DBRS Assigns Provisional Ratings to 12 Tranches of the Nightingale Securities 2017-1 Limited Financial Guarantee

DBRS Ratings Limited (DBRS) assigned provisional ratings to 12 tranches of an unexecuted unfunded financial guarantee (the senior guarantee) regarding a portfolio consisting of loans to U.K-based small- and medium-sized enterprises (SMEs) and income producing real estate (IPRE) (the Nightingale Securities 2017-1 Limited portfolio) originated by National Westminster Bank plc and its affiliates, as follows:

--GBP 3,322,449,145 Tranche A at AAA (sf)
--GBP 191,807,000 Tranche B at AA (high) (sf)
--GBP 52,311,000 Tranche C at AA (sf)
--GBP 60,794,000 Tranche D at AA (low) (sf)
--GBP 133,369,000 Tranche E at A (high) (sf)
--GBP 32,989,000 Tranche F at A (sf)
--GBP 78,702,000 Tranche G at A (low) (sf)
--GBP 210,186,000 Tranche H at BBB (high) (sf)
--GBP 33,931,000 Tranche I at BBB (sf)
--GBP 44,771,000 Tranche J at BBB (low) (sf)
--GBP 139,967,000 Tranche K at BB (high) (sf)
--GBP 21,206,000 Tranche L at BB (sf)

Nightingale Securities 2017-1 Limited (the Issuer or SPV) is a bankruptcy-remote limited liability company incorporated under the laws of Jersey. The transaction is a synthetic balance-sheet securitisation structured in the form of a financial guarantee. The loans in the reference portfolio were originated in the U.K. by the National Westminster Bank plc (the Beneficiary) and its affiliates over their regular course of business.

The initial guaranteed portfolio notional amount totals GBP 4,712.7 million. The transaction consists of a junior financial guarantee relating to the credit risk transferred via a funded credit linked note (CLN) and a senior unexecuted and unfunded financial guarantee which defines the rated tranches. Under the junior financial guarantee, the Beneficiary will transfer the credit risk of the initial GBP 390.2 million (corresponding to the first 8.28% of the initial portfolio notional). Similarly, under the unexecuted senior financial guarantee agreement, the Beneficiary will transfer the remaining credit risk (from 8.28% to 100%) of the same portfolio. The Beneficiary is also holding an additional 20% of each reference obligation as risk retention. The total size of the portfolio including risk retention is GBP 5,890.9 million.

The ratings address the likelihood of a reduction to the respective Tranche Notional Amount resulting from credit events within the reference portfolio within the ten-year Credit Protection Period. The portfolio credit events covered by the guarantee are limited to failure to pay, bankruptcy and failure to pay (restructuring).

The ratings assigned by DBRS are expected to remain provisional until the moment the underlying agreements are executed. The Beneficiary may have no intention of executing the senior guarantee. DBRS will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

The transaction has a two-year replenishment period during which National Westminster Bank can add new reference obligations or increase the notional amount of existing reference obligations. Any new addition or increase of notional on existing reference obligations needs to comply with the eligibility criteria and replenishment criteria. However, if the replenishment criteria is in breach prior to a replenishment such replenishment can be allowed if the covenants in breach are maintained or improved. The replenishment period may end early if either the default or loss balance exceed certain limits.

DBRS divided the analysis of the portfolio in to three key sub-pools: SMEs, residential IPRE and commercial IPRE and applied the relevant asset specific methodology for each. For the SME sub-pool, DBRS applied the “Rating CLOs Backed by Loans to European Small and SMEs” methodology. The residential IPRE sub-pool analysis was conducted in accordance with the “European RMBS Insight Methodology & U.K. Addendum”. The asset analysis of the commercial IPRE sub-pool was conducted in line with the “European CMBS Rating and Surveillance Methodology” to determine expected stressed recovery rates. Given the granularity of the commercial IPRE sub-portfolio, DBRS relied on the historical performance data to determine a base case probability of default (PD).

DBRS considered the eligibility criteria and replenishment criteria to determine a worst-case portfolio used for the analysis for each of the sub-pools. To determine the overall portfolio default and loss assumptions, DBRS combined analysis from each sub-pools weighted by their respective contributions to the total portfolio.

The initial portfolio of GBP 4,712 million notional consisting of loans to SMEs (54.9%), commercial IPRE (31.9%) and residential IPRE (13.2%). The replenishment criteria allows between 54% to 60% for the SME portfolio, 30% to 33% for the commercial IPRE portfolio and 7% to 16% for the residential IPRE.

The eligibility criteria excludes, among other criteria, obligations that are either subordinated or in arrears, as well as, borrowers with an internal rating below a certain threshold. The replenishment criteria includes portfolio-level limits, which include, a maximum borrower group concentration of 0.3% applied for lower risk borrowers, with higher risk borrowers being subject to tighter caps. It also includes limits to weighted average internal PD, loan-to-value (LTV) and weighted-average life (WAL) for the overall portfolio as well as each sub-pool.

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

The principal methodology applicable to the rating is: “Rating CLOs Backed by Loans to European Small and SMEs”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 data and information used for this rating include the lead manager: The Royal Bank of Scotland plc (trading as NatWest Markets) and the Beneficiary: National Westminster 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 to be of satisfactory quality.

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

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of a change of 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”):

-- Defaults Rate used: Portfolio Default rate (ranging between 45.5% and 11.1% at the AAA (sf) to CCC (low) (sf) stress level), a 10% and 20% increase on the Portfolio Default rate used.
-- Recovery Rates used: Base Case Recovery Rate (ranging between 35.2% and 71.2% at the AAA (sf) to CCC (low) (sf) stress level), a 10% and 20% decrease in the Base Case Recovery Rate.

DBRS concludes that:
--A hypothetical increase of the Portfolio Default rate by 20%, ceteris paribus, could lead to a downgrade of the rated tranches by up to three notches.
--A hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, could lead to a downgrade of the rated tranches by up to three notches.
--A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% could lead to a downgrade of the rated tranches by up to three notches.

For further information on DBRS historic 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 and US regulations only.

Lead Analyst: Carlos Silva, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 November 2017

DBRS Ratings Limited
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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

-- Rating CLOs Backed by Loans to European Small and SMEs
-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- European CMBS Rating and Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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

on 17 November 2020, this press release was amended to reflect changes to the Tranche A and Tranche L balances.