DBRS Morningstar Finalises Provisional Ratings on Together Asset Backed Securitisation 2021-CRE2 Plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Together Asset Backed Securitisation 2021-CRE2 Plc (TABS 2021-CRE2 or the Issuer):

-- Class A Loan Note 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 B (sf)
-- Class X Notes at BB (sf)

The final rating of B (sf) assigned to the Class E Notes differs from the provisional rating of B (low) (sf) because of the tighter spreads and step-up margins on the Class A Loan Note to Class X Notes in the final structure.

The final rating on the Class A Loan Note addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date. The final ratings on the Class B Notes, Class C Notes, Class D Notes, and Class E Notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. The final 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 Z Notes.

TABS 2021-CRE2 is the second public securitisation issuance backed by small balance commercial assets originated by Together Commercial Financial Services Limited (TCFL). The portfolio of loans comprises first- and second-lien mortgage loans, secured by commercial, mixed-use, and residential properties located in the United Kingdom.

The Issuer issued five rated tranches of collateralised mortgage-backed securities (Class A Loan Note to Class E Notes) to finance the purchase of the portfolio. The Class A Loan Note was not listed and instead was purchased by the Class A Loan Noteholder via the Loan Note Agreement. The issuance proceeds from the unrated Class Z Notes were used to partially purchase the portfolio and the remaining proceeds were used to fund the general reserve fund (GRF) and the Class A liquidity reserve fund (LRF). Additionally, TABS 2021-CRE2 issued one class of uncollateralised notes, the Class X Notes, which will amortise using the excess revenue funds.

The GRF will amortise in line with the portfolio and is available to provide credit and liquidity support to the Class A Loan Note to Class E Notes. The GRF was fully funded at close at 2.0% of the initial portfolio balance less the LRF. The LRF provides liquidity support to the Class A Loan Note, as well as senior items on the pre-enforcement revenue priority of payments and was sized equal to 1.5% of the Class A Loan Note balance. Additionally, the notes receive liquidity support from principal receipts, which can be used to cover interest shortfalls on the most-senior class of notes, provided a credit is applied to the principal deficiency ledgers, in reverse sequential order.

As of 30 April 2021, the portfolio consisted of 1,055 loans provided to 976 borrowers. The average outstanding principal balance per borrower is GBP 255,253, aggregating to a total portfolio of GBP 249.1 million. Approximately 43.6% of the loans are either fully or partially borrower-occupied with 39.6% of the portfolio provided to self-employed borrowers. Over half of the loans in the portfolio are scheduled to only pay interest on a monthly basis, with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage (61.6% of the loans in the pool are interest only). Furthermore, the portfolio contains 2.7% of second-lien loans and loans with a prior County Court Judgement comprise 8.0%.

The mortgages are high yielding with a weighted-average coupon of 7.5% and newly originated with a weighted-average seasoning of 23.9 months. The weighted-average current loan-to-value (CLTV) ratio of the portfolio is 56.3%, with 0.9% of loans exceeding 75% CLTV. No loans in the portfolio are three months or more in arrears.

The majority of the portfolio (99.0%) are loans paying a floating rate of interest linked to a standard variable rate set by TCFL. The remaining 1.0% of the portfolio is currently paying an initial fixed rate of interest that will switch to a floating rate of interest indexed to bank base rate. The rated notes are all floating rate linked to the Sterling Overnight Index Average (Sonia). The basis rate mismatch will remain unhedged.

Elavon Financial Services DAC, UK Branch (Elavon UK), holds the Issuer’s transaction account. Based on the DBRS Morningstar private rating of Elavon UK, the downgrade provisions outlined in the transaction documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to Elavon UK 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 (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” methodology.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A Loan Note, Class B Notes, Class C Notes, Class D Notes, Class E Notes, and Class X Notes according to the terms of the transaction documents.
-- 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 transaction structure was analysed using Intex DealMaker.

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, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated a moderate reduction in property values, and conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand potential high levels of payment holidays in the portfolio.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-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” (3 June 2021) 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.

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 TCFL and Citigroup Global Markets Ltd. DBRS Morningstar was provided with loan-level data as of 31 March 2021 and historical performance data (dynamic delinquencies and prepayment data) covering the period from January 2014 to March 2021. In addition, DBRS Morningstar was provided with a sample of 33 repossessed properties.

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

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.

These are the first DBRS Morningstar ratings on this financial instrument.

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 Loan Note, a PD of 33.2% and LGD of 45.5%, 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 28.1% and LGD of 37.9%, 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 23.2% and LGD of 31.2%, 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 18.5% and LGD of 23.9%, 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 9.5% and LGD 16.6%, corresponding to the B (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 13.8% and LGD of 19.8%, corresponding to the BB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

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

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

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

Class X Notes risk sensitivity:
-- 25% increase in PD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of B (sf)
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% 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 (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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: 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: Rehanna Sameja, Senior Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 2 June 2021

DBRS Ratings Limited
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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 (3 June 2021) and European RMBS Insight Model v. 5.1.0.1.,
https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (9 October 2020),
https://www.dbrsmorningstar.com/research/368132/european-rmbs-insight-uk-addendum.
-- 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.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/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.
-- 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.

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].