DBRS Finalises Provisional Ratings of Castell 2018-1 PLC

DBRS Ratings Limited (DBRS) finalised its provisional ratings of the notes issued by Castell 2018-1 PLC as follows:

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

The Class X notes and Class Z notes are not rated.

Castell 2018- 1 Plc (the Issuer) is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom. The Rated Notes will be used to fund the purchase of U.K. second-lien mortgage loans originated by Optimum Credit Limited (Optimum Credit or the Seller). Optimum Credit, established in November 2013, is a specialist provider of second-lien mortgages based in Cardiff, Wales. The majority of loan originations are sourced through brokers, all of whom have been regulated by the Financial Conduct Authority under the Mortgage Code of Conduct and Business since March 2016. The originator is owned by Patron Capital Partners, a Western European private equity real estate fund with its main investment advisor, Patron Capital Advisers LLP, based in London. On 5 October 2018, a sale and purchase agreement was signed pursuant to which the entire issued share capital of Optimum Holding S.A. will be sold to Pepper Money (PMB) Limited (Pepper), subject to relevant regulatory approval.

The mortgage portfolio will be serviced by Optimum Credit with Link Mortgage Services Limited in place as the back-up servicer. Optimum Credit is considering delegating all servicing to Pepper after closing of the sale. Intertrust Management Limited has been appointed as a back-up servicer facilitator.

As of 24 October 2018, the portfolio consisted of 7,054 mortgage loans with a total portfolio balance of GBP 311.4 million. The average loan per borrower is GBP 44,138. The weighted-average (WA) seasoning of the portfolio is 8.3 months with a WA remaining term of 16.0 years. The WA current loan-to-value, inclusive of any prior ranking balances of the portfolio, is 63.6%. Within the portfolio, 66.5% of the loans are fixed-rate loans before switching to floating rate upon completion of the initial fixed period. The remainder are floating-rate loans for life. Interest rate risk is expected to be hedged through a fixed-floating balance guaranteed interest rate swap, with further support provided by excess spread. Approximately 3.8% of the portfolio by loan balance comprises loans originated to borrowers with a prior County Court Judgement, and 0.9% of the borrowers are in arrears.

Credit enhancement for the Class A notes is 30.65% and is provided by the subordination of the Class B notes to the Class Z notes (excluding the uncollateralised Class X notes). The credit enhancement includes an amortising cash reserve fund that is available to support the Class A to Class F notes. The cash reserve will be fully funded at closing and is required to be funded at the lower of 2.25% of the initial balance of the Class A to the Class Z notes (excluding the Class X notes) or 4.0% of the current balance of the Class A to the Class Z notes (excluding the Class X notes). The cash reserve is replenished subject to a floor of 1.0% of the Class A to Class Z notes (excluding the Class X notes).

The Class A notes and the Class B notes benefit from further liquidity support provided by an amortising liquidity reserve, which can support the payment of senior fees and interest on the Class A and Class B notes. The liquidity reserve fund will be unfunded at closing, with the required amount of 1.5% of the outstanding balance of the Class A and B notes. Initially, the liquidity reserve will be funded through principal receipts. Any subsequent use of the liquidity reserve fund will be replenished from revenue receipts. Principal receipts may be used to provide liquidity support to payments of senior fees and interest on the Class A and Class B notes subject to principal deficiency ledger conditions.

The Issuer is expected to enter into a fixed-floating balance guaranteed swap with NatWest Markets 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.

The ratings for all the Rated Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date. DBRS based its ratings primarily on the following analytical considerations:

-- The transaction capital structure, form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated portfolio default rates (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. Transaction cash flows were analysed 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 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 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 Optimum Credit and its 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.

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 32.8% and 86.5%
-- In respect of the Class B notes, the PD and LGD at the AA (low) (sf) stress scenario of 29.6% and 83.0%
-- In respect of the Class C notes, the PD and LGD at the A (low) (sf) stress scenario of 23.0% and 71.9%
-- In respect of the Class D notes, the PD and LGD at the BBB (high) (sf) stress scenario of 20.4% and 67.6%
-- In respect of the Class E notes, the PD and LGD at the BB (high) (sf) stress scenario of 14.4% and 56.1%
-- In respect of the Class F notes, the PD and LGD at the B (low) (sf) stress scenario of 7.5% and 31.4%

Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

Class B notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Class C notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Class D notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)

Class E notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

Class F notes risk sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of C (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of C (sf)
-- 50% increase in PD, expected rating of C (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of C (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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: Rehanna Sameja, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 8 October 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.