DBRS Upgrades Four Tranches of Wetherby Securities 2017 Limited and Confirms All Remaining Classes

DBRS Ratings Limited (DBRS) upgraded its provisional ratings on four tranches of the unexecuted, unfunded financial guarantee (the Senior Guarantee) referencing a portfolio of commercial real estate (CRE) loans (the Portfolio) originated and managed by Lloyds Bank Plc (Lloyds) and its affiliates as follows:

-- GBP 4,710,547 Tranche V to BBB (sf) from BBB (low) (sf)
-- GBP 4,710,547 Tranche W to BBB (sf) from BBB (low) (sf)
-- GBP 5,047,014 Tranche X to BBB (low) (sf) from BB (high) (sf)
-- GBP 5,047,014 Tranche Y to BBB (low) (sf) from BB (high) (sf)

DBRS also confirmed its provisional ratings on the tranches listed below:

-- GBP 318,886,917 Tranche A at AAA (sf)
-- GBP 6,729,353 Tranche B at AAA (sf)
-- GBP 6,729,353 Tranche C at AAA (sf)
-- GBP 6,056,417 Tranche D at AA (high) (sf)
-- GBP 6,056,417 Tranche E at AA (high) (sf)
-- GBP 6,056,417 Tranche F at AA (high) (sf)
-- GBP 6,056,417 Tranche G at AA (sf)
-- GBP 6,056,417 Tranche H at AA (sf)
-- GBP 6,056,417 Tranche I at AA (sf)
-- GBP 6,392,885 Tranche J at AA (low) (sf)
-- GBP 6,392,885 Tranche K at AA (low) (sf)
-- GBP 6,056,417 Tranche L at A (high) (sf)
-- GBP 6,056,417 Tranche M at A (high) (sf)
-- GBP 6,392,885 Tranche N at A (sf)
-- GBP 6,392,885 Tranche O at A (sf)
-- GBP 6,056,417 Tranche P at A (low) (sf)
-- GBP 6,056,417 Tranche Q at A (low) (sf)
-- GBP 5,047,014 Tranche R at BBB (high) (sf)
-- GBP 5,047,014 Tranche S at BBB (high) (sf)
-- GBP 4,710,547 Tranche T at BBB (sf)
-- GBP 4,710,547 Tranche U at BBB (sf)

All trends are Stable.

The rating upgrades come amid the stable performance of the referenced loans between inception and November 2018. The notional amount for Tranche A has been reduced to GBP 318.9 million from GBP 487.2 million initially following partial loan amortisation and the repayments/removals of a loans from the portfolio, which has increased credit enhancement levels.

Wetherby Securities 2017 Limited (the Guarantor) is a synthetic balance sheet commercial mortgage-backed securities transaction structured in the form of a financial guarantee. Lloyds bought protection under a junior financial guarantee (JFG) for the first loss piece (FLP) from Wetherby Securities 2017 Limited but has not executed the contracts relating to the senior tranches (senior financial guarantee, SFG). Under the unexecuted guarantee agreement, Lloyds has transferred the remaining credit risk (initially from 7% to 100%) of the portfolio. DBRS only rates the SFG tranches, which were not executed at closing, and DBRS’s ratings remain provisional. The junior tranche was sold with the JFG executed. The financial guarantees reference 38 (51 at inception) U.K. loans, all with no additional subordinated debt, which are set to mature between June 2019 and December 2021. The transaction does not envisage any revolving period, and any refinanced or extended loans would be removed from the portfolio, with the exception of a distressed extension in part of a loan work-out plan.

With the repayment/removal of 13 loans, the portfolio’s total facility commitment (including loan parts outside of the structure) has reduced to GBP 1.5 billion from GBP 1.9 billion initially. As such, the guaranteed obligation notional amount (GONA) amortised to GBP 504.6 billion as of the November 2018 interest payment date (IPD) compared with GBP 672.9 million at inception. Lloyds could decide to grant additional loans to a borrower group (with or without additional property collateral) which would rank pro rata and pari passu to the guaranteed loans, increasing the borrower’s leverage. To reflect the possibility of further leverage increase, DBRS analysed the portfolio assuming further borrowers’ debt to the LTV levels that losses are contractually limited to in this transaction (see 27 December 2017 press release).

For syndicated loans, DBRS has underwritten the loans based on pre-syndication amount and then scaled back the debt amount to the securitised portion when calculating transaction-level proceeds.

There are 228 properties, with a market value of approximately GBP 2.9 billion securing the whole portfolio, a decrease since inception amid loan repayments/removals, which had 336 properties with a market value of approximately GBP 3.6 billion.

The geographical concentration of the portfolio, by market value, as of the November 2018 IPD remains stable with the top three regions being Greater London (68.8% versus 55.7% initially), Midlands (9.9% versus 10.6%) and South West (6.3% versus 20.0%). DBRS notes that although the portfolio is still concentrated in economically strong regions, the value of CRE assets is strongly linked to the economical performance of the U.K. economy, which is highly dependant on the result of Brexit. DBRS did not apply any additional value stress on the portfolio in this rating action; however, additional stress might be warranted following a stressed Brexit scenario and/or if DBRS downgrades the rating of the UK below its current AAA level.

