DBRS Finalises Provisional Ratings of Together Asset Backed Securitisation 2018-1 Plc

DBRS Ratings Limited (DBRS) finalised its provisional ratings of the notes issued by Together Asset Backed Securitisation 2018-1 Plc (TABS 2018) as follows:

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

The final margins applicable to the notes are lower than the provisional margins. This has resulted in DBRS’s final rating assigned to the Class B notes to differ from the provisional rating assigned on 23 October 2018.

The rating assigned to the Class A notes addresses the timely payment of interest to the noteholders on every monthly interest payment date and the ultimate repayment of principal by the legal final maturity date in July 2050. The provisional ratings on the Class B, C and D notes address the ultimate payment of interest and repayment of principal by the legal final maturity date. Once the Class A notes are fully redeemed, the Class B notes followed by the next most senior note outstanding will then be rated for timely payment of interest. DBRS does not rate the Class R and Z notes or residual certificates.

TABS 2018 is the second public securitisation of residential mortgages by Together Financial Services Limited. The loans have been originated by Blemain Finance Limited (BFL), Together Personal Finance Limited (TPFL), Together Commercial Finance Limited (TCFL), each of which belong to the Together Group of companies. The mortgage portfolio expected to be securitised comprises first- and second-lien home loans. Each of the originators will be the servicer of the loans they have originated. Link Mortgage Services Limited acts as the backup servicer.

As of 10 October 2018, the provisional portfolio consisted of 3,899 loans with an average outstanding balance of GBP 73,579 per borrower, aggregating to GBP 286,882,809. Approximately 15.4% of the loans by outstanding balance are buy-to-let mortgages. As is common in the U.K. mortgage market, these loans are largely scheduled to pay interest only monthly with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage (41.6% of the loans in the pool are interest only). Just over half of the mortgages in the portfolio (56.6% by loan balance) have an existing prior charge over the respective property.

The mortgages are high yielding with a weighted-average coupon of 7.2% and newly originated with a weighted-average seasoning of 13.8 months. Around 16.1% of the mortgage portfolio have prior county court judgements. The weighted-average current loan-to-value (CLTV) ratio of the portfolio is 55.1%, with no loan exceeding a 100% CLTV ratio.

The transaction is structured to initially provide 22.7% of credit enhancement to the Class A notes. This includes subordination of the Class B to Z notes (Class R notes are not collateralised) as well as the non-amortising general reserve fund.

The general reserve fund will be funded from the issuance of the Class R notes and can be applied to cover shortfalls in senior fees, pay interest on Classes A to D and clear principal deficiency ledger (PDL) balances on the Class A to D sub-ledgers. This has a balance equal to 2.5% of the initial balance of the Class A to D notes minus the required balance of the liquidity reserve. The liquidity reserve is available to support senior fees and interest shortfalls on the Class A notes following the application of revenue but prior to the general reserve being applied. Whilst the Class A notes are outstanding, this will have a required balance equal to 1.5% of the outstanding balance of the Class A notes, subject to a floor of 1% of the initial balance of the Class A notes. As this liquidity reserve amortises, the excess amounts will become part of the revenue available funds and allow the general reserve to increase in size. The amortisation of this liquidity reserve is subject to performance of the transaction and will not amortise should the notes not be fully redeemed on the optional redemption date.

Principal funds can be diverted to pay shortfalls in senior fees, Class A interest and interest due on the most senior outstanding class of notes which remain 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 five 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 Z sub-ledger.

A portion of the portfolio is initially fixed rate, while the liabilities pay a floating rate of interest, which give rise to interest rate risk. This is mitigated by an interest rate cap provided by Natixis S.A, London Branch. The documents contain downgrade provisions in line with both the first- and second-rating thresholds defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

On the interest payment date in November 2022, the coupon due on the notes will step up and the notes may be optionally called. The notes must be redeemed at par plus pay any accrued interest.

Monthly mortgage receipts are deposited into the collections account at National Westminster Bank Plc (NatWest) and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept within two business days into the account bank. 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-UK) is the account bank for the transaction. DBRS’s private rating of Elavon-UK is consistent with the minimum institution rating given the ratings assigned to the Class A notes, as described in 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), 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 prepayment rate 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 to the ratings are the “European RMBS Insight Methodology” and the “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 Together and Lloyds Bank Plc (the arrangers).

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 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.

To assess the impact of changing the transaction parameters on these ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”).

DBRS expected a base case probability of default (PD) and loss given default (LGD) for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

The Base Case PD and LGD of the current pool of receivables, respectively, for each tranche are:
-- Class A at AAA (sf): 36.2% and 62.3%
-- Class B at AA (high) (sf): 34.4% and 59.5%
-- Class C at A (high) (sf): 29.4% and 51.5%
-- Class D at BBB (high) (sf): 23.5% and 41.0%

For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to decrease to A (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A notes would be expected to decrease to A (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to decrease to BBB (high) (sf), ceteris paribus.

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

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: Matt Albin, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 23 October 2018

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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
-- 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.