DBRS Morningstar Upgrades Junior Tranches of Wetherby Securities 2017 Limited and Confirms Classes A-C

DBRS Ratings Limited (DBRS Morningstar) upgraded its provisional ratings on 22 tranches of the unexecuted, unfunded financial guarantee (the Senior Guarantee) referencing a portfolio of commercial real estate (CRE) loans originated and managed by Lloyds Bank Plc (Lloyds) and its affiliates as follows:

-- GBP 6,056,417 Tranche D to AAA (sf) from AA (high) (sf)
-- GBP 6,056,417 Tranche E to AAA (sf) from AA (high) (sf)
-- GBP 6,056,417 Tranche F to AAA (sf) from AA (high) (sf)
-- GBP 6,056,417 Tranche G to AAA (sf) from AA (sf)
-- GBP 6,056,417 Tranche H to AAA (sf) from AA (sf)
-- GBP 6,056,417 Tranche I to AAA (sf) from AA (sf)
-- GBP 6,392,885 Tranche J to AAA (sf) from AA (low) (sf)
-- GBP 6,392,885 Tranche K to AAA (sf) from AA (low) (sf)
-- GBP 6,056,417 Tranche L to AAA (sf) from A (high) (sf)
-- GBP 6,056,417 Tranche M to AAA (sf) from A (high) (sf)
-- GBP 6,392,885 Tranche N to AA (high) (sf) from A (sf)
-- GBP 6,392,885 Tranche O to AA (high) (sf) from A (sf)
-- GBP 6,056,417 Tranche P to AA (high) (sf) from A (low) (sf)
-- GBP 6,056,417 Tranche Q to AA (sf) from A (low) (sf)
-- GBP 5,047,014 Tranche R to AA (sf) from BBB (high) (sf)
-- GBP 5,047,014 Tranche S to AA (low) (sf) from BBB (high) (sf)
-- GBP 4,710,547 Tranche T to A (high) (sf) from BBB (sf)
-- GBP 4,710,547 Tranche U to A (sf) from BBB (sf)
-- GBP 4,710,547 Tranche V to A (low) (sf) from BBB (sf)
-- GBP 4,710,547 Tranche W to A (low) (sf) from BBB (sf)
-- GBP 5,047,014 Tranche X to A (low) (sf) from BBB (low) (sf)
-- GBP 5,047,014 Tranche Y to BBB (high) (sf) from BBB (low) (sf)

DBRS Morningstar also confirmed its provisional ratings on the tranches listed below:

-- GBP 82,689,260 Tranche A at AAA (sf)
-- GBP 6,729,353 Tranche B at AAA (sf)
-- GBP 6,729,353 Tranche C at AAA (sf)

All trends are Stable.

The rating upgrades come amid the stable performance of the referenced loans between inception and November 2019. The notional amount for Tranche A has been reduced to GBP 82.7 million from GBP 487.2 million following partial loan amortisation and the repayments/removals of a loans from the portfolio, thus increasing credit enhancement levels.

Wetherby Securities 2017 Limited (the Guarantor) is a synthetic balance sheet commercial mortgage-backed securities transaction structured in the form of a financial guarantee. Lloyds bought protection under a junior financial guarantee (JFG) for the first loss piece (FLP) from Wetherby Securities 2017 Limited, but has not executed the contracts relating to the senior tranches (senior financial guarantee or SFG). Under the unexecuted guarantee agreement, Lloyds has transferred the remaining credit risk (initially from 7% to 100%) of the portfolio. DBRS Morningstar only rates the SFG tranches, which were not executed at closing, and DBRS Morningstar’s ratings remain provisional. The junior tranche was sold with the JFG executed. The financial guarantees reference 23 (51 at inception) UK loans, all having no additional subordinated debt, which are set to mature between June 2019 and December 2021. The transaction does not include a revolving period, and any refinanced or extended loans would be removed from the portfolio, with the exception of a distressed extension in part of a loan work-out plan.

With the repayment/removal of 11 loans, the portfolio’s total facility commitment (including syndicated facilities) has reduced to GBP 386 million. As such, the guaranteed obligation notional amount (GONA) amortised to GBP 268.4 million as of the November 2019 interest payment date (IPD) compared with GBP 672.9 million at inception. Lloyds could decide to grant additional loans to a borrower group (with or without additional property collateral), which would rank pro rata and pari passu to the guaranteed loans, increasing the borrower’s leverage. To reflect the possibility of further leverage increase, DBRS Morningstar analysed the portfolio assuming that further borrower draws to the level losses are contractually limited to in this transaction (see the 27 December 2017 press release).

