DBRS Assigns Provisional Ratings to Castell 2017-1 PLC

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the notes issued by Castell 2017-1 PLC (Issuer) as follows:

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (low) (sf)
-- Class C Notes rated A (low) (sf)
-- Class D Notes rated BBB (sf)
-- Class E Notes rated BB (high) (sf)
-- Class F Notes rated BB (low) (sf)

The Class X Notes and Class Z Notes are not rated.

Castell 2017- 1 Plc is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom. The issued notes will be used to fund the purchase of UK second-lien mortgage loans originated by Optimum Credit Limited (Optimum Credit or Seller). Partial proceeds of the Class Z Notes will be used to fund the General Reserve Fund. Optimum Credit is a new lender based in Cardiff, Wales and launched as a specialised provider of second-charge mortgages in the UK in November 2013. The majority of loan originations are sourced through brokers all of whom, since March 2016, are regulated by the Financial Conduct Authority under the Mortgage Code of Conduct and Business. The originator is owned by Patron Capital Partners, a Western European private equity real estate fund with its main investment advisor, Patron Capital Advisers LLP, based in London.

The mortgage portfolio will be serviced by Optimum Credit with Capita Mortgage Services Limited (Capita) in place as the back-up servicer. Intertrust Management Limited has been appointed as a back-up servicer facilitator.

As of 30 April 2017, the portfolio consisted of 5,823 mortgage loans with a total portfolio balance of GBP 242.3 million. The average loan per borrower is GBP 41,612. The weighted-average (WA) seasoning of the portfolio is 10.6 months with a WA remaining term of 15.94 years. The WA loan-to-value, inclusive of any prior ranking balances of the portfolio, is 64.10%. Within the portfolio, 40.94% of the loans are fixed-rate loans reverting to floating, 13.32% are discount-rate loans, 21.48% are floating-rate loans linked to Optimum Base Rate and 24.25% are floating-rate loans linked to one-month Libor. 1.64% of the portfolio comprises loans originated to borrowers with a prior County Court Judgement and 0.74% of the borrowers are in arrears.

Credit enhancement for the Class A Notes is calculated as 25.50% and is provided by the subordination of the Class B Notes to the Class Z Notes (excluding the Class X notes). Credit enhancement for the Class B Notes is calculated as 20.50% and is provided by the subordination of the Class C Notes to the Class Z Notes (excluding the Class X notes). Credit enhancement for the Class C Notes is calculated as 14.50% and is provided by the subordination of the Class D Notes to the Class Z Notes (excluding the Class X notes). Credit enhancement for the Class D Notes is calculated as 10.00% and is provided by the subordination of the Class E Notes to the Class Z Notes (excluding the Class X notes). Credit enhancement for the Class E Notes is calculated as 6.26% and is provided by the subordination of the Class F Notes to the Class Z Notes (excluding the Class X notes). Credit enhancement for the Class F Notes is calculated as 2.96% and is provided by subordination of the Class Z Notes. The Class Z notes provide subordination to the extent they are collateralised.

The transaction benefits from an amortising cash reserve that is available to support the Class A to Class F Notes. The cash reserve is fully funded at close and is required to be funded at the minimum of 2.0% of the initial balance of the Class A to the Class Z Notes (excluding the Class X notes) and 4.0% of the current balance of the Class A to the Class Z Notes (excluding the Class X notes).

The Notes are provided liquidity support from an amortising liquidity reserve which is able to support payment of senior fees and interest on the Class A and Class B Notes. The liquidity reserve is zero on the closing date and is funded from principal receipts to 1.5% of the outstanding balance of the Class A and Class B Notes. Additionally, principal receipts may be used to also provide liquidty support to payments of senior fees and interest on the Class A and Class B Notes subject to principal deficiency ledger conditions.

The Issuer has entered into a fixed-floating swap with The Royal Bank of Scotland PLC (trading as NatWest Markets), to mitigate the fixed interest rate risk from the mortgage loans and the three-month Libor payable on the Notes. The fixed-floating swap documents reflect DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The Account Bank, Cash Manager, Principal Paying Agent, Agent Bank and Registrar is Cititbank N.A., London Branch. The DBRS private rating of the Account Bank complies with the threshold for the Account Bank outlined in DBRS “Legal Criteria for European Structured Finance Transactions”, given the rating assigned to the Class A Notes.

The ratings on the Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date. DBRS based the ratings primarily on the following:

-- The transaction capital structure, form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated portfolio default rates (PDRs), loss given default (LGD) 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 PDRs and LGD outputs provided by the European RMBS Insight Model. Transaction cash flows were modelled using INTEX DealMaker.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the Terms and Conditions of the notes.
-- 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.

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 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 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 these ratings include Optimum Credit, NatWest Markets and their agents.

DBRS did 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 data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern a newly rated financial instrument.

These are the first DBRS ratings on this financial instrument.

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 in addition to its base case, further stress scenarios for its main rating parametes PDRs and LGD in its cash flow analysis. The additional stresses assume a 25% and 50% increase in both the PDRs and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determing the ratings (the Base Case):

--In respect of the Class A Notes, the PDR and LGD at the AAA (sf) stress scenario of 31.57% and 84.36%
--In respect of the Class B Notes, the PD and LGD at the AA (low) (sf) stress scenario of 26.91% and 78.18%
--In respect of the Class C Notes, the PD and LGD at the A (low) (sf) stress scenario of 22.00% and 68.63%
--In respect of the Class D Notes, the PD and LGD at the BBB (sf) stress scenario of 18.58% and 61.20%
--In respect of the Class E Notes, the PD and LGD at the BB (high) (sf) stress scenario of 13.53% and 51.79%
--In respect of the Class F Notes, the PD and LGD at the BB (low) (sf) stress scenario of 11.20% and 42.45%

DBRS concludes the following impact on the Class A Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to A (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).

DBRS concludes the following impact on the Class B Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to A (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).

DBRS concludes the following impact on the Class C Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).

DBRS concludes the following impact on the Class D Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf).

DBRS concludes the following impact on the Class E Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BB (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (low) (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (sf).

DBRS concludes the following impact on the Class F Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to B (high) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to B (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade below B (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade below B (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade below B (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: Rehanna Sameja, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 21 June 2017

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.

-- Derivative Criteria for European Structured Finance Transactions
-- 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
-- European RMBS Insight Methodology
-- European RMBS Insight: UK Addendum

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