DBRS Assigns Provisional Ratings to 25 Tranches of the Wetherby Securities 2017 Limited Financial Guarantee

DBRS Ratings Limited (DBRS) assigned provisional ratings to 25 tranches of an unexecuted, unfunded financial guarantee (the Senior Guarantee) referencing a portfolio of commercial real estate (CRE) loans (the Portfolio) originated and managed by Lloyds Bank Plc (Lloyds) and its affiliates as follows:

-- GBP 487,205,126 Tranche A at AAA (sf)
-- GBP 6,729,353 Tranche B at AAA (sf)
-- GBP 6,729,353 Tranche C at AAA (sf)
-- GBP 6,056,417 Tranche D at AA (high) (sf)
-- GBP 6,056,417 Tranche E at AA (high) (sf)
-- GBP 6,056,417 Tranche F at AA (high) (sf)
-- GBP 6,056,417 Tranche G at AA (sf)
-- GBP 6,056,417 Tranche H at AA (sf)
-- GBP 6,056,417 Tranche I at AA (sf)
-- GBP 6,392,885 Tranche J at AA (low) (sf)
-- GBP 6,392,885 Tranche K at AA (low) (sf)
-- GBP 6,056,417 Tranche L at A (high) (sf)
-- GBP 6,056,417 Tranche M at A (high) (sf)
-- GBP 6,392,885 Tranche N at A (sf)
-- GBP 6,392,885 Tranche O at A (sf)
-- GBP 6,056,417 Tranche P at A (low) (sf)
-- GBP 6,056,417 Tranche Q at A (low) (sf)
-- GBP 5,047,014 Tranche R at BBB (high) (sf)
-- GBP 5,047,014 Tranche S at BBB (high) (sf)
-- GBP 4,710,547 Tranche T at BBB (sf)
-- GBP 4,710,547 Tranche U at BBB (sf)
-- GBP 4,710,547 Tranche V at BBB (low) (sf)
-- GBP 4,710,547 Tranche W at BBB (low) (sf)
-- GBP 5,047,014 Tranche X at BB (high) (sf)
-- GBP 5,047,014 Tranche Y at BB (high) (sf)

All trends are Stable.

DBRS does not rate the GBP 47,105,468 junior Tranche Z (junior financial guarantee).

The transaction is a synthetic balance-sheet commercial mortgage-backed securities transaction structured in the form of a financial guarantee. Lloyds (Originator, Servicer and Beneficiary) bought protection under a junior financial guarantee (JFG) for the first loss piece (FLP) from Wetherby Securities 2017 Limited but has not executed the contracts relating to the senior tranches (senior financial guarantee, SFG). Under the unexecuted guarantee agreements, Lloyds will transfer the remaining credit risk (from 7% to 100%) of the commercial real estate loan portfolio (Portfolio). DBRS only rates the SFG tranches, which will not be executed at closing and DBRS’s ratings will remain provisional. The junior tranche will be sold with the JFG executed.

The financial guarantees cover a portfolio of 51 loans advanced to 34 borrower groups with the biggest borrower group representing 13.5% of the total balance and the top ten borrower group representing 57.3% of total balance. The guaranteed amount at closing is GBP 675.3 million. Some of the borrower groups have additional cross-collateralised debt with Lloyds and/or third parties by way of syndication. Including such syndications and other exposures, the borrower group’s total exposure is GBP 1.9 billion secured by CREs valued at GBP 3.6 billion; the average initial loan-to-value (LTV) is 52.5%. All loans will mature between June 2019 and December 2021 (aggregate maturity balance GBP 650 million), until then, 58.8% of loans will amortise partially and the remaining 41.2% will pay only interest. The transaction does not envisage any revolving period; therefore, refinanced or extended loans (unless distressed extension in light of a loan work-out) would be removed from the portfolio. 79% of the loans pay floating interest, but are typically at least partially hedged. The average loan margin is 250 basis points and the average reported Interest Coverage Ratio is 3.0x.

Credit events are defined as bankruptcy, failure to pay and restructuring and must be declared on or before the scheduled termination date in February 2022. For bankruptcy and failure to pay, realised losses are defined as principal losses after all recoveries have been collected; for restructuring, they are defined as the debit balance to Lloyds profit and loss balance. The transaction includes the concept of initial loss: upon a credit event, an initial loss of 35% of the outstanding reference balance is considered. This initial balance is then reduced or increased based on the actual loss. Any subsequent adjustment to the initial loss makes whole via lost guarantee fee or overpaid guarantee fee. Each loss is verified by the verification agent, KPMG, which checks eligibility criteria and accordance with the servicing standards of the bank.

Amortisation will be allocated sequentially to the different guarantee tranches, and realised losses reverse sequentially.

