DBRS Morningstar Finalises Provisional Ratings on Durham Mortgages A plc

DBRS Ratings Limited (DBRS Morningstar) finalised the following ratings on the residential mortgage-backed floating rate notes issued by Durham Mortgages A plc (Durham or the Issuer):

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

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in May 2054. The rating on the Class B notes addresses the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. The ratings on the Class C, Class D, Class E, Class F, and Class X Notes address the ultimate payment of interest and repayment of principal by the final maturity date.

The Issuer is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in the United Kingdom. The collateralised notes are backed by an owner-occupied residential mortgage portfolio originated by Bradford & Bingley and Mortgage Express (the Originators), sold by Dorset Home Loans Limited (the Seller), and serviced by Topaz Finance Limited (the Servicer).

The issuance performed by Durham Mortgages A is a refinancing of an existing transaction that closed in 2018. The mortgage portfolio (as of end-January 2021) consisted of EUR 2.00 billion of first-lien mortgage loans collateralised by owner-occupied residential properties in England and Wales, with a concentration in the London and South East area. The majority of the pool (65.0%) was originated between 2006 and 2007.

For the purpose of the refinanced transaction, the proceeds of the notes were ultimately used to pay noteholders of the existing notes whereas the portfolio backs the newly-issued notes. However, the closing date of the refinanced transaction is a few days before the redemption date of the existing notes. In the short period between those two dates, the existing noteholders will hold security over the cash proceeds of the new issuance whereas the noteholders of the refinanced transaction will hold security over the portfolio. DBRS Morningstar has reviewed legal opinions on the enforceability of the different transfers involved in the refinancing.

Durham is a securitisation where the seller is not the originator or servicer of the loan portfolio. In 2018, the seller, an entity which is part of the Barclays Group, sold loans to the Issuer that were originated by Bradford & Bingley and Mortgage Express, which both ceased their lending operations in 2008. This poses more risks than a traditional RMBS transaction, where the Originators remain mortgage lenders in the jurisdiction of the securitised portfolio and services the assets, and consequently have a contractual duty and commercial incentives to support the securitisations of their assets. Furthermore, traded portfolio securitisations usually involve more than one sale of the underlying portfolio, often through SPVs and limitations to traditional representations and warranties. DBRS Morningstar has reviewed legal opinions on the validity of the sales.

Even though the mortgages were granted to nonconforming borrowers at origination, the pool has so far displayed limited adverse performance indicators. For example, restructuring arrangements account for only about 2.7% of the outstanding portfolio, which is a striking difference from other nonconforming pool of the same period where restructures could account for about half of the pool.

The portfolio has shown a limited uptake of the pandemic-payment holidays, which have been more predominant in peer transactions. Further current evidence of good performance is also reflected by the low three-month-plus arrears ratio, which as of January 2021, stood at 2.0%.

Interest-only (IO) loans make up 85.5% of the mortgage portfolio, where the principal is repaid as a bullet at the loan’s maturity. This poses a risk at the maturity of the loan if the borrower does not have a repayment strategy in place or is unable to refinance before the maturity date. IO loans representing 0.7% of the mortgage portfolio have matured in the past and are technically in default status while still in most cases pay their regular IO instalments. DBRS Morningstar assumed a higher probability of default (PD) for about 20% of the IO loans in the portfolio it considers as riskier IO loans under its “European RMBS Insight: UK Addendum”. Past due IO loans have been treated as defaulted in DBRS Morningstar’s analysis.

The transaction includes both a general reserve fund (GRF) and a liquidity reserve fund (LRF). The GRF provides credit and liquidity support to the rated notes (with the exception of Class X notes). It can be used to cover interest shortfalls on payments for the Class A Notes and other rated notes if the relevant principal deficiency ledger (PDL) condition (no more than 10% debited) is satisfied. The GRF was funded mainly through the proceeds from the Class R Notes at closing.

The LRF is available to provide liquidity support to the senior fees payments, X certificate payments, and interest on the Class A and Class X notes. The initial amount of 0.5% of initial Class A Notes balance was mainly funded at closing through Class R proceeds. The LRF does not amortise until Class A Notes reach half their initial balance. After, it will amortise at 1% of the Class A Notes outstanding balance. However, if the GRF is depleted to a level lower than 1% of the initial portfolio before Class A has reached half its initial size, then the LRF will be funded to 1% of outstanding Class A Notes balance immediately, using interest available funds, junior to Class A interest but senior to the Class A PDL.

Citibank, N.A., London Branch (Citibank London) holds the Issuer’s transaction account and reserves. Based on the DBRS Morningstar private rating of Citibank London, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar 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 Morningstar's “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings on a review of the following analytical considerations:

-- The transaction’s 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 Morningstar calculated PD, loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio, which are used as inputs into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’s “European RMBS Insight: UK Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class C, Class D, Class E, Class F, and Class X notes according to the terms of the transaction documents. While a failure to timely pay interest on Class B Notes when most senior is not an event of default under the transaction documents, DBRS Morningstar tested its Class B rating for timely interest when most they become most senior. The transaction structure was analysed using Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as a downgrade, and replacement language in the transaction documents.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AA (high) with a Stable trend as of the date of this press release.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many structured finance transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, additional stresses to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the ratings of DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies applicable to the ratings in this transaction are the “European RMBS Insight Methodology” (2 April 2020) and the “European RMBS Insight: UK Addendum” (9 October 2020).

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 at: https://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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings is Barclays Bank PLC. DBRS Morningstar was provided with loan-level data as of 31 December 2020. DBRS Morningstar was also provided with historical performance data, split in two periods: (1) December 2008 – September 2017 (i.e., before the pool was first securitised) and (2) May 2018 – November 2020 (i.e., data extracted after the initial securitisation). The oldest dataset include dynamic arrears, dynamic prepayments, cumulative loss vintages, and repossession files data. The transaction dataset includes dynamic arrears and repossession files data.

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

DBRS Morningstar was supplied with one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its 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.

These ratings concern a newly 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.dbrsmorningstar.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 27.8% and LGD of 41.6%, corresponding to the AAA (sf) 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 23.2% and LGD of 34.2%, corresponding to the AA (low) (sf) 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 18.6% and LGD of 27.6%, corresponding to the A (low) (sf) 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 14.4% and LGD of 20.9%, corresponding to the BBB (low) (sf) 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 10.4% and LGD of 18.1%, corresponding to the BB (sf) 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 5.8% and LGD of 14.9%, corresponding to the B (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class X Notes, a PD of 11.2% and LGD of 19.4%, corresponding to the BB (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (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 (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

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

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

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

Class F Notes risk sensitivity:
-- 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD, expected rating of CCC (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)

Class X 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)
-- 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 (high) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Lorenzo Coccioli, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 16 February 2021

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
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: https://www.dbrsmorningstar.com/about/methodologies.

-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v. 5.0.0.1.,
https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (9 October 2020),
https://www.dbrsmorningstar.com/research/368132/european-rmbs-insight-uk-addendum.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020),
https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020),
https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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].