DBRS Takes Rating Actions on Belmont Green Funding 1 Limited Following Transaction Restructuring

DBRS Ratings Limited (DBRS) discontinued its ratings of the Class A1 and Class A2 notes issued by Belmont Green Funding 1 Limited (the Debtor or the Facility). The discontinuations reflect the nil outstanding balance of the Class A1 notes (the Original Class A1 Notes) and Class A2 notes (the Original Class A2 Notes) as of 19 December 2018.

DBRS assigned the following ratings to the GBP 300 million commitment, represented by the Class A1a, Class A1b and Class A1c notes (together, the Class A1 Notes), and the Class A2a, Class A2b and Class A2c notes (together, the Class A2 Notes; together with the Class A1 Notes, the Class A Notes) that can be issued by the Debtor:
-- Class A1a Notes: AAA (sf)
-- Class A2a Notes: AAA (sf)
-- Class A1b Notes: AA (sf)
-- Class A2b Notes: AA (sf)
-- Class A1c Notes: A (low) (sf)
-- Class A2c Notes: A (low) (sf)

The rating actions follow a review of the transaction in the context of a restructuring that became effective on 19 December 2018 (the Effective Date).

The ratings assigned to the Class A1a and Class A2a notes represent the timely payment of interest to the noteholders on every monthly payment date and the ultimate payment of principal by the legal final maturity date (the Interest Payment Date in October 2063). The ratings assigned to the Class A1b, Class A2b, Class A1c and Class A2c notes represent the timely payment of interest to the noteholders on every monthly payment date after such classes of notes become the most senior notes outstanding and the ultimate payment of all interest and principal by the legal final maturity date.

Amendments:
On 19 December 2018, the following key amendments to the transaction structure became effective:
-- Restructuring of the Original Class A1 Notes into Class A1a, A1b and A1c notes and restructuring of the Original Class A2 Notes into Class A2a, A2b and A2c notes. Class A1a and Class A2a notes rank pari passu, Class A1b and A2b notes rank pari passu and subordinated to the Class A1a and A2a notes, and Class A1c and A2c notes rank pari passu and subordinated to the Class A1b and A2b notes. The credit enhancement for each class must comply with their respective Minimum Subordination Amount (at least 21.75% for Class A1a/A2a, at least 17% for Class A1b/A2b, and at least 10% for Class A1c/A2c).
-- The Class A Notes interest will no longer have a second margin step-up.
-- Allow interest deferral for Class A1b/A2b and Class A1c/A2c notes, until such classes of notes become the most senior notes outstanding.
-- After 36 months after the Effective Date, the Class A noteholders may receive a 0.5% Senior Notes Excess Consideration Amount in a subordinated position in the Pre-Acceleration Revenue Priority of Payments. DBRS does not rate the Senior Notes Excess Consideration Amount.
-- Increase the Total Commitments to GBP 300,000,000 from GBP 275,000,000.
-- Extend the Final Maturity Date by two years to the Interest Payment Date in October 2063.
-- Decrease Target Credit Enhancement Percentage to 10% from 13%.
-- Add a Class B Note Liquidity Reserve Fund, which is used to pay the Class B Notes interest. The minimum required amount is equal to two months of interest on the Class B Notes.

The transaction is a secured funding facility provided by NatWest Markets Plc (NWM, Critical Obligations Rating (COR): “A”, Issuer rating BBB (high) – Stable) to the Debtor. The transaction initially closed in October 2016, and was subsequently amended in March 2017, October 2017 (the Effective Date).

The Debtor can purchase residential mortgage loans originated by Belmont Green Finance Limited (BGFL, not rated by DBRS), through its Vida Homeloans brand. All mortgages are sourced, or are to be sourced, through a network of intermediaries. BGFL is a specialist lender in the UK that offers a full suite of mortgage products: owner-occupied, buy-to-let (BTL), adverse credit, interest-only and second charge. BGFL began lending in Q3 2016, after receiving Financial Conduct Authority approval.

The Facility is structured to permit a maximum advance rate of 90% for the Class A Notes, hence providing a minimum level of credit enhancement for the Class A1c and Class A2c Notes equal to 10%. The 10% credit enhancement consists of the subordination of the subordinated loan (provided by BGFL) and mezzanine Class B notes. In addition to the 10% credit enhancement, the Class A1b/A2b Notes also benefit from a subordination of 7% provided by the Class A1c/A2c Notes, and the Class A1a/A2a Notes also benefit from the subordination provided by the Class A1b/A2b and Class A1c/A2c Notes, which comprise a total of 11.75% of the total commitment.

