DBRS Assigns Provisional Ratings to Genesis Mortgage Funding 2019-1 plc

DBRS Ratings GmbH (DBRS) assigned the following provisional ratings to the notes to be issued by Genesis Mortgage Funding 2019-1 plc (Genesis or the Issuer):

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

The Issuer will securitise a portfolio of high-yield United Kingdom owner-occupied and buy-to-let (BTL) residential mortgage loans granted by Bluestone Mortgages Limited (Bluestone or the Originator). All of the loans in the portfolio are secured by a first-ranking mortgage.

The provisional rating assigned to the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in December 2056. The provisional ratings assigned to the Class B, Class C, Class D, Class E and Class F notes address the timely payment of interest when most senior but otherwise address the ultimate payment of interest and principal.

An increased margin on the rated notes is payable from the step-up date in September 2022. The ratings also address the additional interest amounts that are payable after the step-up date.

On the step-up date, the residual certificate holders have the option to redeem the notes in full. However, if this option is not exercised, Bluestone is required to auction the portfolio in the market with help of an independent advisor. Any such portfolio sale has to be at a minimum price, which ensures that all notes outstanding together with accrued interest and senior cost are paid in full.

The transaction will have a pre-funding period until the first interest payment date. Additional loans added to the transaction are expected to amount to GBP 10 million to GBP 20 million. At closing, the Issuer will deposit the excess proceeds from the issuance of the notes into the pre-funding account. Thus, the proceeds of the Class A to Class G notes will be used to fund the purchase of loans from Bluestone.

Additionally, Genesis will issue Class Z Notes to fund the general reserve fund. This will allow the transaction to build up 2.0% credit enhancement at closing. This reserve fund is available to cover fees, expenses and interest shortfall on the rated notes. The transaction also features a liquidity reserve fund that is available to cover fees, expenses and interest shortfall on the Class A Notes and will be initially funded from available principal funds. If there is further interest shortfall on the senior-most notes, it will be covered from the use of principal receipts.

Genesis will issue Class X Notes to fund the pre-funding revenue reserve, fees and expenses for the Issuer with respect to issuance of the notes.

The initial credit enhancement on the Class A, Class B, Class C, Class D, Class E and Class F notes is sized at 18.5%, 14.0%, 11.5%, 9.0%, 6.5% and 4.5%, respectively. This credit enhancement is provided in the form of overcollateralisation by the portfolio (including excess proceeds) and the general reserve fund.

DBRS was provided with information on the provisional mortgage portfolio consisting of loans that are currently in the Originator’s portfolio as of 31 May 2019 and an offers pipeline with data as at 21 June 2019. At closing, DBRS will also receive detailed information on the entire universe of the loans in the offers pipeline that may be sold by the seller to the Issuer during the pre-funding period.

The current provisional portfolio (excluding the offers pipeline) consists of 1,111 loans with an aggregate principal balance of GBP 198 million extended to 1,101 borrowers. The aggregated balance of the current offers pipeline stands at EUR 26.7 million and consists of 145 loans extended to 142 borrowers, as of 21 June 2019.

The mortgage loans in the asset portfolio are classified as owner-occupied (80.8% of the portfolio by loan amount) and BTL (19.2%) and are secured by a first-ranking mortgage right. The portfolio consists of fixed-rate mortgage loans (94.5%) with different reset intervals, most of the loans reset after two (56.2%), five (33.9%) or three (4.5%) years. Furthermore, 16.5% of the portfolio consists of interest-only loan parts, and 35.8% of the mortgage portfolio is granted to borrowers grouped as either self-employed, retired or not classified. The majority of loans (99.3%) are classified as performing or current, and the remaining 0.7% of loans are less than three months in arrears. Lastly, about 26.1% of the loan borrowers have had prior county court judgements.

The notes pay a floating-rate interest rate indexed to daily-compounded Sterling Overnight Interbank Average Rate (SONIA) plus a margin. To mitigate the interest rate risk that arises due to fixed-floating mismatch, the Issuer will enter into a swap agreement with National Australia Bank Limited (the swap counterparty; rated AA with a Stable trend by DBRS). The Issuer will pay the swap counterparty an amount equal to the swap notional amount multiplied by the swap rate plus additional senior swap amounts. The additional swap amount refers to the cost of novating or offsetting the existing swap contracts over the existing loans held in warehouses. These amounts are pre-determined at the time of pricing and DBRS was provided a schedule of such payments. DBRS has sized for these amounts in its analysis. The swap notional refers to the aggregate balance of the fixed-rate mortgage loans with less than three months in arrears.