For syndicated loans, DBRS Morningstar underwrote the loans based on the pre-syndication amount and then scaled back the debt amount to the securitised portion when calculating transaction-level proceeds.

There are 84 properties, with a market value of approximately GBP 805.1 million securing the whole portfolio, a decrease since inception amid loan repayments/removals, which had 356 properties and a market value of approximately GBP 3.6 billion.

As of the November 2019 IPD, the geographical concentration of the portfolio by market value, has changed following the redemptions. The top three regions are now the Midlands (30.2% of market value versus 10.6%), Greater London (22.4% versus 55.7% initially), and South West (20.9% versus 20.0%).

DBRS Morningstar followed the same method as initially in sizing the portfolio and compared the sizing outcome with the 2019 November reported GONA and concluded the rating upgrades for the bottom 22 tranches and confirmations for the top three tranches. In DBRS Morningstar’s view, the increased credit enhancement for more senior tranches is partially offset by the higher concentration of the remaining reference portfolio.

DBRS Morningstar will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include Lloyds.

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

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these 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.

The last rating action on this transaction took place on 24 December 2018, when DBRS Morningstar upgraded its provisional ratings on Tranche V, Tranche W, Tranche X, and Tranche Y and confirmed the provisional ratings on the other tranches.

The lead analyst responsibilities for this transaction have been transferred to Dinesh Thapar.

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

A decrease of 2.5%, 5% and 10% in the DBRS Morningstar values, derived by more conservative DBRS Morningstar’s underwriting assumptions, would lead to a downgrade of the rated tranches as noted below:

Tranche A Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche A at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche A at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche A at AAA (sf)

Tranche B Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche B at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche B at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche B at AAA (sf)

Tranche C Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche C at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche C at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche C at AAA (sf)

Tranche D Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche D at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche D at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche D at AAA (sf)

Tranche E Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche E at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche E at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche E at AAA (sf)

Tranche F Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche F at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche F at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche F at AAA (sf)

Tranche G Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche F at AAA
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche G at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche G at AAA (sf)

Tranche H Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche H at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche H at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche H at AAA (sf)

Tranche I Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche I at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche I at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche I at AAA (sf)

Tranche J Notes Risk Sensitivity:
--2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche J at AAA (sf)
--5% decline in DBRS Morningstar value would lead to an expected rating of Tranche J at AAA (sf)
--10% decline in DBRS Morningstar value would lead to an expected rating of Tranche J at AAA (sf)

Tranche K Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche K at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche K at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche K at AAA (sf)

Tranche L Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche L at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche L at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche L at AAA (sf)

Tranche M Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche M at AAA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche M at AAA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche M at AAA (sf)

Tranche N Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche N at AAA (high) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche N at AA (high) (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche N at AA (sf)

Tranche O Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche O at AA (high) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche O at AA (high) (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche O at AA (low) (sf)

Tranche P Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche P at AA (sf)
--A5% decline in DBRS Morningstar value would lead to an expected rating of Tranche P at AA (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche P at A (high) (sf)

Tranche Q Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche Q at AA (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche Q Notes at AA (low) (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche Q at A (sf)

Tranche R Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche R at AA (low) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche R at A (high) (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche R at A (low) (sf)

Tranche S Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche S at A (high) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche S at A (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche S at A (low) (sf)

Tranche T Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche T at A (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche T at A (low) (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche T at A (low) (sf)

Tranche U Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche U at A (low) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche U at A (low)(sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche U at BBB (high) (sf)

Tranche V Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche V at A (low) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche V at A (low) (sf)
-- A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche V at BBB (high) (sf)

Tranche W Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche W at A (low) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche W at BBB (high) (sf)
-- A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche W at BBB (sf)

Tranche X Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche X at BBB (high) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche X at BBB (high) (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche X at BBB (sf)

Tranche Y Notes Risk Sensitivity:
--A 2.5% decline in DBRS Morningstar value would lead to an expected rating of Tranche Y at BBB (high) (sf)
--A 5% decline in DBRS Morningstar value would lead to an expected rating of Tranche Y at BBB (sf)
--A 10% decline in DBRS Morningstar value would lead to an expected rating of Tranche Y at BBB (low) (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: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 27 December 2017

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

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].