DBRS Finalises Provisional Ratings Assigned to Tower Bridge Funding No. 2 PLC

DBRS Ratings Limited (DBRS) finalised the following ratings previously assigned to the notes issued by Tower Bridge Funding No. 2 PLC (the Issuer):

--Class A notes at AAA (sf)
--Class B notes at AA (high) (sf)
--Class C notes at A (high) (sf)
--Class D notes at A (low) (sf)
--Class E notes at BBB (sf)

The ratings assigned to the Class A and B notes address the timely payment of interest to the noteholders on every quarterly interest payment date and the ultimate payment of principal by the legal final maturity date. The ratings on the Class C, D and E notes address the ultimate payment of both principal and interest by the legal final maturity date. Deferral of interest is permitted on the Class B to E notes, as per the transaction documents, provided that any deferred interest is repaid in full, plus an interest accrued thereon by the legal final maturity date. However, deferral of interest is not permitted when a class of notes is the senior-most outstanding. DBRS does not rate the Class Z1, X, Z2 notes and residual certificates.

DBRS’s final ratings assigned to the Class C, D and E notes differs from the provisional ratings assigned on 10 April 2018 because of lower than expected spreads on the notes and the removal of the possibility for an additional sale of loans following closing.

Tower Bridge Funding No. 2 PLC is the second securitisation of residential mortgages by Belmont Green Finance Limited (BGFL; the seller and originator). BGFL is a specialist U.K. mortgage lender that offers a full suite of mortgage products including owner-occupied, buy-to-let (BTL), adverse credit history, interest-only loans and second-charge. BGFL began lending, shortly after gaining approval from the Financial Conduct Authority, in October 2016.

The mortgage portfolio comprises first-lien home loans, newly originated by BGFL through its Vida Homeloan brand. BGFL is the named mortgage portfolio servicer, but delegates day-to-day servicing to Homeloan Management Limited (HML). HML is also the back-up servicer and shall replace BGFL if a servicing termination event is triggered. This arrangement means there is, in effect, no back-up servicer in place. In order to maintain servicing continuity, Intertrust Management Limited will be appointed the back-up servicer facilitator.

As of 31 March 2018, the portfolio consisted of 1,635 loans with an average outstanding balance of GBP 208,244 per borrower, aggregating to GBP 308,576,190. Approximately 68.8% of the loans by balance outstanding are BTL mortgages; as is common in the U.K. mortgage market, the loans are largely scheduled to pay interest only on a monthly basis, with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage (71.5% of the loans in the pool are interest-only or part & part). A significant concentration of the BTL loans are granted to portfolio landlords: 55.5% of the loans are granted to landlords with at least one other BTL property, and 14.5% have at least eight other BTL properties.

The mortgages are high-yielding, with a weighted-average coupon of 4.0% and a weighted-average reversionary margin of 4.9% (over either the Vida Variable Rate (VVR) or LIBOR). Moreover, 10.3% of the mortgage portfolio has prior county court judgements (CCJs). The weighted-average current loan-to-value (CLTV) ratio of the portfolio is 69.1%, with no loan exceeding a 90% CLTV ratio.

The transaction is structured to initially provide 20.0% of credit enhancement to the Class A notes. This includes subordination of the Class B to Z1 notes (X and Z2 are not collateralised) as well as the non-amortising general reserve fund, which is equal to 2.5% of the Class A to Z1 notes at issuance.

The general reserve fund will be funded from the issuance of the Class Z2 notes and can be applied to cover shortfalls in senior fees, interest on Class A to E and to clear principal deficiency ledger (PDL) balances on the Class A to E sub-ledgers. Further liquidity support is provided by the liquidity reserve fund, which is not initially funded, but will be funded from closing in a senior position atop the pre-enforcement principal priority of payments to 1.5% of the Class A and B notes. The liquidity reserve fund can be applied to cover further shortfalls in senior fees as well as Class A and B interest, if a shortfall still exists after applying revenue collections and the general reserve fund. If drawn from the liquidity reserve, the fund is replenished from the pre-enforcement revenue priority of payments. The liquidity reserve fund is replenished to 1.5% of the outstanding Class A and B notes, with released amounts forming available principal funds.

