DBRS Finalises Provisional Ratings on Towd Point Mortgage Funding 2016-Granite 3 Plc

DBRS Ratings Limited (DBRS) has today finalised the provisional ratings on the notes issued by Towd Point Mortgage Funding 2016-Granite 3 Plc (the Issuer) as follows:

-- GBP 152,059,000 Class A Notes rated AAA (sf)
-- GBP 20,469,000 Class B Notes rated AA (sf)
-- GBP 8,773,000 Class C Notes rated AA (low) (sf)
-- GBP 11,696,000 Class D Notes rated A (low) (sf)
-- GBP 7,311,000 Class E Notes rated BBB (sf)
-- GBP 7,310,000 Class F Notes rated BBB (low) (sf)
-- GBP 60,414,000 Class Z1 Notes are not rated
-- GBP 24,388,000 Class Z2 Notes are not rated

The Class A Notes are rated for timely payment of interest and ultimate payment of principal. The Class B Notes, Class C Notes, Class D Notes, Class E Notes and Class F Notes are rated for ultimate payment of interest (subject to the net weighted-average coupon cap) and ultimate payment of principal.

Towd Point Mortgage Funding 2016-Granite 3 Plc is a bankruptcy-remote, special-purpose vehicle incorporated in the United Kingdom. The issued notes funded the purchase of U.K. unsecured consumer loans originated by Northern Rock Plc. Northern Rock Plc was nationalised by the U.K. 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 Plc). 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 was closed to new loan originations.

The legal title to the unsecured loans is held by Landmark Mortgages Limited (Landmark; formerly known as NRAM Plc. Beneficial interest in the assets is transferred to the Issuer by Cerberus European Residential Holdings B.V. (CERH). CERH completed, through a wholly owned subsidiary, the acquisition of Landmark on 5 May 2016.

Credit enhancement is provided in the form of subordination of the junior notes. The Class Z Notes are split into two notes: Class Z1 Notes and Class Z2 Notes. The outstanding balance of the Class Z2 Notes is equal to the balance of the unsecured loans, which are over 12 months in arrears. Consequently, the structure has a day-one defaulted balance, which is allocated to the Class Z2 Notes’ Principal Deficiency Ledger (PDL). The PDL allocation to the Class Z2 Notes is not cleared in the revenue waterfall. Only newly defaulted loans will be allocated to the PDLs of the respective notes, beginning with the Class Z1 Notes’ PDL.

The credit enhancement available to the Class A Notes is 43.27%, provided by subordination of the Class B, Class C, Class D, Class E, Class F and Class Z1 Notes. The credit enhancement available to the Class B Notes is 35.63%, provided by subordination of the Class C, Class D, Class E, Class F and Class Z1 Notes. The credit enhancement available to the Class C Notes is 32.36%, provided by subordination of the Class D, Class E, Class F and Class Z1 Notes. The credit enhancement available to the Class D Notes is 27.99%, provided by subordination of the Class E, Class F and Class Z1 Notes. The credit enhancement available to the Class E Notes is 25.27%, provided by subordination of the Class F and Class Z1 Notes. The credit enhancement available to the Class F Notes is 22.54%, provided by subordination of the Class Z1 Notes. Credit enhancement percentages are expressed as a percentage of the Class A to Class Z1 Notes’ balance.

The liquidity support for the Class A Notes is initially available through a liquidity facility provided by Wells Fargo Bank, N.A., London Branch. The liquidity facility is a renewable 364-day committed liquidity facility. The liquidity facility is equal to 1.70% of the Class A Notes and is available until the First Optional Redemption Date (FORD). From the FORD, the liquidity facility will be replaced by the Liquidity Reserve Fund (LRF), which has a target balance of 1.70% of the Class A Notes funded by the Senior Deferred Coupon (SDC) Ledger. To the extent that the LRF has not been funded to the required level, the liquidity facility will continue to support the Class A Notes’ interest payments beyond the FORD. Any shortfalls in funding the LRF up to the required amount will be made good using excess spread after crediting the Class F Notes’ PDL in accordance with the interest priority of payments. Further shortfalls can be funded from the principal waterfall. Until the point where the LRF reaches the required level, for the first time, ignoring any debits (i.e., usage of the LRF to support the Class A Notes’ interest payments), principal available funds will be used to top up on any Interest Payment Date (IPD) after the FORD. After the LRF reaches the required level for the first time, principal funds will no longer be used for the replenishment of the LRF to the required level. The LRF is floored at 1.00% of the initial Class A Notes’ balance.
On the IPD, when all the Class A Notes outstanding have been paid, the amounts in the LRF will be used to fund a reserve called the Excess Cash Flow Reserve Fund (XSRF). The XSRF exists from and after the FORD. On the FORD, the XSRF will be funded by any amount left in the SDC Ledger after the funding of the LRF. On each IPD after the FORD, the amounts trapped in the SDC Ledger minus the senior fees payable will be used to fund the XSRF. The funds in the XSRF will be used to support any interest shortfalls on payment of interest to the Class B, Class C, Class D, Class E and Class F Notes.