DBRS followed the same method as initially in sizing the portfolio and compared the sizing outcome with the 2018 November reported GONA and concluded the rating upgrades for the bottom for tranches and confirmations for all remaining tranches. In DBRS’s view, the increased credit enhancement for more senior tranches is offset by the higher concentration of the remaining reference portfolio.

DBRS will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

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

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”.

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 Lloyds.

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.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Mattia Pauciullo.

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”):

A decrease of 2.5%, 5% and 10% in the DBRS values, derived by more conservative DBRS’s underwriting assumptions, would lead to a downgrade of the rated tranches as noted below:

Tranche A Notes Risk Sensitivity:

--5% decline in DBRS value, expected rating of Class A Notes to AA (high) (sf)
--10% decline in DBRS value, expected rating of Class A Notes to AA (sf)

Tranche B Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class B Notes to AA (high) (sf)
--5% decline in DBRS value, expected rating of Class B Notes to AA (high) (sf)
--10% decline in DBRS value, expected rating of Class B Notes to AA (sf)

Tranche C Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class C Notes to AA (high) (sf)
--5% decline in DBRS value, expected rating of Class C Notes to AA (sf)
--10% decline in DBRS value, expected rating of Class C Notes to AA (low) (sf)

Tranche D Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class D Notes to AA (high) (sf)
--5% decline in DBRS value, expected rating of Class D Notes to AA (sf)
--10% decline in DBRS value, expected rating of Class D Notes to AA (low) (sf)

Tranche E Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class E Notes to AA (sf)
--5% decline in DBRS value, expected rating of Class E Notes to AA (sf)
--10% decline in DBRS value, expected rating of Class E Notes to A (high) (sf)

Tranche F Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class F Notes to AA (sf)
--5% decline in DBRS value, expected rating of Class F Notes to AA (low) (sf)
--10% decline in DBRS value, expected rating of Class F Notes to A (high) (sf)

Tranche G Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class G Notes to AA (low) (sf)
--10% decline in DBRS value, expected rating of Class G Notes to A (sf)

Tranche H Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class H Notes to AA (low) (sf)
--5% decline in DBRS value, expected rating of Class H Notes to A (high) (sf)
--10% decline in DBRS value, expected rating of Class H Notes to A (sf)

Tranche I Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class I Notes to AA (low) (sf)
--5% decline in DBRS value, expected rating of Class I Notes to A (high) (sf)
--10% decline in DBRS value, expected rating of Class I Notes to A (low) (sf)

Tranche J Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class J Notes to A (high) (sf)
--5% decline in DBRS value, expected rating of Class J Notes to A (sf)
--10% decline in DBRS value, expected rating of Class J Notes to A (low) (sf)

Tranche K Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class K Notes to A (high) (sf)
--5% decline in DBRS value, expected rating of Class K Notes to A (sf)
--10% decline in DBRS value, expected rating of Class K Notes to A (low) (sf)

Tranche L Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class L Notes to A (sf)
--5% decline in DBRS value, expected rating of Class L Notes to A (sf)
--10% decline in DBRS value, expected rating of Class L Notes to A (low) (sf)

Tranche M Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class M Notes to A (sf)
--5% decline in DBRS value, expected rating of Class M Notes to A (low) (sf)
--10% decline in DBRS value, expected rating of Class M Notes to BBB (high) (sf)

Tranche N Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class N Notes to A (low) (sf)
--5% decline in DBRS value, expected rating of Class N Notes to A (low) (sf)
--10% decline in DBRS value, expected rating of Class N Notes to BBB (high) (sf)

Tranche O Notes Risk Sensitivity:
--2.5% decline in DBRS value, expected rating of Class O Notes to A (low) (sf)
--5% decline in DBRS value, expected rating of Class O Notes to A (low) (sf)
--10% decline in DBRS value, expected rating of Class O Notes to BBB (high) (sf)

Tranche P Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class P Notes to A (low) (sf)
--10% decline in DBRS value, expected rating of Class P Notes to BBB (high) (sf)

Tranche Q Notes Risk Sensitivity:
--5% decline in DBRS value, expected rating of Class Q Notes to BBB (high) (sf)
--10% decline in DBRS value, expected rating of Class Q Notes to BBB (sf)

Tranche R Notes Risk Sensitivity:
--10% decline in DBRS value, expected rating of Class R Notes to BBB (sf)

Tranche S Notes Risk Sensitivity:
--10% decline in DBRS value, expected rating of Class S Notes to BBB (sf)

Tranche U Notes Risk Sensitivity:
--10% decline in DBRS value, expected rating of Class U Notes to BBB (low) (sf)

Tranche V Notes Risk Sensitivity:
--10% decline in DBRS value, expected rating of Class V Notes to BBB (low) (sf)

Tranche W Notes Risk Sensitivity:
--10% decline in DBRS value, expected rating of Class W Notes to BB (high) (sf)

Tranche X Notes Risk Sensitivity:
--10% decline in DBRS value, expected rating of Class X Notes to BB (high) (sf)

Tranche Y Notes Risk Sensitivity:
--10% decline in DBRS value, expected rating of Class U Notes to 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: Mattia Pauciullo, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 27 December 2017

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.

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

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.