DBRS’s ratings address the likelihood of a reduction to the respective tranche notional amounts resulting from borrower defaults (credit events) within the Portfolio on or before the transaction’s termination date, which is defined as the date on which all losses have been verified and no further losses can occur. For credit events still outstanding two years after the scheduled termination date, Lloyds would estimate future recoveries and the ultimate loss, which DBRS understands would be verified by the loss verification agent. In DBRS’s view, this mitigates the risk arising from the relatively short tail period: the verification mitigates the potential conflict of interest arising from Lloyds as the Beneficiary determining expected recoveries. Nevertheless, DBRS considered in its analysis lower recoveries for loans maturing shortly before the scheduled termination date in February 2022 to account for the additional uncertainty related to recovery and loss estimation.

The loans represent typical UK balance commercial real estate lending that is characterised by “relationship banking”. As such, servicing will remain within Lloyds. Nearly all borrowers are special-purpose vehicle borrowers, which is typical for commercial real estate lending. The data tape shows that approximately 61% of the loan balance benefits from some form of financial guarantee from the sponsor, which DBRS views positively compared with relationship-focused lending and usual CMBS loans.

Lloyds could decide to grant additional loans to a borrower group (with or without additional property collateral) which would rank pro rata and pari passu to the guaranteed loans, increasing the borrower’s leverage. This is mitigated by losses being contractually limited to:

-- If the borrower group’s initial LTV is below 50%, the maximum LTV considered for loss allocation is 55%.
-- If borrower group’s initial LTV is above 50%, the maximum LTV considered for loss allocation is the initial LTV plus 5%.
-- The maximum LTV considered for loss allocation is 65%.
-- For four borrower groups, the maximum LTV considered for loss allocation is the higher of the initial LTV and 50% and for one borrower group the maximum LTV considered of loss allocation is 35%.

There are 356 properties securing the whole portfolio, which are located across all the UK, with the highest concentrations in Greater London (40 properties or 54% by market value), South West (37 properties or 19% by market value) and Midlands (57 properties, 10% of market value). In terms of property types, Industrial is the largest contributor (29% or 102 properties), followed by Residential/Apartment blocks (27% or 95 properties) and office (12% or 42 properties). By value, office is the largest contributor (54%), then Industrial (21%), then Mixed-Use (8%). The high proportion of office by value is driven by the largest property from one loan, in which the majority of exposure has been syndicated; therefore, the guaranteed exposure to London offices is much lower.

Approximately 67% of the guaranteed loan balance was originated less than two years ago and approximately 60% of the loan balance matures within the next three years. 96% of the properties (by value) have been valued in 2015-2017; the Originator characterised 70% by property value as prime or good secondary properties and 29% as secondary. Approximately 76% of the guaranteed loan balance has a current LTV between 40% and 60% and 17% has a current LTV of more than 60%. According to the originator, all loans fall into the slotting categories “Strong” (73% of the guaranteed loan balance) or “Good” (27%).

Because of the granularity of the portfolio, DBRS has conducted detailed underwriting for 11 large borrower groups. Collectively, these 11 borrower groups’ loans cover 59% of the Portfolio’s cut-off balance or 79% of the total pre-syndication loan amount. A net recovery assumption, derived from the underwriting exercise, was then applied to the other loans to calculate their corresponding DBRS values. In its analysis, DBRS considered potential LTV increases of borrower groups as outlined above.

To calculate the net recovery for each rating level, each loan’s DBRS value was sized based on corresponding property type parameters detailed in the agency’s “European CMBS Rating and Surveillance Methodology”. The underwritten loans also received parameter adjustments based on their characteristics. A positive credit adjustment has been allocated to all rated classes to reflect the high granularity of the Portfolio.

As a whole, the Portfolio has a large exposure to the overall UK economy given its large tenant base and the embedded correlation between CRE market and economy growth. Therefore, should the UK economy deteriorate in the future and/or DBRS downgrades the rating of the UK below its current AAA level, DBRS’s provisional ratings may come under pressure.

DBRS will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

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

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include Lloyds Bank PLC.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating 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 issued 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 the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

A decrease of 2.5%, 5% and 10% in the DBRS values, derived by more conservative DBRS’s underwriting assumptions, would lead to a downgrade of the rated tranches as noted below:

Tranche A Notes Risk Sensitivity:

--2.5% decline in DBRS Value, expected rating of Class A Notes to AA (high) (sf)
--5% decline in DBRS Value, expected rating of Class A Notes to AA (sf)
--10% decline in DBRS Value, expected rating of Class A Notes to A (high) (sf)

Tranche B Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class B Notes to AA (high) (sf)
--5% decline in DBRS Value, expected rating of Class B Notes to AA (sf)
--10% decline in DBRS Value, expected rating of Class B Notes to A (sf)

Tranche C Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class C Notes to AA (high) (sf)
--5% decline in DBRS Value, expected rating of Class C Notes to AA (sf)
--10% decline in DBRS Value, expected rating of Class C Notes to A (sf)

Tranche D Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class D Notes to AA (sf)
--5% decline in DBRS Value, expected rating of Class D Notes to AA (low) (sf)
--10% decline in DBRS Value, expected rating of Class D Notes to A (low) (sf)

