DBRS Finalises Provisional Ratings Assigned to Notes Issued by Trinidad Mortgage Securities 2018-1 PLC

DBRS Ratings Limited (DBRS) finalised the following provisional ratings to the notes issued by Trinidad Mortgage Securities 2018-1 PLC (TMS18 or the Issuer):

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

The ratings assigned to the Class A notes addresses the timely payment of interest to the noteholders and the ultimate payment of principal on or before the legal final maturity date. The ratings on the Class B, C, D, E and F notes address the ultimate payment of both principal and interest on or before the legal final maturity date. Deferral of interest is permitted on the Class B to F 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 G, H, X or Z notes that were issued.

DBRS’s final ratings on the Class B, E and F notes are higher than the provisional ratings assigned on 12 June 2018 because of lower than anticipated spreads on the notes, a later step-up date and a larger reserve fund. There is higher excess spread modelled for the final ratings, positively supporting the notes.

TMS18 is a securitisation of three distinct residential mortgage loan portfolios, each originated by a different lender. The sub-portfolios each have different loan, borrower and/or property characteristics. The mortgage portfolio, which includes both buy-to-let (BTL) and owner-occupied loans, aggregates to GBP 276.4 million (as of May 2018).

The largest subset (62.0% of the total portfolio by outstanding balance) was originated by Magellan Homeloans Limited (MHL) and is a newly originated owner-occupied collection of loans, including credit repair loans. Credit repair loans (19.4% of the portfolio) are granted to borrowers with heavy adverse features due to impaired credit histories, including past bankruptcies, individual voluntary agreements (IVAs) and/or county court judgements (CCJs). Alongside the credit repair loans, MHL has included complex-prime products in the transaction. These products are more aligned with typical U.K. non-conforming mortgage loans, albeit without interest-only loans or those granted to borrowers who self-certify income.

Thrones 2013-1 Plc (T13) —a mixed BTL and owner-occupied portfolio—originated between 2003 and 2008 by Heritable Bank PLC (29.6% of the pool) will also be included in the transaction. Heritable Bank went into administration in October 2008, and the T13 asset portfolio was purchased by funds managed by Mars Capital Finance Limited (MCFL) in May 2013. DBRS currently rates the T13 securitisation transaction, which is to be called on the first optional redemption date falling in July 2018. Any funds that are not applied to purchase the T13 loans will be applied as available principal funds, in a sequential manner.

The remainder of the collateral is the Camael portfolio (8.4% of the pool). Camael was originated by Cyprus Popular Bank Public Co Ltd (formerly Marfin Popular Bank Public Co. Ltd and trading as Laiki Bank or Marfin Popular Bank). The portfolio consists of mortgage loans backed by residential and commercial properties, which are both BTL and owner-occupied. All mortgages are British-pounds-sterling denominated and secured by one or more properties located in the United Kingdom. The originator collapsed in 2012 and was rescued by the government of Cyprus. In March 2013 the 'good' assets of the originator (including Camael loans) were transferred to Bank of Cyprus before being acquired by MCFL in 2014.

The transaction structure allows the Issuer to purchase further MHL-originated mortgage loans before the first interest payment date (the pre-funded loans). These assets are expected to be purchased using funds standing to the credit of the pre-funding ledger, which was funded at closing by an over-issuance of notes. DBRS has assumed a worst-case pre-funding portfolio given the conditions and has stressed the negative carry arising from the pre-funding reserve. Any funds that are not applied to purchase additional loans will be applied to amortise the rated notes, pro-rata.

As of 31 May 2018, the provisional portfolio consisted of 1,842 loans with an average outstanding balance of GBP 152,207, aggregating to GBP 271.1 million. Approximately 20.6% of the loans by outstanding balance are BTL mortgage loans; as is common in the U.K. mortgage market, the BTL 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. In total, 28.1% of the portfolio by loan amount is interest only, all of which are either T13 or Camael loans.

The mortgage loans are relatively high yielding, with a weighted-average coupon of 5.0% and a weighted-average reversionary margin of 3.5%, assuming the standard variable rate (SVR) is set at the floor of 2.5% over LIBOR. Approximately 14.4% of the mortgage loans have prior CCJs and 14.3% have either a prior bankruptcy or IVAs amongst other features. The Camael loans have no information provided regarding borrower characteristics (including adverse credit history, employment status and income amongst others). DBRS has assumed the worst-case scenarios for the missing Camael portfolio borrower characteristics. The weighted-average current loan-to-value ratio of the portfolio is 64.8% (including DBRS haircuts to valuations for commercial properties and/or non-surveyor valuations).

