DBRS Morningstar Assigns Provisional Ratings to Tower Bridge Funding 2021-2 plc

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Tower Bridge Funding 2021-2 plc (TBF21-2 or 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 X notes at BB (high) (sf)

The provisional 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 November 2063. The provisional 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 provisional rating on the Class X notes addresses the ultimate payment of interest and principal on or before the final maturity date.

DBRS Morningstar does not rate the Class Z1, Class Z2 notes, or the residual certificates.

TBF21-2 will be the seventh securitisation of residential mortgages by Belmont Green Finance Limited (BGFL). The asset portfolio comprises first-lien owner-occupied and buy-to-let (BTL) mortgages, originated by BGFL through the Vida Homeloans brand and secured by properties in the United Kingdom. BGFL is the named mortgage portfolio servicer but has appointed Computershare Limited (formerly Homeloan Management Limited) to perform certain servicing activities. In order to maintain servicing continuity, CSC Capital Markets UK Limited will be appointed as the backup servicer facilitator. BGFL is a specialist UK lender that offers a full suite of mortgage products including owner-occupied, BTL and adverse credit history loans. BGFL only started originating loans in 2016 and hence has limited performance history.

The structure is expected to include a pre-funding mechanism where BGFL has the option to sell recently originated mortgage loans to the Issuer, subject to certain conditions to prevent a material deterioration in credit quality. The acquisition of these assets shall occur before the first interest payment date (IPD), using the proceeds standing to the credit of the pre-funding reserves. Any funds that are not applied to purchase additional loans will flow through the pre-enforcement principal priority of payments and pay down the notes on a pro rata basis.

The Issuer is expected to issue five tranches of collateralised mortgage-backed securities (the Class A, Class B, Class C, Class D and Class Z1 notes; the Principal Backed Notes) to finance the purchase of the initial portfolio and fund the pre-funding reserves. Additionally, TBF21-2 is expected to issue two classes of noncollateralised notes, the Class Z2 and Class X notes. The proceeds of Class Z2 notes will be used to fund the General Reserve Fund (GRF) and the proceeds of the Class X notes will be used to fund pre-funding Class X reserve ledger at closing. Any funds remaining in the pre-funding principal reserve and pre-funding Class X reserve on the first IPD will flow through the pre-enforcement principal priority of payments. To mitigate the risk of negative carry arising during the first quarter, the GRF is sized at its target level directly as of the closing date.

The transaction is structured to initially provide 16.5% of credit enhancement to the Class A notes. This includes subordination of the Class B to Class Z1 notes (Classes X and Class Z2 are not collateralised) and the non-amortising GRF.

The GRF will be available to cover shortfalls in senior fees, interest, and any PDL debits on the Class A to Class D notes after the application of revenue. On the closing date and prior to the redemption in full of the Class A to Class D notes, the required amount will be equal to [2.5]% of the Principal Backed Notes as of closing. The reserve will form part of available principal on the payment date that the Class D notes will be redeemed in full.

The liquidity reserve fund (LRF) will be available to cover shortfalls of senior fees and interest on the Class A and Class B notes after the application of revenue and the GRF. The LRF will have a balance of zero at closing and will be funded through principal receipts as a senior item in the waterfall to its amortising target – [1.5]% of the outstanding balance of the Class A and Class B notes. Any use, including prior to its complete funding, will be replenished from revenue. The excess amounts following amortisation of the notes will form part of available principal.

Principal can be used to cure any shortfalls of senior fees or unpaid interest payments on the most-senior class of the Class A to Class D notes outstanding after using revenue funds and both reserves. Any use will be recorded as a debit in the principal deficiency ledger (PDL). The PDL comprises five subledgers that will track the principal used to pay interest, as well as realised losses, in a reverse sequential order that begins with the Class Z1 subledger.

On the interest payment date in August 2025, the coupon due on the notes will step up and the notes may be optionally called. The notes must be redeemed for an amount sufficient to fully repay them, at par, plus pay any accrued interest.

As of 31 May 2021, the provisional portfolio consisted of 1,183 loans with an aggregate principal balance of GBP 231.9 million. Approximately 78.2% of the loans by outstanding balance were BTL mortgages. As is common in the UK mortgage market, the loans were largely scheduled to pay interest-only on a monthly basis, with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage (78.4% of the loans in the pool are interest-only). A significant part of the BTL loans was granted to portfolio landlords: 49.2% of the loans by total loan balance were granted to landlords with at least one other BTL property, and 16.4% have at least eight other BTL properties.