Once the loan reaches the reset period, the borrowers will switch to paying a floating interest rate linked to the Bluestone variable rate (BVR) plus the revisionary margin. The BVR is expected to reset or reviewed at least once every quarter and will be set such that it at least exceeds the daily compounded SONIA over the previous calendar month plus 1.0%, in accordance with the interest rate policy. DBRS considered the basis risk between periodically resetting BVR and daily compounding SONIA in its analysis.

The structure includes a principal deficiency ledger (PDL) comprising seven sub-ledgers (Class A PDL to Class G PDL) that provisions for realised losses as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest on the most-senior class of notes outstanding. The losses will be allocated starting from Class G PDL and then to sub-ledgers of each class of notes in reverse sequential order.

The Issuer Account Bank is Citibank, N.A., London branch. Based on the DBRS private rating of the account bank, the downgrade provisions outlined in the transaction documents and structural mitigants, DBRS considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

The ratings are based on DBRS’s review of the following analytical considerations:

-- The transaction capital structure and 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 outputs on the mortgage portfolio, which are used as inputs into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS’s “European RMBS Insight: U.K. Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E and Class F notes according to the terms of the transaction documents. The transaction structure was analysed using Intex DealMaker.
-- DBRS’s sovereign rating of the United Kingdom of Great Britain and Northern Ireland is at AAA/R-1(high) with Stable trends as of the date of this press release.
-- The consistency of the legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and 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 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 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 these ratings include Bluestone.

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

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 30.2% and LGD of 44.5%, corresponding to the AAA rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 26.7% and LGD of 40.2%, corresponding to the AA rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 23.2% and LGD of 35.3%, corresponding to the A(high) rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 18.2% and LGD of 29.1%, corresponding to the BBB (high) rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.
-- In respect of the Class E Notes, a PD of 12.8% and LGD of 24.0%, corresponding to the BB (high) rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.
-- In respect of the Class F Notes, a PD of 6.7% and LGD of 18.1%, corresponding to the B (low) rating scenario, was stressed assuming a 25.0% and 50.0% increase in the PD and LGD.

DBRS concludes the following sensitivity analysis on the rated notes:

Risk sensitivity when the PD is stressed by 25.0%:
--The Class A rating is AA (high) (sf)
--The Class B rating is A (high) (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BBB (low) (sf)
--The Class E rating is BB (sf)
--The Class F rating is CCC (sf)

Risk sensitivity when the LGD is stressed by 25.0%:
--The Class A rating is AA (high) (sf)
--The Class B rating is A (high) (sf)
--The Class C rating is A (low) (sf)
--The Class D rating is BBB (sf)
--The Class E rating is BB (sf)
--The Class F rating is B (low) (sf)

Risk sensitivity when the PD is stressed by 50.0%:
--The Class A rating is AA (low) (sf)
--The Class B rating is A (low) (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is BB (low) (sf)
--The Class F rating is CCC (sf)

Risk sensitivity when the LGD is stressed by 50.0%:
--The Class A rating is AA (sf)
--The Class B rating is A (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is BB (low) (sf)
--The Class F rating is CCC (sf)

Risk sensitivity when the PD is stressed by 25.0% and the LGD is stressed by 25.0%:
--The Class A rating is AA (low) (sf)
--The Class B rating is A (low) (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is B (high) (sf)
--The Class F rating is CCC (sf)

Risk sensitivity when the PD is stressed by 50.0% and the LGD is stressed by 25.0%:
--The Class A rating is A (high) (sf)
--The Class B rating is BBB (high) (sf)
--The Class C rating is BBB (low) (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is B (high) (sf)
--The Class F rating is CCC (sf)

Risk sensitivity when the PD is stressed by 25.0% and LGD is stressed by 50.0%:
--The Class A rating is A (high) (sf)
--The Class B rating is BBB (high) (sf)
--The Class C rating is BBB (sf)
--The Class D rating is BB (high) (sf)
--The Class E rating is B (high) (sf)
--The Class F rating is CCC (sf)

Risk sensitivity when the PD is stressed by 50.0% and the LGD is stressed by 50.0%:
--The Class A rating is A (low) (sf)
--The Class B rating is BBB (sf)
--The Class C rating is BB (high) (sf)
--The Class D rating is BB (sf)
--The Class E rating is B (sf)
--The Class F rating is 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: Hrishikesh Oturkar, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 14 August 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
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
-- 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.