DBRS Morningstar Finalises Provisional Ratings on Gemgarto 2021-1 plc

DBRS Ratings Limited (DBRS Morningstar) finalised the provisional ratings on the following classes of notes issued by Gemgarto 2021-1 plc (GMG21-1 or the Issuer):

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

The final ratings assigned to the Class B, Class C, Class D, and Class X notes differ from the provisional ratings of AA (low) (sf), A (low) (sf), BBB (high) (sf), and BB (low) (sf), respectively, because of the tighter spreads and step-up margins on Class A through Class X and a lower initial swap rate in the final structure.

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. The ratings on the Class B, Class C, and Class D notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the Final Maturity Date. The rating on the Class X Notes addresses the ultimate payment of interest and repayment of principal by the Final Maturity Date. DBRS Morningstar does not rate the Class E or Class Z notes.

GMG21-1 is a securitisation collateralised by a portfolio of owner-occupied residential mortgage loans granted by Kensington Mortgage Company Limited (KMC) in England, Wales, and Scotland.

The Issuer issued five tranches of collateralised mortgage-backed securities (Class A to Class E notes) to finance the purchase of the initial portfolio. Additionally, GMG21-1 issued two classes of noncollateralised notes, the Class X and Class Z notes, whose proceeds funded the general reserve fund (GRF) and covered initial costs and expenses. The Class X Notes will primarily amortise using revenue funds; however, if the excess spread is insufficient to fully redeem the Class X Notes, principal funds will be used to amortise the Class X Notes in priority to the Class E Notes.

The transaction structure includes a four-year replenishment period. During this time, principal receipts can be applied to purchase further mortgage loans, subject to additional loan criteria, once there are sufficient principal funds to amortise the Class A Notes to the target notional amount.

The GRF, funded at closing with GBP 9.4 million, is available to provide liquidity and credit support to the Class A to Class D notes. From the first payment date onwards, the required GRF balance will be 2.0% of the balance of the Class A to Class E notes. If the GRF balance falls below 1.5% of the Class A to Class E notes’ balance, principal available funds will be used to fund the liquidity reserve fund (LRF), which will be available to cover interest shortfalls on the Class A and Class B notes, as well as senior items from the pre-enforcement revenue priority of payment. The availability of the LRF for paying interest on the Class B Notes is subject to a 10% principal deficiency ledger condition.

As of 31 January 2021, the portfolio consisted of 2,798 loans with an aggregate principal balance of GBP 470.7 million. Some of these loans (29.7%) in the initial portfolio were previously securitised under the Finsbury Square 2018-1 transaction. The mortgage loans in the asset portfolio are all classified as owner-occupied and are secured by a first-ranking mortgage right.

The portfolio contains 4.5% interest-only and part-and-part loans, and 42.8% of the loans were granted to self-employed borrowers. Furthermore, loans with prior County Court Judgements (CCJs) comprise 11.5% of the mortgage pool and 13.4% of the loans were granted under the Help-to-Buy (HTB) scheme. All of these loans have at least three years of clean credit history in terms of CCJs, defaults, Individual Voluntary Agreements, and bankruptcies. As of the cut-off date, loans in arrears between one and three months represented 2.2% of the outstanding principal balance of the portfolio; no loans were three months or more in arrears.

The majority of the initial portfolio (88.4%) are loans that pay a fixed rate of interest for a teaser period of between two and five years before they will change to a floating rate. After having switched, the majority of these loans will be linked to three-month Libor with a small portion of loans switching to the Kensington Standard Rate (KSR). The remaining 11.6% of the portfolio balance are floating-rate loans that have already switched from their initial fixed-rate period in the past and are indexed to three-month Libor. The notes are all floating rate linked to Sterling Overnight Index Average (Sonia). Interest rate risk is expected to be hedged through an interest rate swap.

The Issuer has entered into a fixed-floating swap with BNP Paribas, London Branch (BNP London) to mitigate the fixed-interest rate risk from the mortgage loans and Sonia payable on the notes. Based on the DBRS Morningstar private rating of BNP London, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to BNP London to be consistent with the ratings assigned to the rated notes as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

Citibank, N.A., London Branch (Citibank London) holds the Issuer’s transaction account, the GRF, the LRF, and the swap collateral account. 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 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 Morningstar’s “European RMBS Insight: UK Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, and Class X notes according to the terms of the transaction documents. 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 report.
-- 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 include KMC and Lloyds Banking Capital Markets Limited. DBRS Morningstar was provided with loan-level data as of 31 January 2021 and historical performance data (static defaults, dynamic delinquencies, and prepayment data) covering the period from December 2010 to September 2020. In addition, DBRS Morningstar was provided with a small sample of repossessed properties for the period between 2013 and 2020.

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 26.0% and LGD of 42.9%, 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 22.6% and LGD of 37.1%, corresponding to the AA (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 18.7% and LGD of 30.3%, corresponding to the A (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 17.0% and LGD of 28.4%, 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 X Notes, a PD of 10.3% and LGD of 19.3%, 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 (high) (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (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 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 (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (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 A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (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 (high) (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 X Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (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: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 26 January 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].