DBRS Morningstar Finalises Provisional Ratings on Towd Point Mortgage Funding 2019-Vantage2 Plc

DBRS Ratings Limited (DBRS Morningstar) finalised the following provisional ratings on the notes issued by Towd Point Mortgage Funding 2019-Vantage2 Plc (Vantage2 or the Issuer):

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

DBRS Morningstar does not rate the Class Z and Class XA Notes.

The rating assigned to the Class A Notes addresses the timely payment of interest and ultimate payment of principal by the legal final maturity date in February 2054. The rating on the Class B Notes addresses the timely payment of interest when they are the most-senior notes, after the redemption of the Class A Notes, and the ultimate payment of principal. The ratings on the Class C to Class F Notes address the ultimate payment of principal and interest. An increased margin on all the rated notes is payable from the step-up date in November 2022.

Vantage2 Plc is a bankruptcy-remote special-purpose vehicle incorporated in England and Wales. The proceeds of the notes funded the purchase of residential mortgage loans secured over properties located in the United Kingdom of Great Britain and Northern Ireland (United Kingdom; rated AAA with a Stable trend by DBRS Morningstar). Cerberus European Residential Holdings B.V. (the Seller) acquired the portfolio from Promontoria (Vantage) Limited who originally purchased the portfolio from GE Money Home Lending Limited, First National Bank plc and Igroup Limited. The loans were previously securitised by Towd Point Mortgage Funding 2016-Vantage1 Plc.

As of the 31 October 2019 cut-off date, the mortgage portfolio consisted of 6,059 loans with a total portfolio balance of approximately GBP 631.6 million. The weighted-average (WA) current indexed loan-to-value is 61.6% with a WA seasoning of 13.0 years. Approximately 1.8% of the portfolio by loan balance comprises loans granted for buy-to-let purposes, and 17.9% of the loans have been in arrears for three months or more. The majority of the loans in the portfolio consists of interest-only loans (63.0%) or Part & Part loans (12.2%).

The notes pay a coupon linked to the daily compounded SONIA (i.e., the Sterling Overnight Index Average). Almost all (99.9%) of the loans in the provisional portfolio are floating-rate loans and the majority (98.9% of the portfolio) are linked to the Bank of England Base Rate, with the remaining linked to the Standard Variable Rate. There will be no swap in the structure and thus the basis mismatch remains unhedged. In its cash flow analysis, DBRS Morningstar considered the mismatch a result of differing indices along with the daily note interest accrual versus loans resetting with a time lag.

Credit enhancement for the Class A Notes is calculated at 35.00% and is provided by the subordination of Class B to Class Z Notes. Credit enhancement for the Class B Notes is calculated at 32.25% and is provided by the subordination of the Class C to Z Notes. Credit enhancement for the Class C Notes is calculated at 25.25% and is provided by the subordination of the Class D to Z Notes. Credit enhancement for the Class D Notes is calculated at 20.00% and is provided by the subordination of the Class E to Z Notes. Credit enhancement for the Class E Notes is calculated at 15.25% and is provided by the subordination of the Class F to Z Notes. Credit enhancement for the Class F Notes is calculated at 12.25% and is provided by the subordination of the Class Z Notes. Class Z and XA are unrated, and Class XA is uncollateralised.

The transaction benefits from a Liquidity Facility, an amortising Class A Liquidity Reserve Fund and an Excess Cash Flow Reserve Fund (ECRF). The Liquidity Facility will be established at closing, provided by Wells Fargo Bank N.A. and sized at 1.7% of the principal amount outstanding of Class A Notes. The Liquidity Facility will cover senior fees and interest payment on Class A Notes up to the Liquidity Facility Cancellation Date. The Class A Liquidity Reserve Fund will cover senior fees and interest payments on Class A Notes on and from the Liquidity Facility Replacement Date in November 2025 and will be funded by available principal and revenue receipts. It will be amortising and sized at 1.7% of the principal amount outstanding of the Class A Notes. The ECRF Fund will be established from the First Optional Redemption Date (November 2022, if redemption is not exercised) until all the Subordinated Rated Notes have been repaid in full, and it will be available to pay interest due on the Subordinated Rated Notes, after applying any principal addition amounts. The ECRF will be funded with available revenue receipts, and relevant amounts will continue to be credited until no more Subordinated Rated Notes are outstanding.

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

Borrower collections are held with Barclays Bank plc and estimated collections are deposited on the next business day into the Issuer transaction account held with Elavon Financial Services D.A.C., UK Branch. DBRS Morningstar’s private rating of the Issuer Account Bank is consistent with the threshold for the Account Bank outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement.
-- The characteristics of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar calculated probability of default (PD), loss given default (LGD) and expected loss outputs on the mortgage portfolio to analyse with DBRS Morningstar’s cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’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 ratings of the United Kingdom of AAA and R-1 (high) with Stable trends as of the date of this report.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the 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 Morningstar 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: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for the ratings include Pepper and its agents.

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

DBRS Morningstar considers the data and information available to it for the purposes of providing the ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

DBRS Morningstar was supplied with third-party assessments. DBRS Morningstar applied a haircut to the original valuations of the properties of 5% based on the estimated errors in the audit report.

These ratings concern a to be issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):

-- In respect of the Class A Notes, a PD of 66.9% and LGD 47.0%, 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 62.2% and LGD of 41.9%, corresponding to the AA (low) 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 56.7% and LGD of 36.1%, corresponding to the A (low) 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 52.3% and LGD of 31.8%, 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 43.2% and LGD of 26.4%, corresponding to the BB rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F Notes, a PD of 35.1% and LGD of 21.8%, corresponding to the B 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 A (high) (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 (low) (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 (low) (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 (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 (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 A Notes to BBB (high) (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 (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 BB (high) (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 (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class B 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 B Notes to A (sf).
-- A hypothetical increase of the base case 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 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (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 BB (high) (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 BB (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 B Notes to BB (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 (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (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 (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 (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 C 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 C Notes to B (high) (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 (low) (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 (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 (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 D Notes to B (high) (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 B (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 D Notes to B (low) (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 (high) (sf).
-- A hypothetical increase of the base case PD by 50%, 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 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (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 B (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 E Notes to CCC (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 (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 (sf).

Class F Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class F Notes to CCC (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to CCC (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class F 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 F Notes to CCC (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 F Notes to CCC (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 F Notes to CCC (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 F Notes to CCC (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 F Notes to CCC (sf).

For further information on DBRS Morningstar 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: Rehanna Sameja, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 5 November 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 Morningstar 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 [email protected].