DBRS Assigns Provisional Ratings to Towd Point Mortgage Funding 2018-Auburn 12 Plc

DBRS Ratings Limited (DBRS) assigned provisional ratings to the notes to be issued by Towd Point Mortgage Funding 2018-Auburn 12 Plc (Auburn 12 or the Issuer) as follows:

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

The Class F notes are not rated.

The Class A notes are provisionally rated for timely payment of interest and ultimate payment of principal. The Class B notes, Class C notes, Class D notes and Class E notes are provisionally rated for ultimate payment of interest (subject to the net weighted-average coupon cap (Net WAC Cap)) and ultimate payment of principal. The Net WAC Cap is calculated as the WAC due on the asset portfolio less the senior fee cap of 0.3% divided by the floating-rate note percentage, which is the outstanding balance of the Class A to Class E Notes divided by the outstanding balances of the mortgage portfolio. In the event that the interest paid to the Class A to Class E Notes is lower than the coupon based on the net WAC cap, the difference is to be paid to the noteholders subordinated in the revenue priority of payments as net WAC additional amounts. Such payments are not addressed in the ratings assigned by DBRS.

Auburn 12 is the refinancing of Auburn Securities 9 plc (Auburn 9). Auburn 12 is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom. The issued notes will be used to fund the purchase of U.K. buy-to-let (BTL) and owner-occupied residential mortgage loans originated by Capital Home Loans Limited (CHL). These loans currently collateralise the outstanding notes under the Auburn 9 transaction. CHL ceased mortgage originations in 2008. Servicing is undertaken by CHL with Homeloan Management Limited (HML) expected to be appointed as Backup Servicer. The legal title to the residential mortgage loans is held by CHL.

CHL is an experienced entity in the BTL sector and originated a number of residential mortgage-backed securities transactions before 2008 through its Auburn securitisation platform. The Auburn programme was established in November 1998 (Auburn 1) with eight further stand-alone securitisations publicly issued. The latest securitisations originated post-2008 by CHL are Auburn 9 (July 2015), Towd Point Mortgage Funding 2016-Auburn 10 Plc (October 2016) and Towd Point Mortgage Funding 2017-Auburn 11 Plc (February 2017).

Credit enhancement is expected to be provided in the form of subordination of the junior notes.

The credit enhancement available to the Class A notes is 16.9%, provided by subordination of the Class B, Class C, Class D, Class E and Class F notes. Credit enhancement available to the Class B notes is 10.3%, Class C notes is 7.5%, Class D notes is 5.0% and Class E notes is 2.4%. Credit enhancement percentages are expressed as a percentage of the portfolio balance.

The liquidity support for the Class A notes is initially available through a liquidity facility provided by Salisbury Receivables Company LLC (on an uncommitted basis) and Barclays Bank PLC (Barclays; rated “A” with a Stable trend by DBRS) (on a committed basis). The liquidity facility is equal to 1.7% of the Class A notes and is available until the First Optional Redemption Date (FORD). From the FORD, the liquidity facility will be replaced by the liquidity reserve fund (LRF), which has a target balance of 1.7% of the Class A notes funded by the Senior Deferred Coupon (SDC) Ledger. To the extent that the LRF has not been funded to the required level, the liquidity facility will continue to support the Class A notes’ interest payments. Any shortfalls in funding the LRF up to the required amount will be made good using excess spread after crediting the Class E notes’ principal deficiency ledger (PDL) in accordance with the interest priority of payments. Further shortfalls can be funded by principal receipts from the assets. Until the point where the LRF reaches the required level, for the first time, ignoring any debits (usage of the LRF to support the Class A notes’ interest payments), principal available funds will be used to top up any interest payment dates (IPDs) after the FORD. After the LRF reaches the required level for the first time, principal funds will no longer be used to replenish the LRF to the required level. The LRF is floored at 1.00% of the initial Class A notes’ balance.

Liquidity to the junior notes will be provided by the Excess Cash Flow Reserve Fund (XSRF), which will come into existence from closing and is funded via excess spread. On the IPD, when all the Class A notes outstanding have been paid, the amounts in the LRF will be used to fund the XSRF. On the FORD, the XSRF will be funded by any amount left in the SDC Ledger after the funding of the LRF. On each IPD after the FORD, the amounts trapped in the SDC Ledger minus the senior fees payable will be used to fund the XSRF. The XSRF will be used to support shortfalls on payment of interest to the Class B, Class C, Class D and Class E notes.

