DBRS Confirms Ratings of Gemgarto 2018-1 PLC

DBRS Ratings Limited (DBRS) confirmed the ratings of the notes issued by Gemgarto 2018-1 PLC (the Issuer) as follows:

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes confirmed at AA (sf)
-- Class C Notes confirmed at A (high) (sf)
-- Class D Notes confirmed at A (low) (sf)
-- Class E Notes confirmed at BB (high) (sf)
-- Class X Notes confirmed at C (sf)

The ratings of the Class A, Class B, Class C, Class D and Class E Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date. The rating of the Class X Notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses, as of the June 2019 payment date.
-- Portfolio default rate (PD), loss given default (LGD) and expected loss assumptions on the receivables.
-- Current available credit enhancement (CE) to the notes to cover the expected losses at their respective rating levels.
-- No revolving termination events have occurred.

The Issuer is a securitisation of UK first-ranking owner-occupied residential mortgages originated and serviced by Kensington Mortgage Company Limited (KMC). The transaction is currently in its four-year replenishment period, which is scheduled to end in September 2022. During the replenishment period, principal funds are first allocated toward the amortisation of the Class A Notes to the target notional amount before applying any remaining principal funds to purchase additional loans.

DBRS has analysed a stressed collateral portfolio to represent potential deterioration in the characteristics that can impact the transaction, subject to portfolio-wide covenants.

PORTFOLIO PERFORMANCE
As of June 2019, loans that were two- to three-months in arrears represented 0.2% of the outstanding portfolio balance and the 90+ delinquency ratio was 0.2%, both up from 0.0% at closing. As of June 2019, the cumulative loss ratio was 0.0%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions to 9.0% and 15.7%, from 8.2% and 17.1%, respectively.

CREDIT ENHANCEMENT
As of the June 2019 payment date, Class A CE was 18.6%, up from 18.1% at the DBRS initial rating. Class B CE was 13.5%, up from 13.1% at the DBRS initial rating. Class C CE was 10.9%, up from 10.6% at the DBRS initial rating. Class D CE was 8.8%, up from 8.6% at the DBRS initial rating. Class E CE was 5.2%, up from 5.1% at the DBRS initial rating. CE is provided by subordination of the junior notes and a General Reserve Fund (GRF).

The GRF is non-amortising and available to cover senior fees and senior swap payments as well as interest and principal losses via the principal deficiency ledgers on the Class A to Class E Notes. The GRF is currently funded to its target level of GBP 5 million, equal to 2% of the initial Class A to Class F Notes.
If the GRF balance falls below 1.5% of the outstanding Class A to F Notes, a Liquidity Reserve Fund (LRF) will be funded through available principal funds to 2% of the outstanding Class A and Class B Notes balance. The LRF will be available to cover senior fees, senior swap payments and interest on the Class A and Class B Notes.

Citibank N.A., London branch acts as the account bank for the transaction. Based on the DBRS private rating of the Citibank N.A., London branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

BNP Paribas, London branch acts as the swap counterparty for the transaction. DBRS's private rating of the BNP Paribas, London branch is above the First Rating Threshold, as described in DBRS's "Derivative Criteria for European Structured Finance Transactions" methodology.

The transaction structure was analysed in Intex DealMaker.

Notes:
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with 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/333487/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include investor reports and loan level data provided Wells Fargo Bank International Unlimited Company and KMC.

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 30 July 2018 when DBRS finalised its provisional ratings on the Class A, Class B, Class C, Class D, Class E and Class X Notes at AAA (sf), AA (sf), A (high) (sf), A (low) (sf), BB (high) (sf) and C (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Clare Wootton.

Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the “Base Case”):
-- DBRS expected a lifetime base case PD and LGD for the pool 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 loans for the Issuer are 9.0% and 15.7%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to fall to AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to A (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, 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 (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class C 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)
-- 50% increase in PD, expected rating of A (low) (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 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 D Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Class E Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD, expected rating of BB (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

The Class X Notes are rated C (sf) and therefore any stressed scenario would not have any further rating impact.

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: Clare Wootton, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 12 July 2018

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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
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- 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 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.