DBRS Assigns Provisional Ratings to Gemgarto 2018-1 PLC

DBRS Ratings Limited (DBRS) assigned provisional ratings to the notes expected to be issued by Gemgarto 2018-1 PLC as follows:

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA(sf)
-- Class C Notes rated A (high) (sf)
-- Class D Notes rated A (low) (sf)
-- Class E Notes rated BB (high) (sf)
-- Class X Notes rated C (sf) (together, the Rated Notes)

The ratings assigned to the Class A to E Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date. The rating assigned to the Class X Notes addresses the ultimate payment of interest and principal. The Class F Notes and Class Z Notes are not rated by DBRS.

Gemgarto 2018-1 PLC (the Issuer) is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom. The notes will be used to fund (i) the purchase of a U.K. owner-occupied mortgage portfolio, originated by Kensington Mortgage Company Limited (KMC), and (ii) a credit entry to a pre-funding principal ledger. KMC, a North View Group company, is an established lender and servicer in the U.K. KMC is owned by funds managed by The Blackstone Group and TPG.

The mortgage portfolio will be serviced by KMC, which will also act as the cash/bond administrator, with CSC Capital Markets UK Limited in place as the back-up servicer facilitator. Wells Fargo Bank is expected to be engaged as the standby cash/bond administrative counterparty at closing and will be delegated certain cash admin duties.

At closing, the Issuer is expected to credit part of the initial Class A to F Note proceeds to the pre-funding principal ledger and part of the Class X Note proceeds to the pre-funding revenue ledger, which can subsequently be applied to purchase additional loans prior to the first payment date. The additional loans must conform to portfolio-wide covenants, which mitigate additional credit risk. Negative carry is partially mitigated by a partial reserve fund release on the first payment date, providing that 0.1% of the Class A to F Notes at closing will flow through the revenue priority of payments on the first payment date.

The transaction structure is designed to permit replenishment of the collateral portfolio prior to the step-up date provided that the Class A Notes are amortised in line with the target notional amount. DBRS notes that the target notional should be viewed as a soft target; accordingly, if the Issuer is unable to amortise the Class A Notes in line with the expectation, then no replenishment period ending event nor an event of default on the Class A Notes is triggered.

During the replenishment period, the Issuer will first allocate principal funds toward the amortisation of the Class A Notes until principal funds are sufficient to amortise the Class A Notes to the target notional before applying principal proceeds to purchase additional loans. DBRS has analysed a stressed collateral portfolio to represent potential deterioration in the characteristics that can impact the transaction, subject to portfolio-wide covenants.

As of 15 June 2018, the provisional portfolio, which is to be sold on the closing date, consisted of 1,210 mortgage loans with a total portfolio balance of GBP 214.9 million. The average loan per borrower was GBP 177,020. The weighted-average (WA) seasoning of the portfolio was 0.2 years with a WA remaining term of 26.8 years. The portfolio includes 14.6% of help-to-buy (HTB) loans, which are standard mortgages, but the HTB borrowers are supported by government loans (the equity loans, which rank in a subordinated position to the mortgages). HTB loans are used to fund the purchase of new-build properties with a minimum deposit of 5% from the borrowers. The WA current loan-to-value of the portfolio is 75.8%, which increased to 78.9% in DBRS’s analysis to include the HTB equity loan balances.

The entire portfolio is currently paying fixed interest rates, which will become floating rates upon completion of the initial fixed period. Interest rate risk is expected to be hedged through an interest rate swap. Approximately 9.8% of the portfolio by loan balance comprises loans originated to borrowers with at least one prior County Court Judgement and 4.8% are either interest-only-loans for-life or loans that pay on a part-and-part basis. DBRS notes that affordability for these loans is assessed on a capital-plus-interest basis. All loans in the portfolio are owner-occupied.

Credit enhancement for the Class A Notes is expected to be [18.00%] at closing and will be provided by the subordination of the Class B Notes to the Class F Notes (excluding the Class X Notes). The credit enhancement includes a cash reserve fund that is available to support the Class A to Class E Notes (and Class X Notes upon redemption of the Class E Notes). The cash reserve will be fully funded at closing to [2.10]% and is required to be funded to [2.00]% of the initial balance of the Class A to the Class F Notes (excluding the Class X Notes) following the first payment date. The [0.10]% release amount is intended to mitigate negative carry from pre-funding period.

The Class A Notes and the Class B Notes benefit from further liquidity support provided by a liquidity reserve fund, which can support the payment of senior fees and interest on the Class A and Class B Notes once it is funded (subject to a 10% Class B principal deficiency ledger condition). The liquidity reserve will not be funded on the closing date but will be funded from principal receipts to [2.00]% of the outstanding balance of the Class A and Class B Notes on subsequent payment dates if the general reserve fund falls below [1.50]% of the outstanding Class A to F Notes. Additionally, principal receipts may be used to provide liquidity support to payments of senior fees and interest on the Class A to E Notes subject to principal deficiency ledger conditions when a class is not the senior-most outstanding.

The Class X Notes are primarily intended to amortise using revenue funds. However, if excess spread is insufficient to fully redeem the Class X Notes when the Class E Notes are paid-down, principal funds will be used to amortise the Class X Notes in priority to the Class F Notes. In DBRS’s cash flow analysis, the Class F Notes are rendered partially collateralised as principal funds are diverted to amortise the Class X Notes. Such an event leads to a PDL debit; however, DBRS’s analysis finds there is insufficient excess spread to reduce the PDL balances and ensure the Class F Notes are fully collateralised. DBRS concludes that full repayment of the Class F Notes is considered unlikely in extreme scenarios such as large-scale redemptions or repurchase events.

The Issuer is expected to enter into a fixed-floating swap with BNP Paribas, London Branch 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 Citibank N.A., London Branch. The DBRS private rating of the Account Bank is consistent with the threshold for the Account Bank outlined in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology, given the rating assigned to the Class A Notes.

DBRS based its ratings primarily on the following analytical considerations:

-- The transaction’s capital structure, form and sufficiency of available credit enhancementand liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated portfolio default rate (PD), 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 analysed using PD and LGD outputs provided by the European RMBS Insight Model and 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 consistency of the legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the assignment of the assets to the Issuer.

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

The principal methodologies applicable to the ratings are “European RMBS Insight Methodology” and “European RMBS Insight: U.K. Addendum”.

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

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 KMC 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 parameters PD and LGD in its cash flow analysis. The additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes.

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

-- In respect of the Class A Notes, the PD and LGD at the AAA (sf) stress scenario of 30.4% and 53.0%.
-- In respect of the Class B Notes, the PD and LGD at the AA (sf) stress scenario of 26.9% and 48.2%.
-- In respect of the Class C Notes, the PD and LGD at the A (sf) stress scenario of 22.7% and 40.2%.
-- In respect of the Class D Notes, the PD and LGD at the BBB (high) (sf) stress scenario of 18.4% and 35.1%.
-- In respect of the Class E Notes, the PD and LGD at the BB (high) (sf) stress scenario of 13.0% and 26.9%.
-- In respect of the Class X Notes, the PD and LGD at the CCC (sf) stress scenario of 4.5% and 11.7%.

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

DBRS concludes the following impact on the Class X Notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade below C.
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to below C.
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade below C.
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade below C.
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade below C.
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade below C.
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade below C.
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade below C.

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
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 12 July 2018

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
-- 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.