Of the principal balance outstanding of the loans for each month (during a collection period), 0.50% per annum minus senior expenses is set aside from the available revenue. Such amounts are credited to the SDC Ledger, each IPD, until the FORD. There is no target amount for the funds collected in the SDC Ledger. The amounts credited to the SDC Ledger are used to pay senior fees, fees due on the liquidity facility and the amount drawn under the liquidity facility, Class A Notes’ interest and Class A Notes’ PDL.

The transaction also benefits from an Excess Trap Reserve Fund (XSTR). Up until the FORD, the XSTR captures any excess cash flows at the bottom of the revenue waterfall. On the FORD, provided the rated notes are not redeemed in full, all amounts standing to the credit of the XSTR will be used as available principal funds.

The portfolio (GBP 292,420,353) comprises unsecured Together Loan parts (GBP 281,776,662) and de-linked unsecured loans (GBP 10,643,670). 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 GBP 30,000 or 125% LTV when combined with the secured loan. The de-linked unsecured loans consist of an unsecured Together Loan part where the secured mortgage element has redeemed.

The portfolio is significantly seasoned with a weighted-average seasoning of 10.6 years. The majority of the portfolio was originated between 2005 and 2007 (91.5%). DBRS calculated the weighted-average current LTV (WACLTV) based on the current loan balance (unsecured plus secured) and original property valuation at 92.88%. The indexed WACLTV is calculated at 82.24%. The portfolio largely consists of borrowers who, at the time, were in full employment (95.68%) with 99.8% of the pool underwritten on a full income verification basis. DBRS calculated the weighted-average coupon generated by the mortgage loans at 4.34%. The fixed-rate proportion of the pool is 13.4% with 86.6% of the pool linked to a standard variable rate (SVR). The interest payable on the rated notes is linked to three-month GBP LIBOR. For the cash flow analysis, DBRS modelled the SVR at a floor that is being proposed in accordance with the transaction documents.

Landmark is also the named servicer, with servicing activities delegated to Computershare Mortgage Services Limited. Topaz Finance Limited and Western Mortgages Services Limited have been appointed as the backup servicer and the backup delegated servicer, respectively. The servicer collections are currently deposited into the collection account bank held by National Westminster Bank Plc. A declaration of trust over the collection account has been provided in favour of the Issuer. The funds credited to the collection account are swept on a daily basis to the transaction account held in the name of the Issuer with Elavon Financial Services DAC, U.K. Branch. The account-bank downgrade and replacement language is compliant with DBRS’s legal criteria for the assigned ratings of the notes.

DBRS received performance history data for the securitised portfolio on a loan-by-loan basis, covering January 2010 until September 2016. Prior to 2008, under the Consumer Credit Act (CCA) (1974), a consumer credit agreement was regulated if under GBP 25,000. Additionally, under Section 77A, periodic statements had to be provided under a regulated agreement. Where a creditor fails to give such a 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 Section 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 the 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 Issuer. CERH may have limited resources at its disposal to fund such a 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 regulations in the past, and as part of the issues related to the CCA, the subsequent remediation processes and the assessment of the controls put in place, DBRS expects a future breach of representation and warranty to be limited.

The rating assignments are based on DBRS’s “European RMBS Insight: U.K. Addendum” methodology. Though the unsecured loan provider does not have a charge on the properties, based on the assessment of the unique linkage between unsecured Together Loan parts and the underwriting processes, DBRS has analysed the loan portfolio on the basis of the unsecured loans as a second lien to the secured Together Loan parts. However, it should be noted that there is no legal right for such cash flows to repay the loan outstanding, and as such, DBRS has assessed recovery rates against observed recoveries for unsecured loan defaults.

The ratings assignments are based on a review by DBRS of the following analytical considerations:

-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the unsecured loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated probability of default (PD), loss given default (LGD) and expected loss outputs on the unsecured loan portfolio.
-- The closing portfolio comprises loans already considered defaulted, which total the initial Class Z2 Notes. As such, the Class Z2 Notes offer credit support only insofar as recoveries are received from defaulted loans. DBRS assumed any future defaults will arise from the non-defaulted loans as at the pool cut-off date (31 October 2016).
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and LGD outputs provided by the European RMBS Insight Model. Transaction cash flows were modelled using INTEX DealMaker.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.
-- The relevant counterparties, as rated by DBRS, are appropriately in line with DBRS legal criteria to mitigate the risk of counterparty default or insolvency.

Notes:
All figures are in British pounds sterling unless otherwise noted.

The principal methodology applicable is: European RMBS Insight Methodology and European RMBS Insight: U.K. Addendum.

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 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 First Key, Morgan Stanley and their agents.

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 to be 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 rating action since the Initial Rating Date.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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):

-- In respect of the Class A Notes, a PD of 37.77% and LGD of 97.22%, corresponding to the AAA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 35.55% and LGD of 97.04%, corresponding to the AA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 31.17% and LGD of 97.04%, corresponding to the AA (low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 26.05% and LGD of 96.86%, corresponding to the A (low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E Notes, a PD of 21.59% and LGD of 95.00%, corresponding to a BBB rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F Notes, a PD of 19.82% and LGD of 95.00%, corresponding to a BBB (low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS concludes the following impact on the rated notes:

Class A Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to maintaining the ratings of the Class A Notes at AAA (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to maintaining the ratings of the Class A Notes at AAA (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).

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

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

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

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

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (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, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President
Initial Rating Date: 07 December 2016

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.

-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- 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 analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375