Tranche E Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class E Notes to AA (sf)
--5% decline in DBRS Value, expected rating of Class E Notes to AA (low) (sf)
--10% decline in DBRS Value, expected rating of Class E Notes to A (low) (sf)

Tranche F Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class F Notes to AA (sf)
--5% decline in DBRS Value, expected rating of Class F Notes to A (high) (sf)
--10% decline in DBRS Value, expected rating of Class F Notes to BBB (high) (sf)

Tranche G Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class G Notes to AA (low) (sf)
--5% decline in DBRS Value, expected rating of Class G Notes to A (high) (sf)
--10% decline in DBRS Value, expected rating of Class G Notes to BBB (high) (sf)

Tranche H Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class H Notes to AA (low) (sf)
--5% decline in DBRS Value, expected rating of Class H Notes to A (sf)
--10% decline in DBRS Value, expected rating of Class H Notes to BBB (sf)

Tranche I Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class I Notes to A (high) (sf)
--5% decline in DBRS Value, expected rating of Class I Notes to A (sf)
--10% decline in DBRS Value, expected rating of Class I Notes to BBB (sf)

Tranche J Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class J Notes to A (high) (sf)
--5% decline in DBRS Value, expected rating of Class J Notes to A (low) (sf)
--10% decline in DBRS Value, expected rating of Class J Notes to BBB (sf)

Tranche K Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class K Notes to A (sf)
--5% decline in DBRS Value, expected rating of Class K Notes to A (low) (sf)
--10% decline in DBRS Value, expected rating of Class K Notes to BBB (low) (sf)

Tranche L Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class L Notes to A (sf)
--5% decline in DBRS Value, expected rating of Class L Notes to BBB (high) (sf)
--10% decline in DBRS Value, expected rating of Class L Notes to BBB (low) (sf)

Tranche M Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class M Notes to A (low) (sf)
--5% decline in DBRS Value, expected rating of Class M Notes to BBB (high) (sf)
--10% decline in DBRS Value, expected rating of Class M Notes to BB (high) (sf)

Tranche N Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class N Notes to A (low) (sf)
--5% decline in DBRS Value, expected rating of Class N Notes to BBB (sf)
--10% decline in DBRS Value, expected rating of Class N Notes to BB (sf)

Tranche O Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class O Notes to BBB (high) (sf)
--5% decline in DBRS Value, expected rating of Class O Notes to BBB (sf)
--10% decline in DBRS Value, expected rating of Class O Notes to BB (sf)

Tranche P Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class P Notes to BBB (high) (sf)
--5% decline in DBRS Value, expected rating of Class P Notes to BBB (low) (sf)
--10% decline in DBRS Value, expected rating of Class P Notes to BB (low) (sf)

Tranche Q Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class Q Notes to BBB (sf)
--5% decline in DBRS Value, expected rating of Class Q Notes to BBB (low) (sf)
--10% decline in DBRS Value, expected rating of Class Q Notes to BB (low) (sf)

Tranche R Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class R Notes to BBB (sf)
--5% decline in DBRS Value, expected rating of Class R Notes to BB (high) (sf)
--10% decline in DBRS Value, expected rating of Class R Notes to B (high) (sf)

Tranche S Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class S Notes to BBB (low) (sf)
--5% decline in DBRS Value, expected rating of Class S Notes to BB (high) (sf)
--10% decline in DBRS Value, expected rating of Class S Notes to B (high)

Tranche T Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class T Notes to BBB (low) (sf)
--5% decline in DBRS Value, expected rating of Class T Notes to BB (sf)
--10% decline in DBRS Value, expected rating of Class T Notes to B (high) (sf)

Tranche U Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class U Notes to BB (high) (sf)
--5% decline in DBRS Value, expected rating of Class U Notes to BB (sf)
--10% decline in DBRS Value, expected rating of Class U Notes to B (sf)

Tranche V Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class V Notes to BB (high) (sf)
--5% decline in DBRS Value, expected rating of Class V Notes to BB (low) (sf)
--10% decline in DBRS Value, expected rating of Class V Notes to B (sf)

Tranche W Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class W Notes to BB (sf)
--5% decline in DBRS Value, expected rating of Class W Notes to BB (low) (sf)
--10% decline in DBRS Value, expected rating of Class W Notes to B (low) (sf)

Tranche X Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class X Notes to BB (sf)
--5% decline in DBRS Value, expected rating of Class X Notes to BB (low) (sf)
--10% decline in DBRS Value, expected rating of Class X Notes to B (low) (sf)

Tranche Y Notes Risk Sensitivity:
--2.5% decline in DBRS Value, expected rating of Class Y Notes to B (low) (sf)
--5% decline in DBRS Value, expected rating of Class Y Notes to B (high) (sf)
--10% decline in DBRS Value, expected rating of Class Y Notes to CCC (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 and US regulations only.

Lead Analyst: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 27 December 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.

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.