DBRS Finalises Provisional Ratings on Finsbury Square 2019-2 plc

DBRS Ratings GmbH (DBRS) finalised its provisional ratings on the notes issued by Finsbury Square 2019-2 plc (the Issuer or FSQ19-2):

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (high) (sf)
-- Class C Notes rated A (high) (sf)
-- Class D Notes rated BBB (high) (sf)
-- Class E Notes rated BB (high) (sf)
-- Class X Notes rated B (high) (sf)

The final rating assigned to the Class X Notes differs from the provisional rating of CCC (sf) because of the tighter spreads and step-up margins on Classes A to D and Class X in the final structure.

The rating on the Class A Notes addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date falling in September 2069. The ratings on the Class B, Class C, Class D and Class E notes address the timely payment of interest once they are the most-senior class and the ultimate repayment of principal on or before the final maturity date. The rating on the Class X Notes addresses the ultimate payment of interest and repayment of principal by the final maturity date. DBRS does not rate the Class F Notes and Class Z Notes.

The Issuer is a securitisation collateralised by a portfolio of owner-occupied (80.4% of the portfolio balance) and buy-to-let (19.6%) residential mortgage loans granted by Kensington Mortgage Company Limited (KMC) in England, Wales and Scotland.

The Issuer issued six tranches of mortgage-backed securities (the Class A to Class F notes) to finance the purchase of the initial portfolio and to fund the pre-funding principal reserve. Additionally, FSQ19-2 issued two classes of non-collateralised notes, the Class X and Class Z notes, to fund the general reserve fund (GRF) and the pre-funding revenue reserve and to cover initial costs and expenses. The Class X Notes are primarily intended to amortise using revenue funds; however, if excess spread is insufficient to fully redeem the Class X Notes, principal funds will be used to amortise the Class X Notes before the Class F Notes.

The structure includes a pre-funding mechanism where the seller, Koala Warehouse Limited (KWL), has the option to sell recently originated mortgage loans to the Issuer, subject to certain conditions. The acquisition of these assets shall occur before the first payment date, using the proceeds standing to the credit of the pre-funding reserves.

The GRF, which was funded at closing to nearly GBP 10.0 million (2.15% of the Class A to Class F notes’ balance), is available to provide liquidity and credit support to the Class A to Class E notes. From the first payment date onward, the GRF’s required balance will be 2.0% of the Class A to Class F notes’ balance, and if its balance falls below 1.5% of the Class A to Class F notes’ balance, principal available funds will be used to fund the liquidity reserve fund (LRF) to a target of 2.0% of the Class A and Class B notes’ balance. The LRF will be available to cover interest shortfalls on the Class A and Class B notes, as well as senior items on the pre-enforcement revenue priority of payment. The availability for paying Class B notes’ interest is subject to a 10.0% principal deficiency ledger condition.

As of 30 June 2019, the portfolio consisted of 2,016 loans extended to 1,985 borrowers with an aggregate principal balance of GBP 323.9 million. Loans that were one- to three-months in arrears represented 1.0% of the outstanding principal balance of the portfolio, and loans that were three-or-more month’s delinquent represented 0.8% of the portfolio.

The portfolio comprises 6.6% of help-to-buy (HTB) loans, whose borrowers are supported by government loans (the equity loans, which rank in a subordinated position to the mortgages). HTB loans are used to fund the purchase of new-build properties with a minimum deposit of 5.0% from the borrowers. The weighted-average current loan-to-value of the portfolio is 72.4%, which increased to 74.1% in DBRS’s analysis to include the HTB equity loan balances.

Fixed-to-floating products make up 85.7% of the portfolio, where borrowers have an initial fixed-rate period of one to five years, before switching to floating-rate interest indexed to three-month LIBOR. Interest rate risk is hedged through an interest rate swap. Approximately 8.8% of the portfolio by loan balance comprises loans originated to borrowers with at least one prior County Court Judgment and 21.5% are either interest-only-loans-for-life or loans that pay on a part-and-part basis.

The Issuer has entered into a fixed-floating swap with BNP Paribas, London branch (BNP London) to mitigate the fixed interest rate risk from the mortgage loans and the SONIA (Sterling Over Night Index Average) payable on the notes. Based on the DBRS private rating of BNP London, the downgrade provisions outlined in the documents and the transaction structural mitigants, DBRS considers the risk arising from the exposure to BNP London to be consistent with the ratings assigned to the rated notes, as described in DBRS's “Derivative Criteria for European Structured Finance Transactions” methodology.

Citibank, N.A., London branch (Citibank London) holds the Issuer’s Transaction Account, the GRF, the LRF, the pre-funding reserves and the Swap Collateral Account. Based on the DBRS private rating of Citibank London, the downgrade provisions outlined in the documents and the transaction structural mitigants, DBRS considers the risk arising from the exposure to Citibank London to be consistent with the ratings assigned to the rated notes, as described in DBRS's “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS based its ratings on the following analytical considerations:
-- The transaction capital structure, and form and sufficiency of available credit enhancement to support DBRS-projected expected cumulative losses under various stressed scenarios.
-- The credit quality of the portfolio and DBRS’s qualitative assessment of KMC’s capabilities with regard to originations, underwriting and servicing.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes.
-- The transaction parties’ financial strength in order to fulfil their respective roles.
-- The transaction’s legal structure and its consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology, as well as the presence of the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- The sovereign rating of the United Kingdom of Great Britain and Northern Ireland that DBRS rates at AAA with a Stable trend as of the date of this press release.

The transaction structure was analysed in Intex DealMaker.

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 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/333487/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include KMC and its agents.

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 ratings concern newly issued financial instruments. These are the first DBRS ratings on these financial instruments.

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 the ratings, DBRS considered further stress scenarios for its main rating parameters PD and LGD in its cash flow analysis. The additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determining the ratings (the Base Case):
-- In respect of the Class A Notes, the PD and LGD at the AAA (sf) stress scenario of 25.5% and 49.0%, respectively.
-- In respect of the Class B Notes, the PD and LGD at the AA (high) (sf) stress scenario of 23.4% and 47.0%, respectively.
-- In respect of the Class C Notes, the PD and LGD at the A (high) (sf) stress scenario of 18.9% and 41.2%, respectively.
-- In respect of the Class D Notes, the PD and LGD at the BBB (high) (sf) stress scenario of 14.5% and 35.0%. respectively.
-- In respect of the Class E Notes, the PD and LGD at the BB (high) (sf) stress scenario of 10.0% and 28.6%, respectively.
-- In respect of the Class X Notes, the PD and LGD at the B (high) (sf) stress scenario of 6.9% and 22.6%, respectively.

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)
-- 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, expected rating of AA (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)
-- 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, expected rating of A (high) (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 (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (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, expected rating of BBB (high) (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 BB (high) (sf)

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

Class E Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in LGD, expected rating of BB (low) (sf)
-- 25% 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, expected rating of BB (low) (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)

Class X Notes risk sensitivity:
-- 25% increase in LGD, expected rating of B (sf)
-- 50% increase in LGD, expected rating of B (sf)
-- 25% increase in PD, expected rating of B (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (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 GmbH are subject to EU and US regulations only.

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 July 2019

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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
-- Legal Criteria 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
-- Interest Rate Stresses for European Structured Finance Transactions

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.