DBRS Finalises Provisional Ratings on Towd Point Mortgage Funding 2017-Auburn 11 Plc

DBRS Ratings Limited (DBRS) has today finalised provisional ratings on the notes issued by Towd Point Mortgage Funding 2017-Auburn 11 Plc (the Issuer) as follows:

-- GBP 732,500,000 Class A1 Notes rated AAA (sf)
-- GBP 50,000,000 Class A2 Notes rated AAA (sf)
-- GBP 52,500,000 Class B Notes rated AA (sf)
-- GBP 37,500,000 Class C Notes rated A (sf)

The Class D Notes, Class E Notes and Class Z Notes are not rated.

The Class A1 and Class A2 Notes are rated for timely payment of interest and ultimate payment of principal. The Class B Notes and Class C 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 2017-Auburn 11 Plc is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom. The issued Notes will be used to fund the purchase of U.K. buy-to-let (BTL) and owner-occupied residential mortgage loans originated by Capital Home Loans Limited (CHL) (99.97%) and Irish Permanent Plc (0.03%). CHL ceased mortgage originations in 2008. Servicing is undertaken by CHL with Homeloan Management Limited (HML) expected to be appointed as Back-up servicer. The legal title to the residential mortgage loans is held by CHL. Beneficial interest in the assets is owned by Cerberus European Residential Holdings B.V. (CERH).

CHL is a limited company incorporated in England and Wales in October 1987. CHL was formed as a result of a joint venture between Credit Foncier de France (CFF) and Société Generale (SocGen). SocGen holdings in CHL was later purchased by CFF in 1992. CHL was acquired from CFF by Permanent tsb p.l.c. (PTSB) in 1996 and was sold by PTSB to Promontoria (Lansdowne) Limited, an affiliate of Cerberus Capital Management L.P. (Cerberus) in July 2015. Cerberus acquired both the CHL servicing platform and approximately GBP 2.5 billion of BTL loans and an approximately GBP 96 million regulated home loan portfolio from PTSB. Cerberus acquired the residual approximately GBP 2.25 billion of BTL loans from PTSB in November 2016. This securitisation consists of a subset of the residual loans acquired in November 2016.

CHL is an experienced entity in the BTL sector and originated a number of RMBS transactions before 2008 through its Auburn securitisation platform. The Auburn programme was established in November 1998 (Auburn 1) with eight further standalone securitisations publicly issued. The latest securitisations originated post-2008 by CHL are Auburn Securities 9 Plc (July 2015) and Towd Point Mortgage Funding 2016-Auburn 10 Plc (October 2016).

Credit enhancement is expected to be provided in the form of subordination of the junior notes.

The credit enhancement available to the Class A1 Notes is 26.75%, provided by subordination of the Class A2, Class B, Class C, Class D, Class E and Class Z Notes. The credit enhancement available to the Class A2 Notes is 21.75%, provided by subordination of the Class B, Class C, Class D, Class E and Class Z Notes. The credit enhancement available to the Class B Notes is 16.50%, provided by subordination of the Class C, Class D, Class E and Class Z Notes. The credit enhancement available to the Class C Notes is 12.75%, provided by subordination of the Class D, Class E and Class Z Notes. Credit enhancement percentages are expressed as a percentage of the portfolio 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 1.65% 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 1.65% 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. Any shortfalls in funding the LRF up to the required amount will be made good using excess spread after crediting the Class E Notes’ Principal Deficiency Ledger (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 (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 Dates after the FORD. After the LRF reaches the required level the first time, principal funds will no longer be used for replenishment of the LRF to the required level. The LRF is floored at 1.00% of the initial Class A Notes’ balance.

The Excess Cash Flow Reserve Fund (XSRF) exists from closing and is funded via excess spread. On the Interest Payment Date (IPD), when all the Class A Notes outstanding have been paid, the amounts in the LRF will be used to fund the XSRF. 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 shortfalls on payment of interest to the Class B, Class C, Class D and Class E Notes.

Of the principal balance outstanding of the loans for each month (during a collection period), 0.25% 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, interest on the drawn amount of the Liquidity Facility, Class A1 and Class A2 Notes’ interest and Class A1 and Class A2 Notes’ PDL.

Principal funds are available to provide liquidity support to the most senior outstanding Class of Notes. Support provided to the Class A2 notes (while the Class A1 notes remain outstanding) is subject to the Class A2 trigger.