0.3% p.a. of the aggregate principal balance of the loans at the end of each of the three months in a collection period, minus senior expenses, is set aside from the available revenue. Such amounts are credited to the SDC Ledger each IPD, until the FORD. There is no target amount for the funds collected in the SDC Ledger. The amounts credited to the SDC Ledger are used to pay senior fees, interest on the drawn amount of the liquidity facility, Class A note interest and Class A note PDL.

The liquidity support to the notes is further enhanced by the use of principal receipts to support the most-senior outstanding class of notes.

The provisional portfolio balance as of 31 May 2018 equates to approximately GBP 393 million. The portfolio is significantly seasoned with a weighted-average seasoning of 11.5 years. The majority of the portfolio was originated between 2005 and 2008 (91.6%). DBRS calculated the weighted-average current LTV (WACLTV) based on the current loan balance and original property valuation of 58.1%. The indexed WACLTV is 58.2%. Of the mortgage portfolio, 93.1% comprises interest-only mortgage loans. The high concentration is a consequence of the BTL loans in the portfolio (96.5%). The performance of BTL loans have been relatively stronger than owner-occupied loans.

The weighted-average coupon generated by the mortgage loans stands at 2.1%. The interest rate is low, as the loans are indexed to the bank base rate (98.7%). The remaining 1.3% is linked to a standard variable rate. The interest payable on the rated notes is linked to three months’ GBP LIBOR. The average annualised prepayment rate (CPR) on the Auburn 9 mortgage portfolio has trended at approximately 7% over the last two years; however, DBRS notes the transaction structure is sensitive to low CPR rates. DBRS will continue to monitor CPR rates as part of its surveillance process.

CHL is appointed as the servicer with HML appointed as the backup-servicer. The monthly receipts are deposited into the collections account at Barclays and held on trust by the legal titleholder in accordance with the collection account declaration of trust. The funds credited to the collection are swept daily into the transaction account. The daily sweep of funds mitigates the potential risk of disruption in servicing, particularly following a servicer event of default, including insolvency. The funds credited to the collections account are swept daily into the transaction account in the name of the Issuer, which is held with HSBC Bank plc. The legal titleholder has declared a trust over the funds in the collections account in favour of the Issuer. The transaction documents include account bank rating triggers and downgrade provisions that lead DBRS to conclude that the account bank satisfies DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The mortgage sale agreement contains representations and warranties given by CHL in relation to the portfolio. Upon breach of representation or warranties, CHL is required to repurchase or indemnify the Issuer. CHL may have limited resources at its disposal to fund such a repurchase. Given the significant seasoning of the loans in the mortgage portfolio, loans in breach of warranties would have been expected to be identified during the earlier life of the loans. Any future breach of representation or warranty is expected to be limited.

The rating assignments are based on a review by DBRS of the following analytical considerations:

-- Transaction capital structure, proposed ratings and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and ability of the servicer to perform collection activities. DBRS calculated probability of default, loss given default (LGD) and expected loss 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 modelled using portfolio default (PD) rates and LGD outputs provided by the European RMBS Insight Model. Transaction cash flows were projected using INTEX DealMaker.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

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.

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 FirstKey Mortgages LLC, Morgan Stanley & Co. International plc and their agents.

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 (to be) 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 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”):

-- In respect of the Class A notes, a PD of 23.3% and LGD of 53.4%, corresponding to the AAA rating stress scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 18.8% and LGD of 47.3%, corresponding to the AA(low) rating stress scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 14.5% and LGD of 40.9%, corresponding to the A(low) rating stress scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 10.7% and LGD of 34.5%, corresponding to the BBB(low) stress rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E Notes, a PD of 6.3% and LGD of 28.4%, corresponding to the BB(low) rating stress scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS concludes the following impact on the rated notes:

Class A Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class A Notes to AA(high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA(low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class A Notes to AA(high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class A Notes to AA(low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).

Class B Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class A Notes to A(high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A(low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class A Notes to A(high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class A Notes to A(low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A(low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB(high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB(high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB(low) (sf).

Class C Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class C Notes to BB(high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB(high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class C Notes to BB(high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class C Notes to BB(high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB(high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB(low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB(low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB(low) (sf).

Class D Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class D Notes to B (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B(low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class D Notes to B (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class D Notes to B (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to B(low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to B(low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to B(low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to C (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: Kali Sirugudi, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 23 July 2018

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

-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- 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

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.