DBRS Finalises Provisional Ratings of Stratton Mortgage Funding 2019-1 plc

DBRS Ratings Limited (DBRS) finalised its provisional ratings on the notes (the Notes) issued by Stratton Mortgage Funding 2019-1 plc (the Issuer), as follows:

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

The Class F, Z1 and Z2 Notes are not rated by DBRS.

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

The margins on the final structure’s notes are lower than the ones in the provisional structure. This had a positive impact on the final ratings assigned to the Class B, Class C, Class D and Class E notes, which are one notch above the respective provisional ratings of AA (sf), A (low) (sf), BBB (low) (sf) and B (sf).

The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in England and Wales. The issued Notes were used to fund the purchase of U.K. residential mortgage loans secured over properties located in the United Kingdom. The loans were by Ertow Holdings IV DAC (the Seller) from Moorgate Funding 2014-1 plc and Stratton Finance I Ltd. and were previously securitised by Mortgage Funding 2014-1 plc (Moorgate 2014-1) and Residential Mortgage Securities 25 plc (RMS25).

The portfolio cut-off dates are 11 April 2019 for the RMS25 sub-pool and 31 March 2019 for the Moorgate Funding 2014-1 sub-pool. As at the cut-off dates, the mortgage portfolio consisted of 3,406 loans with a total portfolio balance of approximately GBP 413.4 million. The weighted-average (WA) unindexed current loan-to-value is 77.6% with a WA seasoning of 11.8 years. Approximately 33.4% of the portfolio by loan balance comprises loans granted for buy-to-let purposes, and 4.2% of the loans are in arrears for three months or more.

The Notes pay a coupon linked to daily compounded SONIA (Sterling Overnight Index Average). All loans in the portfolio are floating-rate loans linked predominately to the Bank of England base rate (BBR; 86.7% or the portfolio), with the remaining 13.3% of loans linked to three-month LIBOR (9.4%) or a Standard Variable Rate (SVR) (4.0%). SVR-linked loans are set with reference to BBR plus a margin. BBR-linked loans reset monthly, while three-month LIBOR loans reset quarterly. There are no swaps in the structure and thus the basis mismatch remains unhedged. DBRS considered the mismatch due to differing indices along with the daily note interest accrual versus loans resetting with a time lag in its cash flow analysis.

Credit enhancement for the Class A notes is calculated at 21.5% and is provided by the subordination of the Class B notes through the Class Z1 notes and the reserve fund. Credit enhancement for the Class B notes is calculated at 18.5% and is provided by the subordination of the Class C notes through the Class Z1 notes and the general reserve fund. Credit enhancement for the Class C notes is calculated at 14.8% and is provided by the subordination of the Class D notes through Class Z1 notes and the general reserve fund. Credit enhancement for the Class D notes is calculated at 11.0% and is provided by the subordination of the Class E notes through the Class Z1 notes and the general reserve fund. Credit enhancement for the Class E notes is calculated at 7.0% and is provided by the subordination of the Class F notes through the Class Z1 notes and the general reserve fund. The Class F, Class Z1 and Class Z2 notes are unrated, and the Class Z2 notes are uncollateralised.

The transaction benefits from a reserve fund, equal to 2.00% of the collateralised Notes at closing, split into a general reserve component and an amortising liquidity component. The liquidity reserve will provide liquidity support to the Class A notes and conditionally to the Class B notes. The liquidity reserve amortises with a target amount set as the lesser of 2.75% of the Outstanding Balance of the Class A and Class B notes on the relevant calculation dates and 2.00% of the balance of the Class A and Class B notes at closing.

The reserve fund will provide credit enhancement to the Class A notes at all times. At any time after the Class A note redemption Date, the reserve fund will provide credit enhancement to the Class B notes. If the balance standing to the reserve fund exceeds the Reserve Fund Required Liquidity Amount, the excess shall unconditionally provide liquidity support to all other classes of collateralised rated Notes.

Borrower collections are held with Barclays Bank PLC (rated “A” with a Stable trend by DBRS), and estimated collections are deposited on the next business day into the Issuer’s transaction account held with Citibank N.A., London Branch. DBRS’s private rating of the Issuer’s Account Bank is consistent with the threshold for account banks 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 the probability default rate (PD), loss given default (LGD) and expected loss 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 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 HSBC Bank plc, the arranger of the transaction.

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 is the first rating action since the Initial Rating Date.

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 35.26% and LGD of 55.24%, 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 33.18% and LGD of 53.58%, corresponding to the AA (high) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C notes, a PD of 27.35% and LGD of 47.26%, corresponding to the A rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D notes, a PD of 21.83% and LGD of 42.19%, corresponding to the BBB rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E notes, a PD of 12.48% and LGD of 31.80%, corresponding to the B (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 lead to a downgrade of the Class A notes to AA (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to AA (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (high) (sf).
-- 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 BBB (sf).

Class B Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class B notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class B notes to A (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B notes to A (low) (sf).
-- 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 BBB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B notes to BBB (low) (sf).
-- 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 BB (high) (sf).

Class C Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (low) (sf).

Class D Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to B (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to B (high) (sf).

Class E Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class E notes to B (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E notes to CCC (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E notes to B (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E notes to CCC (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E notes to CCC (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus would lead to a downgrade of the Class E notes to CCC (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E notes to CCC (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E notes to CCC (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: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 May 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
-- Legal 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.