DBRS Confirms Rating on Cape Funding No. 1 Plc

DBRS Ratings Limited (DBRS) has today confirmed its rating on the following bond issued by Cape Funding No. 1 Plc (the Issuer):

-- Class A1P at AAA (sf)

The confirmation of the rating on the Class A1P variable funding note (VFN) credit facility is based on the following analytical considerations as described more fully below:

-- Portfolio performance, in terms of delinquencies and defaults, as of February 2016.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement to the Class A1P VFN to cover the expected losses at the AAA (sf) rating level

Cape Funding No. 1 Plc is a securitisation of a portfolio of prime UK residential mortgage loans originated by TSB Bank Plc (TSB), including loans originated by Lloyds Bank Plc (Lloyds) and Cheltenham & Gloucester Plc (C&G) and transferred to TSB. The transaction is currently in its revolving period.

The purpose of the transaction is to raise financing by means of issuing variable funding note credit facilities. Through the term of the transaction, the VFNs may be drawn up to their maximum limits. As of the February 2016 payment date, the Class A1P drawn amount is at its maximum limit of GBP 2.24 billion and the Class A2 drawn amount is GBP 1.00 million.

The Class A1P is subscribed by Lloyds, and the Class A2 and Class Z by TSB. Following certain events, Lloyds has the option (Class A1P Put Option) to cancel the Class A1P VFN and transfer its outstanding notional amount and coupon to the Class A1R VFN. Unlike the Class A1P VFN, the Class A1R VFN is expected to be cleared in an acceptable clearing house and listed in an acceptable market.

During the Class A1P facility commitment period, Lloyds has the obligation to subscribe to further drawings of the Class A1P facility upon the request of the Issuer or by TSB on its behalf as Cash Manager. The Class A1P facility commitment period is scheduled to end on 17 December 2018. Drawings on the Class A1P facility will be used to redeem the Class A2 notes.

As of February 2016, 2-3 month arrears were at 0.05% and there were no loans in higher delinquency buckets. Repossessions to date are at zero.

Credit enhancement to the maximum of the Class A1P VFN is at 15.94%, up from 14.53% at transaction close, and consists of subordination of Class Z.

As of February 2016, the Reserve Fund was at the target level of GBP 73 million. It was initially funded at 2.50% of the initial balance of the notes, and covers senior fees and interest shortfall on the Class A1P and A2 VFNs.

Lloyds Bank Plc holds the Transaction Account for the transaction. The account bank reference rating of AA (low) – being one notch below the DBRS Long Term Critical Obligations Rating of Lloyds Bank Plc at AA – complies with the Minimum Institution Rating, given the rating assigned to the Class A1P VFN, 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 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.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. A review of the transaction’s legal documents was not conducted, as the documents have remained unchanged since the most recent rating action.

The sources of information used for this rating include reports and loan level data provided by TSB Bank Plc.

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.

The last rating action on this transaction took place on 20 May 2015, when DBRS confirmed the Class A1P VFN at AAA (sf). The lead responsibilities for this transaction have been transferred to Andrew Lynch.

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 1.54% and 18.48%, respectively. At the AAA (sf) rating level, the corresponding PD is 21.77% and the LGD is 43.80%.
-- 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 fall to AA (high) (sf).

Class A1P 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 AA (high) (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: David Sanchez Rodriguez
Initial Rating Date: 22 May 2014
Initial Rating Committee Chair: Quincy Tang

Lead Surveillance Analyst: Andrew Lynch
Rating Committee Chair: Mary Jane Potthoff

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
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 (February 2016)
-- Master European Structured Finance Surveillance Methodology (April 2016)
-- Operational Risk Assessment for European Structured Finance Servicers (December 2015)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (January 2016)
-- Unified Interest Rate Model for European Securitisations (October 2015)

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.