DBRS Finalises Provisional Ratings on Tower Bridge Funding No. 4 PLC

DBRS Ratings Limited (DBRS) finalised the following ratings previously assigned to the notes issued by Tower Bridge Funding No. 4 PLC (the issuer):

--Class A notes at AAA (sf)
--Class B notes at AA (high) (sf)
--Class C notes at A (sf)
--Class D notes at BBB (high) (sf)
--Class E notes at BBB (low) (sf)
--Class F notes at BB (sf)

The final margins applicable to the notes are lower than the provisional margins. This has resulted in DBRS’s final rating of BB (sf) assigned to the Class F notes to differ from the provisional rating of BB (low) (sf) assigned on 24 June 2019.

The ratings assigned to the Class A and B notes address the timely payment of interest to the noteholders on every quarterly interest payment date and the ultimate repayment of principal by the legal final maturity date. The ratings on the Class C, D, E and F notes address the ultimate payment of interest and repayment of principal by the legal final maturity date. DBRS does not rate the Class G, Class X and Class Z notes or the residual certificates.

Tower Bridge Funding No. 4 PLC is the fourth securitisation of residential mortgages by Belmont Green Finance Limited (BGFL, the seller and the originator). The mortgage portfolio comprises first-lien home loans, newly originated by BGFL through its Vida Homeloans brand. BGFL is the named mortgage portfolio servicer but it will delegate day-to-day servicing to Homeloan Management Limited (HML). HML is also the backup servicer and shall replace BGFL if a servicing termination event is triggered. This arrangement means there is effectively no backup servicer in place. In order to maintain servicing continuity, CSC Capital Markets UK Limited will be appointed as the backup servicer facilitator.

As of 30 June 2019, the GBP 369.1 million portfolio consisted of 1,986 loans with an average outstanding balance of GBP 185,845. Approximately 74.3% of the loans by outstanding balance are buy-to-let (BTL) mortgages. As is common in the U.K. mortgage market, the loans are largely scheduled to pay interest only on a monthly basis, with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage (73.3% of the loans in the pool are interest only). A significant concentration of the BTL loans are granted to portfolio landlords: 45.5% of the loans by total loan balance are granted to landlords with at least one other BTL property, and 13.0% have at least eight other BTL properties.

The mortgages are high-yielding, with a weighted-average coupon of 4.1% and a weighted-average reversionary margin of 5.1% over either the Vida Variable Rate (VVR) or LIBOR. Moreover, 7.6% of the mortgage portfolio by loan balance have prior county court judgements (CCJs). The weighted-average current loan-to-value (CLTV) ratio of the portfolio is 71.3%, with no loan exceeding a 90% CLTV ratio.

Before the first interest payment date, the issuer may purchase additional loans that are funded by the over-issuance of notes at closing. The pre-funded loans will be subject to criteria tests to prevent a material deterioration in credit quality. At least 50% of these loans will be post-offer and pre-completion as of the end of May 2019. DBRS analysed the eligible pre-funding loans that can be sold to the issuer. Any funds that are not applied to purchase additional loans will flow through the pre-enforcement principal priority of payments to repay the notes pro-rata.

The transaction is structured to initially provide 19.5% of credit enhancement to the Class A notes. This includes subordination of the Class B to G notes (Classes X and Z are not collateralised) and the non-amortising general reserve fund.

The general reserve is available to cover shortfalls in senior fees, interest and any principal deficiency ledger (PDL) debits on the Class A to F notes after the application of revenue. The general reserve is initially funded to 2% of the Class A to G notes multiplied by 1 minus the pre-funding maximum principal percentage; however, it will have a non-amortising target equal to 2.5% of the initial balance of the Class A to G notes that will be funded through excess spread. The liquidity reserve is available to cover shortfalls of senior fees and interest on the Class A and B notes after the application of revenue and the general reserve. The liquidity reserve is expected to havehas a balance of zero at closing and will be funded through principal receipts as a senior item in the waterfall to its amortising target – 1.5% of the outstanding balance of the Class A and Class B notes. Any use, including prior to its complete funding, will be replenished from revenue.

Principal funds can be diverted to pay revenue liabilities, insofar as a shortfall in senior fees, Class A interest and interest due on the senior-most outstanding class of notes persist 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 six sub-ledgers that will track the principal used to pay interest, as well as realised losses, in a reverse sequential order that begins with the Class G sub-ledger.

The fixed-rate assets and the floating-rate liabilities give rise to interest rate risk. This is mitigated by using a fixed-floating balance-guaranteed swap, provided by the NatWest Markets. There is basis risk in the transaction that arises once the loans complete the initial teaser period. The owner-occupied loans reset to pay a rate of interest linked to VVR. This basis risk is mitigated through a transaction floor on the VVR linked to SONIA, the Sterling Overnight Index Average, which is compounded daily. The basis risk between the BTL mortgages linked to three-month LIBOR and the notes has been considered in the cash flow analysis.

On the interest payment date in December 2022, the coupon due on the notes will step up and the notes may be optionally called. The notes must be redeemed for an amount sufficient to fully repay them, at par, plus pay any accrued interest.

Monthly mortgage receipts are deposited into the collections account at Barclays Bank PLC (Barclays) and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept daily to the issuer’s account for direct debit payments and within three business days for other payment formats. 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. BNP Paribas Securities Services SCA, London Branch is the account bank. 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.

In its cash flow assessment, DBRS 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 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 BGFL and Barclays.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

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 rating concerns a newly issued financial instrument.

These are the first DBRS ratings on this financial instrument.

This 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 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 portfolio default rate (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): 28.4% and 54.1%
-- Class B at AA (high) (sf): 26.3% and 52.4%
-- Class C at A (sf): 20.8% and 44.6%
-- Class D at BBB (high) (sf): 16.8% and 40.0%
-- Class E at BBB (low) (sf): 15.0% and 35.5%
-- Class F at BB (sf): 10.9% and 30.8%

For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to decrease to AA (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A notes would be expected to decrease to AA (low) (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 A (low) (sf), ceteris paribus.

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

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

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

Class E notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD, expected rating of B (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (sf)
-- 50% increase in PD, expected rating of B (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (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: Matt Albin, Senior Financial Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 24 June 2019

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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Derivative Criteria 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
-- Interest Rate Stresses for European Structured Finance Transactions
-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum

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.