aggregate liability of the seller for breaches of non-fundamental warranties will not exceed 10% of the Issuers purchase price. There is no cap on fundamental warranties.

Deutsche Bank AG as the Option Holder has the right to elect to repurchase any loan in breach of a Loan Warranty. There is no obligation on the Option Holder to repurchase any loan and its related security following a breach. The repurchase price will be equal to its outstanding principal balance together with accrued interest plus an amount equal to costs and expenses related to the repurchase. Given the significant seasoning of the loans in the loan portfolio (8.2 years), loans in breach of warranties can reasonably have been expected to be identified during the earlier life of the loan. Additionally, there have been cases of DB UK not being in compliance with Mortgage Conduct of Business (MCOB). On 15 December 2010, the Financial Conduct Authority issued a notice with respect to the mortgage origination activities of DB UK, which identified certain breaches of MCOB. During reviews in 2010, DB UK identified certain aspects of the servicing that were potentially not compliant with MCOB. Such breaches have been remedied and amendments were made to the mortgage terms and conditions. Following the review and remedies, DBRS expects a future breach of representation and warranty to be limited.

Until the Legal Title transfers to the seller from DB UK, collections will be paid into the Interim Collection Account. There shall be no trust declared over the Interim Collection Accounts by DB UK in favour of the Issuer or the Security Trustee. The lack of a declaration of trust over the interim collection account is mitigated through the daily sweep of cash into the Issuer Account and the limited period in which the interim collection account is expected to be in place. Transfer will take place on 28 March 2016 in accordance with the transaction documents. The interim collection account with be held with Deutsche Bank AG, London Branch, privately rated by DBRS.

Following the transfer on 28 March 2016, Borrowers will pay into a Collection Account held in the name of the issuer at National Westminster Bank Plc (Natwest). Natwest is privately rated by DBRS. There is a daily sweep of funds from the collections account into the Issuer account bank. In addition, the Issuer covenants that the Collection Accounts will have been opened and will be operational on or prior to the end of the Interim Period.

The Issuer will maintain the Deposit Account held with Elavon Financial Services Limited, acting through its London branch. The account bank is privately rated by DBRS. The account bank downgrade and replacement language is compliant with DBRS legal criteria for the assigned ratings to the Notes.

An Extraordinary Resolution or an Ordinary Resolution may be passed by the negative consent of the relevant Noteholders. The risk is that it becomes possible that an Extraordinary Resolution or Ordinary Resolution (excluding note acceleration notice and Basic Terms Modification of the Notes) could be passed without the vote of any Noteholders.

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

--The transaction’s cash flow structure and form and sufficiency of available credit enhancement. At closing, credit enhancement for the Class A Notes (32.00%) is provided in the form of subordination via the Class B, Class C, Class D, Class E, Class F, Class G and Class P certificates. Credit enhancement for the Class B Notes (23.25%) is provided in the form of subordination via the Class C, Class D, Class E, Class F, Class G and Class P certificates. Credit enhancement for the Class C Notes (18.25%) is provided in the form of subordination via the Class D, Class E, Class F, Class G and Class P certificates. Credit enhancement for the Class D Notes (14.00%) is provided in the form of subordination via the Class E, Class F, Class G and Class P certificates. Credit enhancement for the Class E Notes (10.50%) is provided in the form of subordination via the Class F, Class G and Class P certificates. Credit enhancement for the Class E Notes (8.25%) is provided in the form of subordination via the Class G and Class P certificates.

The General Reserve will also provide Credit Enhancement to the rated Notes. At closing it will be funded to an amount equal to £27,700. The target amount of the General Reserve is equal to 3% of the initial Class A to Class F Note balance minus the Liquidity Reserve required amount. As the Liquidity Reserve is amortised, all other factors being equal, the size of the General Reserve should increase.

--Liquidity coverage provided through the aforementioned General Reserve Fund, Liquidity Reserve, Junior Liquidity Reserve and Principal receipts.

--The credit quality of the expected mortgage loans that the rated Class A to F Notes are secured against and the ability of the servicer to perform collection activities on the collateral. DBRS calculated probability of default, loss given default and expected loss outputs on the mortgage loan portfolio provided by the DBRS European RMBS Default Model. In addition DBRS analysed the historical loan-level payment history of the underlying borrowers. DBRS also reviewed the servicing practices of Target and the Servicing Specification between the Servicer and Master Servicer.

--The ability of the transaction to withstand stressed cash flow assumptions and repay the rated Notes. The transaction cash flows were modelled using portfolio default rates and loss given default outputs for the loan portfolio. DBRS assesses the structure to be sensitive to interest rate fluctuations and will monitor the transaction as part of its surveillance process.

--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.

--The relevant Counterparties are private rated by DBRS. Such counterparties appropriately rated per DBRS criteria to mitigate the risk of counterparty default or insolvency.

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 sources of information used for this rating include Morgan Stanley Principal Funding, Inc, OneSaving Bank Plc and DB UK Bank Limited.

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 of the Class A, Class B, Class C, Class D and Class 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 58.38% and Loss Given Default (LGD) of 45.61%, corresponding to a AAA stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class B Notes, the PD of 51.78% and LGD of 38.32%, corresponding to a AA stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class C Notes, the PD of 46.98% and LGD of 35.36%, corresponding to an A stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class D Notes, the PD of 41.02% and LGD of 30.95%, corresponding to a BBB stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class E Notes, the PD of 34.51% and LGD of 27.51%, corresponding to a BB (high) stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.
-- In respect of the Class F Notes, the PD of 30.47% and LGD of 24.16%, corresponding to a BB (low) stress scenario, were stressed assuming a 25% and 50% increase on the PD and LGD.

DBRS concludes the following impact on the rated notes:

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

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

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

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

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

Lead Analyst: Asim Zaman
Rating Date: 26 February 2016
Rating Committee Chair: Diana Turner
Lead Surveillance Analyst: Andrew Lynch

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

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