The transaction is structured to initially provide 25.6% of credit enhancement (represented as a percentage asset portfolio) to the Class A notes. This includes subordination of the Class B to H notes (the Class X and Z notes are not collateralised by mortgage loans) as well as the non-amortising general reserve fund (GRF), which is funded to 3.65% of the mortgage-backed notes at issuance. The GRF can be applied to cover shortfalls in senior fees, interest on the senior-most outstanding class of notes and to clear principal deficiency ledger (PDL) balances on the rated notes’ sub-ledgers. Further liquidity support is provided by the liquidity reserve fund (LRF), which is not initially funded but will be funded from closing in a senior position atop the pre-enforcement principal priority of payments to 4% of the Class A notes if the GRF falls below 2% of the outstanding balance of the Class A to H notes. The LRF only provides liquidity support to the Class A notes and is applied after revenue collections and the GRF. If drawn from, the LRF is replenished from the pre-enforcement revenue priority of payments and release amount from available principal funds.

Principal funds can be diverted to pay revenue liabilities, insofar as a shortfall in senior fees, 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 eight sub-ledgers that will track principal used to pay interest, as well as realised losses, in a reverse sequential order that begins with the Class H sub-ledger.

The fixed-rate assets and the floating-rate liabilities give rise to interest rate risk. This is partially hedged using an interest rate cap (IRC), provided by NatWest Markets PLC. The IRC is struck at 2% with a pre-determined notional of the outstanding balance of the fixed-rate loans, assuming no prepayments. There is also basis risk in the transaction that arises as there are loans linked to the SVR that is set by the legal-title holders. This basis risk is mitigated through a transaction floor on the SVR. The floor, which has been analysed by DBRS, is three-month LIBOR plus 2.5%.

Receipts from the mortgage loans are deposited into the collections account at Barclays Bank PLC and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept on a weekly basis to the Issuer’s account. 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. Citibank, N.A., London branch 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.

At closing, the Issuer purchased the beneficial title to the mortgage loan portfolio from the beneficial-title seller (BTS). Legal title remains with the two legal-title holders – MHL for Magellan loans and MCFL for Camael and T13. The legal-title holders will continue to hold the title to the mortgages on trust for the Issuer. Certain perfection events will trigger the Issuer to acquire the title to the mortgages.

The mortgage sale agreement includes various asset warranties, which are considered in line with U.K. RMBS transaction standard, albeit with certain awareness limitations. However, DBRS considers the remedial action following a breach of asset warranty to be weaker than standard. The asset warranties are time limited (no claims can be made following 60 months from the closing date), which is atypical for a newly originated U.K. mortgage portfolio. Furthermore, the repurchase obligation is primarily held with the BTS (Magellan Funding No. 2 DAC), a special-purpose vehicle. As such, no guarantee is provided that the BTS has sufficient resources to either indemnify or repurchase loans, as applicable. No quantitative adjustment has been made by DBRS in the analysis of TMS18 because of the asset warranty review. DBRS has observed similar time limitation and awareness clauses in other U.K, RMBS transactions, however, these are typically seasoned portfolios. The seasoning is a risk mitigant for the Camael and T13 portfolios (ten and 11 years for Camael and T13, respectively); however, as the Magellan portfolio consists of recent originations, there is a limited track record, and no Magellan loan has been repossessed to date.

DBRS reviewed the transaction opinion, financial regulation opinion (review of the lender’s standard form documentation) and an additional third-party report (including a platform review and sample re-underwriting review) to understand the possibility of asset warranty breaches in this transaction. DBRS will monitor the transaction and will be notified of asset warranty breaches

As part of its cash flow assessment, DBRS applied two default timing curves (front-ended and back-ended), 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 were 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 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 methodoloiesy.

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 this rating include MHL, MCFL and Deutsche Bank AG, London Branch.

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 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.

The following scenarios constitute the parameters used to determine the ratings (the Base Case):
--In respect of the Class A Notes, a portfolio default rate (PD) and loss given default (LGD) at the AAA (sf) stress scenario of 50.1% and 38.2%, respectively.
--In respect of the Class B Notes, the PD and LGD at the AA (sf) stress scenario of 46.6% and 33.9%, respectively.
--In respect of the Class C Notes, the PD and LGD at the A (low) (sf) stress scenario of 39.5% and 26.3%, respectively.
--In respect of the Class D Notes, the PD and LGD at the BBB (low) (sf) stress scenario of 33.6% and 20.0%, respectively.
--In respect of the Class E Notes, the PD and LGD at the BB (sf) stress scenario of 26.8% and 17.3%, respectively.
--In respect of the Class F Notes, the PD and LGD at the B (high) (sf) stress scenario of 21.8% and 15.2%, 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 (low) (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 (low) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (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 (low) (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 A (high) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- A 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:
-- 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 (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 (high) (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (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 BBB (low) (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 D 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 (low) (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 B (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 B (high) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to B (high) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to below-B.
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (sf).
-- A 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to below-B.

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

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 June 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.

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

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