The Class A2 notes will hold the initial commitment. The Class A1 notes may be issued in the future. If issued, the proceeds of a Class A1 note issuance will be applied to redeem the Class A2 notes. The proceeds of Class B note issuances will be utilised to either purchase further mortgages or repay the subordinated loan. DBRS does not rate the Class B notes and the subordinated loan.

The transaction is structured so that the Class A1a and A2a notes will have the same credit enhancement and receive both principal and interest on a pro rata and pari passu basis. Similarly, the Class A1b and A2b notes will have the same credit enhancement and receive both principal and interest on a pro rata and pari passu basis. The Class A1c and A2c notes will have the same credit enhancement and receive both principal and interest on a pro rata and pari passu basis. DBRS’s analysis considers the Class A notes fungible in all material aspects.

The term of the Facility for the Class A Notes is 24 months from the Effective Date (the Initial Loan Period End Date), with an option to extend another 24 months. The coupon due on the Class A notes will step up by 0.5% 24 months after the Effective Date. The coupon due on the Class B Notes will step up by 1.5% starting in April 2020, and a further 1.5% after a further 12 months. DBRS has assumed that the Facility is fully drawn on the Initial Loan Period End Date, and subsequently begins to amortise, as per the transaction documents. The ratings assigned to the Class A1a and Class A2a Notes address the timely payment of interest and repayment of principal by the legal final maturity date. The ratings assigned to the Class A1b, Class A2b, Class A1c and Class A2c Notes represent the timely payment of interest to the noteholders after such classes of notes become the most senior notes outstanding and the ultimate payment of all interest and principal by the legal final maturity date. The ratings do not address the Senior Notes Excess Consideration Amount that Class A noteholders may receive after 36 months after the Effective Date. No credit is given to asset disposals, including securitisation exits, in DBRS’s analysis; although they are provisioned for in the transaction documentation including that the assets must be sold for a price that is sufficient to repay the Class A notes and accrued, but unpaid interest on them.

DBRS’s ratings address the likelihood of full repayment of the commitment by the legal final maturity date (falling in October 2063).In order to estimate the portfolio default rate (PD) and loss given default (LGD) of the mortgage portfolio, DBRS has opted to simulate a collateral portfolio that represents conservative credit characteristics given the eligibility criteria and the portfolio concentration limits.

Drawings on the Facility are permitted prior to the Initial Loan Period End Date, provided that a draw stop event has not been triggered. Such events are defined in the transaction documents, which include, among others, a cumulative net loss trigger (0.75%), a delinquency-based trigger (three-month plus exceeding 2.5%), insufficient credit enhancement, and insolvency of BGFL. An initial breach can be cured, allowing the Debtor to purchase further loans. The Debtor must oblige with the portfolio concentration limits at all times, once the mortgage portfolio exceeds GBP 60 million in size.

BGFL is the initial servicer of the mortgage portfolio, but delegates all servicing activities to Homeloan Management Limited (HML). HML has a full mandate for primary and special servicing of the assets and requires no approval from BGFL to undertake these activities. HML is deemed to have extensive experience in servicing mortgage products similar to those BGFL is originating.

Monthly mortgage receipts are deposited into the collections account held with Barclays Bank PLC (Barclays). Funds are held on trust by the legal title holder in accordance with the collection account declaration of trust and subsequently credited to the collection account and swept on a daily basis to the applicable account. The collection account declaration of trust provides that interest in the collection account is in favour of the Debtor over the seller. Commingling risk is considered mitigated by the collection account declaration of trust and the daily sweep of funds. The collection account bank is subject to a DBRS downgrade trigger.