The portfolio balance as of 31 January 2017 equates to GBP 1,003,131,841. The portfolio is significantly seasoned with a weighted-average seasoning of 9.9 years. The majority of the portfolio was originated between 2005 and 2008 (94.7%). DBRS calculated the weighted-average current LTV (WACLTV) based on the current loan balance and original property valuation at 82.8%. The indexed WACLTV is calculated at 72.4%. Of the mortgage portfolio, 98.7% comprises interest-only mortgage loans. The high concentration is a consequence of the BTL loans in the portfolio, as 92.9% of the mortgage portfolio comprises BTL mortgage loans. The performance of buy-to-let loans has been relatively stronger than owner-occupied loans. Cumulative 3M+ arrears on the portfolio is 4.8% (as a percentage of all BTL loans). In comparison, the cumulative 3M+ on owner-occupied loans is 21.5% (as a percentage of all owner-occupied loans).

DBRS calculated the weighted-average coupon generated by the mortgage loans at 1.55%. The interest rate is low as the loans are indexed to bank base rate (99.8%). The remaining 0.2% is linked to standard variable rate. The interest payable on the Rated Notes is linked to 3M GBP LIBOR. The margin on the mortgage loans over 3M GBP LIBOR is 1.18%. Annualised CPR on the CHL loan book has trended at approximately 4% over the last three years; however, DBRS notes the transaction structure is sensitive to low CPR rates. DBRS will continue to monitor CPR rates as part of its surveillance process.

CHL is appointed as the Servicer with HML appointed as the backup servicer. The monthly receipts are deposited into the collections account at Barclays Bank Plc (Barclays) and held on trust by the legal title holder in accordance with the collection account declaration of trust. The funds credited to the collection are swept daily to the transaction account. The daily sweep of funds mitigates the potential risk of disruption in servicing or following a servicer event of default, including insolvency. The collections from the loans are credited to a collection account in the name of the legal title holder at Barclays. The funds credited to the collections account are swept daily into the transaction account in the name of the Issuer, which is held with Elavon Financial Services D.A.C., U.K. Branch. The legal title holder has declared a trust over the funds in the collections account in favour of the Issuer. The transaction account bank meets the eligible account bank rating in structured finance transactions as per DBRS legal criteria.

The mortgage 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. DBRS expects a future breach of representation and warranty to be limited.

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 mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated probability of default, loss given default and expected loss (EL) outputs on the mortgage loan portfolio.
-- 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 (PDRs) and loss given default outputs provided by the European RMBS Insight Model. Transaction cash flows were modelled using INTEX DealMaker. DBRS considered an additional sensitivity scenario of 0% CPR stress. In this scenario, the notes do not pass DBRS cash flow stresses given the low WAC on the portfolio and the interest-only nature of the collateral. However, DBRS notes that while portfolio is generating a low WAC, the annualised CPR has trended at approximately 4% over the last 36 months. DBRS will continue to monitor the CPR rates as part of its surveillance process.
-- 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 methodologies applicable are 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 DBRS 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 A1 Notes, a PD of 26.63% and LGD of 59.63%, corresponding to the AAA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
--In respect of the Class A2 Notes, a PD of 26.63% and LGD of 59.63%, 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 23.25% and LGD of 56.68%, 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 19.40% and LGD of 51.29%, corresponding to the A 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 A1 Notes:
---- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to maintain the ratings at of the Class A1 Notes at AAA (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A1 Notes to AA (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to maintaining the ratings of the Class A1 Notes at AAA (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class A1 Notes to AA (high) (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 A1 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 A1 Notes to A (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 A1 Notes to A (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 A1 Notes to A (sf).

Class A2 Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the ratings of the Class A2 Notes to AA (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A2 Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the ratings of the Class A2 Notes to AA (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class A2 Notes to A (high) (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 A2 Notes to A (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 A2 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 A2 Notes to A (low) (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 A2 Notes to BBB (high) (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 (high) (sf).
-- A hypothetical increase of the base case PD 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 LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (high) (sf).
-- A hypothetical increase of the base case 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 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 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 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 (low) (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 BBB (high) (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 (sf).
-- A hypothetical increase of the base case LGD by 25%, 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 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to 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 C 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 C 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 C 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 C 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: Quincy Tang, Managing Director
Rating Date: 21 February 2017

Initial Rating Date: 02 February 2017

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 analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.