DBRS Confirms Rating on Newstone Mortgage Securities No. 1 Plc

DBRS Ratings Limited (DBRS) has today confirmed the AAA (sf) rating on the Class A Notes issued by Newstone Mortgage Securities No. 1 Plc (Newstone 1).

Today’s rating action is based on the following analytical considerations, as described more fully below:

-- Portfolio performance, in terms of delinquencies and losses.
-- Portfolio probability of default rate (PD), loss given default (LGD) and expected loss assumptions for the remaining collateral pool.
-- Current credit enhancement available to the Class A Notes to cover the expected losses at the AAA (sf) rating level.

Newstone 1 closed in 2014, and is a securitisation of the U.K. first-lien non-conforming residential mortgage loans. The loans were originated by Beacon Homeloans Limited between 2004 and 2010 and were subsequently purchased by Redstone Mortgages Limited, a wholly owned subsidiary of Unicredit Bank AG. Homeloan Management Limited acts as Servicer in the transaction.

Portfolio Performance
The level of loan delinquencies has risen quickly since the last rating review. As of 29 February 2016, loans more than 90 days delinquent as a percentage of the outstanding performing portfolio balance increased to 1.52% from 0.67%. The cumulative loan losses as a percentage of the original portfolio balance at transaction closing increased limitedly to 0.01% during the same period due to the low loan-to-value (LTV) ratio of the portfolio.

PD and LGD Assumptions
DBRS has updated the PD and LGD assumptions for the remaining outstanding collateral pool. At the AAA (sf) rating level, the PD assumption is increased to 36.42% from 34.95% to reflect the increased delinquency level. The LGD, at the same time, is reduced to 35.96% from 39.17% to reflect the portfolio’s reduced weighted-average LTV.

Credit Enhancement Available
The credit enhancement (CE) available to the Class A Notes has increased slightly to 17.55% as the transaction deleverages. The CE to the Class A Notes is provided through the subordinated notes. The current available CE for the Class A Notes is sufficient to pass the AAA (sf) level cash flow stress analysis using the updated PD and LGD assumptions.

Elavon Financial Services Limited, U.K. branch is the Account Bank in this transaction. DBRS’s private rating on the Account Bank meets the Minimum Institution Rating criteria given the AAA (sf) rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in British pounds 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.

A review of the transaction legal documents was not conducted as these documents have remained unchanged since the most recent rating action.

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 sources of information used for the rating actions include the investor reports and the loan-by-loan data from U.S. Bank Global Corporate Trust Services.

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 took place on 13 May 2015, when DBRS confirmed the rating on the Class A Notes at AAA (sf). The lead responsibilities for all three transactions 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 PD and 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 10.23% and 12.13%, respectively. At the AAA (sf) rating level, the corresponding PD is 36.42% and the LGD is 35.96%.

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

Class A Notes 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 AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (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: David Sanchez Rodriguez
Initial Rating Date: 23 April 2014
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Kevin Ma, Assistant Vice President
Rating Committee Chair: Quincy Tang, Managing Director

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London EC3M 3BY
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
-- Unified Interest Rate Model for European Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda

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.