DBRS Confirms Rating on Senior Note Issuance Facility in Mortar No. 1 Limited Following Amendments

DBRS Ratings Limited (DBRS) has today confirmed the AA (sf) rating on the Senior Note Issuance Facility (Senior Facility) in Mortar No. 1 Limited (Mortar 1, the Issuer) following the review of the amendments to the transaction executed on 10 March 2016.

Mortar 1 closed in November 2015 and consists of a Senior Facility and a Junior Note Issuance Facility (Junior Facility, and jointly the Facility). The Facility funds the purchase of buy-to-let mortgage loans originated by Paratus AMC Limited. The purchased mortgage loans are used as collateral for the Facility.

The transaction amendments consist of:
-- Removal of the 87% limit on fixed-rate loans in the collateral pool.
-- Increase of the limit on the percentage of loans secured by properties in London and the South East of the United Kingdom to 65% from 52%.
-- Increase of the Senior Facility commitment amount.
-- Amendments to the top ten loan and the top ten borrower concentration covenants. The concentration limit covenants will not be considered breached so long as the amounts of the loan balance exceeding the limits are solely funded by the Junior Facility.

The removal of the fixed-rate loan limit on the collateral pool will not have a material credit impact on the Senior Facility due to the fixed- and floating-rate swaps and the minimum 1.3% excess spread performance trigger in place.

There is no negative credit implication from the increase in the concentration of properties located in London and the South East of the UK where the property market is performing well.

Allowing only the Junior Facility to fund the loan balance amounts exceeding the concentration limits increases the credit enhancement available to the Senior Facility to higher than the Required Subordination. As a result, any increase in large loan and borrower concentration risks arising from the amendments is effectively mitigated.

Elavon Financial Services Limited, U.K. branch is the account bank, and Natixis S.A., London Branch is the swap counterparty for the transaction. Both entities’ DBRS private ratings meet the rating requirements given the rating assigned to the Senior Facility, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” and “Derivative Criteria for European Structured Finance Transactions” methodologies.

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.

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

An operational risk review was not conducted. Both asset and a cash flow analysis were conducted. However, due to the inclusion of a revolving period in the transaction, an analysis based on worst-case replenishment criteria set forth in the transaction legal documents was assumed.

DBRS conducted a review of the amendment documents including Amendment Deed, Amended and Restated Master Definitions Schedule, Amended and Restated Mortgage Sale Agreement, and Amended and Restated Senior Note Issuance Facility Agreement. Other transaction legal documents have remained unchanged since the most recent rating action and were not reviewed.

Other methodologies referenced in this transaction are listed at the end of this press release. This 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 “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The source of information used for this rating include the amendment legal documents provided by Clifford Chance LLP and information provided by Natixis.

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 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 since the Initial Rating Date. The last rating action on this transaction took place on 7 December 2015 when DBRS assigned AA (sf) rating to the Senior Note Issuance Facility. The lead responsibilities for this transaction have been transferred to Kevin Ma.

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):

-- 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 are 10.70% and 19.62%, respectively. At the AA (sf) rating level, the corresponding PD is 31.29% and the LGD is 37.39%.

-- 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 on the Senior Facility would be expected to be at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Senior Facility would be expected to be at A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Senior Facility would be expected to be at BBB (sf).

Senior Facility Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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: Kali Sirugudi
Initial Rating Date: 7 December 2015
Initial Rating Committee Chair: Diana Turner

Lead Surveillance Analyst: Kevin Ma
Rating Committee Chair: Diana Turner

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