Principal funds can be diverted to pay revenue liabilities, insofar as a shortfall in senior fees, Class A interest and interest due on the senior-most outstanding class of notes persist after applying revenue collections and exhausting both reserve funds.

If principal funds are diverted to pay revenue liabilities, the amount will subsequently be debited to the PDL. The PDL comprises six sub-ledgers that will track principal used to pay interest, as well as realised losses, in a reverse sequential order that begins with the Z1 sub-ledger.

The fixed-rate assets and the floating-rate liabilities gives rise to interest rate risk. This is mitigated by using a fixed-floating balance-guaranteed swap, provided by the Royal Bank of Scotland plc (trading as NatWest Markets). There is basis risk in the transaction that arises once the loans complete the initial teaser period. The owner-occupied loans reset to pay a rate of interest linked to VVR. This basis risk is mitigated through a transaction floor on the VVR. The floor, which has been analysed by DBRS, is three-month LIBOR plus 1.9%.

On the interest payment date in June 2021, the coupon due on the notes will step up and the notes may be optionally called. The notes must be redeemed for an amount sufficient to fully repay them, at par, plus pay any accrued interest.

Monthly mortgage receipts are deposited into the collections account at Barclays Bank PLC (Barclays) and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept on a daily basis to the issuer’s account for direct debit payments and within three business days for other payment formats. The collection account declaration of trust provides that interest in the collection account is in favour of the issuer over the seller. Commingling risk is considered mitigated by the collection account declaration of trust and the regular sweep of funds. The collection account bank is subject to a DBRS investment-grade downgrade trigger. Elavon Financial Services DAC, UK branch (Elavon) is the issuer’s account provider. The transaction documents include account bank rating triggers and downgrade provisions that lead DBRS to conclude that both account banks satisfy DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

In assessing the cash flows, DBRS has applied two default timing curves (front-ended and back-ended), its prepayment curves (low, medium and high assumptions) and interest rate stresses as per the DBRS “Interest Rate Stresses for European Structured Finance Transactions” methodology. DBRS applied an additional 0% constant principal repayment stress. The cash flows were analysed using Intex DealMaker.

The legal structure and presence of legal opinions are deemed consistent with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology.

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

The principal methodologies applicable are the “European RMBS Insight Methodology” and the “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 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 BGFL and NatWest Markets.

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 are the first DBRS ratings on this financial instrument.

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

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

--In respect of the Class A Notes, a Probability of Default (PD) and Loss Given Default (LGD) at the AAA (sf) stress scenario of 28.3% and 53.4%, respectively.
--In respect of the Class B Notes, the PD and LGD at the AA (High) (sf) stress scenario of 26.2% and 51.1%, respectively.
--In respect of the Class C Notes, the PD and LGD at the A (High) (sf) stress scenario of 21.5% and 44.1%, respectively.
--In respect of the Class D Notes, the PD and LGD at the A (Low) (sf) stress scenario of 19.0% and 39.8%, respectively.
--In respect of the Class E Notes, the PD and LGD at the BBB (sf) stress scenario of 15.9% and 35.1%, respectively.

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.

DBRS concludes the following impact on the Class A Notes:
-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to AA (sf).
-- A 25% increase of the LGD, ceteris paribus would not lead to a downgrade.
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- A 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).

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

DBRS concludes the following impact on the Class C Notes:
-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to A (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB(high) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- A 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 D Notes:
-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 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 E Notes:
-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB(sf).
-- A 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (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: Lloyd Morrish-Thomas, Senior Financial Analyst, RMBS
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 24 April 2018

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.

-- 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
-- Interest Rate Stresses for European Structured Finance Transactions
-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. 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.

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