DBRS Assigns Provisional Ratings to Barley Hill No. 1 plc

DBRS Ratings Limited (DBRS) assigned the following provisional ratings to the notes to be issued by Barley Hill No. 1 plc (the Issuer):

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (high) (sf)

The Class Z VFN Notes are not rated by DBRS and will be retained by the seller.

The provisional rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal. The provisional rating of the Class B Notes addresses the timely payment of interest when they are the most-senior notes, after the redemption of the Class A Notes, and the ultimate payment of principal. An increased margin on all the rated notes is payable from the step-up date in February 2022.

Barley Hill No. 1 plc is a bankruptcy-remote special-purpose vehicle incorporated in England and Wales. The issued notes will be used to fund the purchase of U.K. residential mortgage loans originated and serviced by The Mortgage Lender Ltd. and secured over properties located in the U.K.

As at 28 February 2019, the provisional mortgage portfolio consisted of 1,139 loans with a total portfolio balance of approximately GBP 207.4 million. The weighted-average (WA) current loan-to-value is 68.0% with a WA seasoning of 12.0 months. Approximately 4.3% of the portfolio by loan balance comprises loans originated to borrowers with a prior County Court Judgement in the last three years, and 1.5% to borrowers with a previous bankruptcy or Individual Voluntary Arrangement.

The majority of loans in the portfolio (84.3% by loan balance) are fixed-rate loans with a future reset to three-month LIBOR. The remaining 15.7% of loans are floating-rate loans. The notes pay a floating rate of interest linked to three-month LIBOR. To address this interest rate mismatch, the transaction is structured with an interest rate swap that swaps [•] for three-month LIBOR. The swap notional will be the outstanding balance of the performing fixed-rate loans.

During the first interest period, the Issuer may purchase additional loans that are funded by the over-issuance of notes at closing and principal collections. The pre-funded loans will be subject to criteria tests to prevent a material deterioration in credit quality. DBRS analysed the mortgage conditions for pre-funding loans that can be sold to the Issuer. Any funds that are not applied to purchase additional loans will be disbursed to redeem the notes pro-rata. At closing, the pre-funding amount is expected to be up to GBP 25.0 million.

Credit enhancement for the Class A Notes is calculated at 14.8% and is provided by the subordination of Classes B Notes through Z VFN and the general reserve fund. Credit enhancement for the Class B Notes is calculated at 11.8% and is provided by the subordination of the Class Z VFN Notes and the general reserve fund.

The transaction benefits from a non-amortising general reserve fund, which is split into a credit ledger and a liquidity ledger. The general reserve will have a target amount equal to 2% of the rated notes at closing. The credit ledger equals the difference between the target amount of the general reserve and the target amount of the liquidity ledger. The liquidity ledger will provide liquidity and credit support to Class A Notes. The liquidity ledger amortises with a target amount equal to 1% of the outstanding Class A Notes. Amortised amounts of the liquidity will form part of the general reserve fund.

Borrower collections are held with Barclays Bank plc and estimated collections are deposited on the next business day into the Issuer transaction account held with Citibank, N.A., London branch. DBRS’s private rating of the Issuer 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 ratings assigned to the notes.

The ratings are based on DBRS’s review of the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS calculated probability of default (PD), loss given default (LGD) and expected loss (EL) outputs on the mortgage portfolio to analyse with DBRS’s cash flow tool. The mortgage portfolio was analysed in accordance with DBRS’s “European RMBS Insight Methodology” and “European RMBS Insight: U.K. Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A and Class B Notes according to the terms of the transaction documents. The transaction structure was analysed using Intex DealMaker.
-- The sovereign rating of the United Kingdom of Great Britain and Northern Ireland, which is rated AAA/R-1 (high) with Stable trends as of the date of this report.
-- The consistency of the transaction’s legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing 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 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.

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 the ratings include The Mortgage Lender Limited .

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.

These ratings concern a to be issued financial instrument. These is 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 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 32.2% and LGD of 40.0%, corresponding to the AAA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 30.2% and LGD of 37.4%, corresponding to the AA (high) rating 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 have no impact on the AAA (sf) rating assigned to the Class A Notes.
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would have no impact on the AAA (sf) rating assigned to the Class A Notes.
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would have no impact on the AAA (sf) rating assigned to the Class A Notes.
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would have no impact on the AAA (sf) rating assigned to the Class A Notes.
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would have no impact on the AAA (sf) rating assigned to the Class A Notes.
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would have no impact on the AAA (sf) rating assigned to the Class A Notes.
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would have no impact on the AAA (sf) rating assigned to the Class A Notes.
-- 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 AA (high) (sf).

Class B Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would have no impact on the AA (high) (sf) rating assigned to the Class B Notes.
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would have no impact on the AA (high) (sf) rating assigned to the Class B Notes.
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would have no impact on the AA (high) (sf) rating assigned to the Class B Notes.
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would have no impact on the AA (high) (sf) rating assigned to the Class B Notes.
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would have no impact on the AA (high) (sf) rating assigned to the Class B Notes.
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to AA (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would have no impact on the AA (high) (sf) rating assigned to the Class B Notes.
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (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: Rehanna Sameja, Senior Vice President
Rating Committee Chair: Vito Natale, Managing Director
Initial Rating Date: 29 March 2019

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company 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
-- Interest Rate Stresses 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

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.