DBRS Morningstar Confirms Ratings on Finsbury Square 2019-1 plc

DBRS Ratings Limited (DBRS Morningstar) confirmed the following ratings on the notes issued by Finsbury Square 2019-1 plc (the Issuer):

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

The ratings on the Class A Notes, Class B Notes, Class C Notes, Class D Notes, and Class E Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date, on the payment date in June 2069. The rating on the Class X Notes addresses the ultimate payment of interest and principal on or before the legal final maturity date, on the payment date in June 2069.

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 February 2020 monthly report and December 2019 payment date.
-- Portfolio default rate (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.

The transaction is a securitisation collateralised by a portfolio of residential mortgage loans granted by Kensington Mortgage Company Limited (KMC) in England, Wales, and Scotland. Notable features of the portfolio are Help-to-Buy (HTB), Right-to-Buy (RTB) mortgages, Buy-to-Let (BTL) properties, borrowers with adverse borrower features including self-employed borrowers and borrowers with prior county court judgments and the presence of arrears at closing, albeit in limited proportions. The outstanding portfolio balance increased to GBP 515,688,018 from GBP 375,649,014 between closing and the first payment date falling in September 2019 as additional loans were purchased during that period. The portfolio has been amortising since.

PORTFOLIO PERFORMANCE
Delinquencies have been volatile since closing. As of the February 2020 monthly report, current two-to-three months arrears represented 0.4% of the outstanding portfolio balance, up from 0.2% at closing and the 90+ delinquency ratio was 1.23% up from 0.9% at closing. As of the February 2020 monthly report, total arrears are 4.6% of the outstanding portfolio balance, up from 2.3% of at closing. As of the February 2020 monthly report, cumulative net losses are immaterial, representing 0.0% of the portfolio initial balance. To date, only one property has been repossessed.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has marginally adjusted its base case PD and LGD assumptions to 7.4% and 17.0%, respectively, from 7.5% and 17.2%. DBRS Morningstar’s analysis factors the presence of HTB mortgages (6.0% of the outstanding portfolio balance) and BTL mortgages (24.4% of the outstanding portfolio balance) as well as a high proportion of self-employed borrowers (46.0% of the outstanding portfolio balance).

The DBRS Morningstar base case PD and LGD of the current pool of receivables are 7.4% and 17.0%, respectively.

CREDIT ENHANCEMENT
As of the December 2019 payment date, the credit enhancement (CE) increased as follows since the DBRS Morningstar initial rating:

--CE to the Class A Notes increased to 19.1%, up from 17.5%
--CE to the Class B Notes increased to 13.8%, up from 12.6%
--CE to the Class C Notes increased to 9.0%, up from 8.2%
--CE to the Class D Notes increased to 6.4%, up from 5.7%
--CE to the Class E Notes increased to 5.3%, up from 4.7%
--CE to the Class X Notes remained at 0.0%

The CE for the Class A to E Notes consists of the subordination of the junior notes and a General Reserve Fund (GRF).

The GRF is nonamortising and is available to cover senior fees, senior swap payments, interest on the Class A to E Notes and principal losses via the principal deficiency ledgers (PDLs) on the Class A to F Notes. The GRF was funded at GBP 11,502,500 at closing and reduced to GBP 10,700,000 at the first payment date. As of the December 2019 payment date, the GRF was its target level of GBP 10,700,000, equal to 2% of the initial Class A to F Notes. Once the Class E Notes are fully redeemed, the target balance of the GRF becomes zero. As of the December 2019 payment date, all PDLs were clear.

A Liquidity Reserve Fund (LRF) provides additional liquidity support to the transaction to cover senior fees, senior swap payments, and interest on the Class A and Class B Notes. The LRF is funded through available principal funds if the GRF balance falls below 1.5% of the outstanding Class A to F Notes. In this event, the LRF is funded to 2% of the outstanding Class A and Class B Notes balances and is replenished at each payment date.

The transaction is exposed to interest rate risk as 85.8% of the outstanding portfolio balance pays a (short-term) fixed rate of interest while the rated notes are indexed to three-month Libor. In addition, loans can be subject to a variation in the length of the fixed-rate period, the applicable interest rate, and maturity date through a “Product Switch” up to 20% of the Class A to F original balance. As of December 2019, Product Switch loans were marginal (0.2% of the Class A to F original balance).

Citibank N.A./London Branch acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Citibank N.A./London Branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar 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 Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The transaction structure was analysed in Intex DealMaker.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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” (13 December 2019).

DBRS Morningstar 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 at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include monthly and quarterly investor reports as well as loan-level data provided by Citibank N.A./London Branch.

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 28 March 2019, when DBRS Morningstar finalised its provisional ratings on the notes.

The lead analyst responsibilities for this transaction have been transferred to Natalia Coman.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar 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 receivables are 7.4% and 17.0%, 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 (high) (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 (high) (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 (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (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 AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (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 (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 (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 (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 D Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, 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 (high) (sf)

Class E Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (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 (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating below B (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 below B (sf)
-- 50% increase in LGD, expected rating below B (sf)
-- 25% increase in PD, expected rating below B (sf)
-- 50% increase in PD, expected rating below B (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating below B (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating below B (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating below B (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating below B (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 U.S. regulations only.

Lead Analyst: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 4 March 2019

DBRS Ratings Limited
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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.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (13 December 2019)
https://www.dbrsmorningstar.com/research/354616/master-european-structured-finance-surveillance-methodology
-- European RMBS Insight Methodology (12 April 2018) and European RMBS Insight Model 4.2.0.0
https://www.dbrsmorningstar.com/research/325874/european-rmbs-insight-methodology
-- European RMBS Insight: U.K. Addendum (8 November 2019)
https://www.dbrsmorningstar.com/research/352573/european-rmbs-insight-uk-addendum
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019)
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].