The transaction has two named account banks: Elavon Financial Services DAC, UK branch (Elavon) and Barclays. The funding and collection accounts are held with Barclays, and the Debtor’s transaction account is held with Elavon. 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.
The transaction’s cash flow structure has been analysed by DBRS with consideration of the form and sufficiency of available credit enhancement. The transaction structure provides for a maximum advance rate of 90% for the Class A notes. Credit support of 10% for the Class A1c and Class A2c Notes is provided through subordination of the subordinated loan, and the Class B Notes. Credit support of 17% for the Class A1b and Class A2b Notes is provided through subordination of the subordinated loan, the Class B Notes and the Class A1c and Class A2c Notes. Credit support of 21.75% for the Class A1a and Class A2a Notes is provided through subordination of the subordinated loan, the Class B Notes, the Class A1c and Class A2c Notes and the Class A1b and Class A2b Notes.

The Class A notes benefit from liquidity support from a Liquidity Reserve Fund, which is initially sized at 1% of the total commitment (GBP 3 million). The Liquidity Reserve Fund is to be replenished from the revenue priority of payments. Similar to the Liquidity Reserve Fund, the Debtor also established a Class B Note Liquidity Reserve Fund that is initially funded from the Subordinated Loan to an amount equal to two months of interest on the Class B Notes (minimum required amount). It is available to pay interest on Class B Notes after the depletion of revenue collections (including swap income). After the full repayment of the Class B Notes, the balance of the Class B Note Liquidity Reserve Fund becomes part of the available revenue funds. Liquidity in the transaction is further supported by the ability to apply available principal funds to pay senior fees, swap payments and Class A1a and Class A2a Notes interest. Such amounts are used subject to debits to the Principal Deficiency Ledgers (PDL), which will also track realised losses. Excess spread will be applied to clear PDL balances. An accelerated redemption feature is used at the earlier of a draw stop event or upon completion of the commitment period, which allows for the conversion of revenue to principal in order to accelerate the redemptions of the Class A notes.

The structure benefits from interest rate hedging in the form of a fixed to floating balance guaranteed swap. Under the swap agreement, the Debtor will receive one-month GBP London Interbank Offered Rate (LIBOR) on a monthly basis, and the Debtor will pay the swap provider a weighted average of the swap rates. Swap rates are assigned to each fixed-rate loan by NWM when assigned to the Facility. The notional of the swap is the outstanding balance of the fixed-rate mortgages as determined by a pre-calculated amortisation schedule at origination of each loan.
DBRS has applied two default timing curves (front-ended and back-ended), its 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.

As a result of the analytical considerations, DBRS derived a base-case PD of 38.7%, LGD of 56.3% at the AAA level, a PD of 35.1%, LGD of 51.2% at the AA level, and a PD of 28.7%, LGD of 40.6% at the A (low) level using the European RMBS Insight Model. DBRS’s cash flow analysis assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 12 cash flow scenarios were applied to test the capital structure and ratings of the notes. Four additional scenarios without prepayments were analysed; however, the structure is more sensitive to fast prepayment speeds.

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 methodology applicable to the rating is: “European RMBS Insight: U.K. Addendum”.

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

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

An asset and a cash flow analysis were both conducted. Due to the revolving period in the transaction, the analysis is based on a conservative asset portfolio given the eligibility criteria and concentration limits set forth in the transaction legal documents.

In DBRS’s opinion, a discontinued-repaid rating action does not warrant the application of the entire principal methodology, as the bond has been repaid in full.

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: https://www.dbrs.com/research/333487/rating-sovereign-governments

The sources of data and information used for this rating include information provided by Belmont Green Finance Limited, other U.K. RMBS transactions rated by DBRS and investor reports for U.K. RMBS transactions available in Intex DealMaker.

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.

The last rating action on this transaction took place on 3 October 2018.

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”):
Class A1a and Class A2a:
-- A hypothetical increase in both PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus, would lead to a downgrade of the rating to AA (low) (sf).
-- A hypothetical increase in PD by 50%, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to AA (sf).
-- A hypothetical increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).

Class A1b and Class A2b:
-- A hypothetical increase in both PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (sf).
-- A hypothetical increase in PD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to A (sf).
-- A hypothetical increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (sf).

Class A1c and Class A2c:
-- A hypothetical increase in both PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to B (high) (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in PD by 50%, ceteris paribus, would lead to a downgrade of the rating to BB (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50%, ceteris paribus, would lead to a downgrade of the rating to BB (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25%, ceteris paribus, would lead to a downgrade of the rating to BB (low) (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: Vito Natale, Senior Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President, Head of European Surveillance
Initial Rating Date: 3 October 2017

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.

-- 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
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Structured Finance 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.