The mortgages are high-yielding, with a weighted-average coupon of 4.4% and a weighted-average reversionary margin of 4.8% over either the Vida Variable Rate (VVR) or the Bank of England Base Rate (BBR). The weighted-average seasoning of the pool is relatively low at 2.7 years. The weighted-average original loan-to-value (LTV) is 70.0% and the weighted-average indexed current LTV of the portfolio as calculated by DBRS Morningstar is 68.9%, with only 8.9% of the loans having an indexed current LTV above 80%.

Furthermore, 41.4% of the loans were granted to self-employed borrowers and 2.6% of the loans were granted under the Help-to-Buy scheme. Moreover, 7.8% of the mortgage portfolio by loan balance have prior county court judgements (CCJ) relating to the primary borrower with only 4.8% of the borrowers having a CCJ recorded during the past six years. As of the provisional cut-off date, loans between one and three months in arrears represent 1.6% of the outstanding principal balance of the portfolio; loans more than three months in arrears were 0.4%.

The majority of loans in the portfolio (81.2%) will revert to floating rates after the initial fixed-rate period, with 53.0% of the floating-rate loans reverting to the BBR and 28.2% to the VVR in the next one to five years; the remaining 18.8% of the portfolio is currently paying a floating rate linked to either the BBR or the VVR. Almost all loans linked to BBR as of the date of this report were previously linked to three-month Libor and have transitioned to a new rate as of 21 June 2021, the Libor replacement rate which is set quarterly as BBR plus an adjustment spread. The Libor replacement rate is subject to a floor at 25 bps and is always rounded up to the next 5 bps. The customer’s previous margin over Libor will then be applied as the margin over the Libor Replacement Rate. The interest on the notes is calculated based on the daily-compounded Sterling Overnight Index Average (Sonia), which gives rise to interest rate risk. The basis risk exposure is partially mitigated through a minimum VVR covenant, which will provide that the variable rate is not set below Sonia plus [1.5]%. DBRS Morningstar considered the basis risk between the variable rate mortgages linked to the BBR or VVR and the notes in its cash flow analysis.

The Issuer is expected to enter into a fixed-floating swap with Banco Santander S.A. (Santander) to mitigate the fixed interest rate risk from the mortgage loans and Sonia payable on the notes. Based on the DBRS Morningstar ratings of Santander, which has a long-term issuer rating of A (high) and a Long Term Critical Obligations Rating of AA (low), the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to Santander to be consistent with the ratings assigned to the notes as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

Monthly mortgage receipts are deposited into the collections account at Barclays Bank PLC (Barclays) and held in accordance with the collection account declaration of trust. DBRS Morningstar has assigned a long-term issuer rating of “A” and a Long Term Critical Obligations Rating of AA (low) to Barclays. The funds credited to the collection account are swept daily to the Issuer’s account for direct debit payments and within three business days for other payment formats. The collection account declaration of trust provides that interest in the collection account is in favour of the Issuer over the seller. Commingling risk is considered mitigated by the collection account declaration of trust and the regular sweep of funds. If the collection account provider is downgraded below BBB (low), the collection account bank will be replaced by an appropriately rated bank within 60 calendar days.

Citibank N.A., London Branch (Citibank) is the account bank in the transaction and will hold the Issuer’s transaction account, the GRF, the LRF, the prefunding reserves, and the swap collateral account. The transaction documents stipulate in the event of a breach of the DBRS Morningstar rating level of “A”, the account bank will be replaced by, or obtain a guarantee from, an appropriately rated institution within 30 calendar days. Based on the DBRS Morningstar rating of Citibank at AA (low) (long-term issuer rating), replacement provisions, and investment criteria, DBRS Morningstar considers the risk arising from the exposure to Citibank 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 the 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 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, considering the default rates at which the rated notes did not return all specified cash flows.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for 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 an increase in probability of default for certain borrower characteristics, 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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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. 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 BGFL and Santander. DBRS Morningstar was provided with loan-level data for both the completion and offer pipeline loans as of 31 May 2021 and 11 June 2021, respectively, and historical monthly performance data (delinquencies and payment data) covering the period from December 2016 to May 2021.

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 an expected to be issued new financial instrument. 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 notes, a PD of 30.5% and LGD of 52.1%, 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 26.9% and LGD of 46.9%, 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 20.9% and LGD of 38.1%, 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 17.7% and LGD of 33.2%, corresponding to the BBB (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 13.3% and LGD of 28.8%, corresponding to the BB (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (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 (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 BBB (high) (sf)

Class B 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 (high) (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 Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (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 (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (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 Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% 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, 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 X Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD, expected rating of BB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (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: 28 June 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 (3 June 2021) and European RMBS Insight Model v. 5.2.0.0., 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.
-- 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.
-- 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].