DBRS Morningstar Finalises Its Provisional Ratings on Elvet Mortgages 2021-1 plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes (the Rated Notes) issued by Elvet Mortgages 2021-1 plc (Elvet 2021-1 or the Issuer):

-- Class A notes at AAA (sf)
-- Class B notes at AA (high) (sf)
-- Class C notes at A (high) (sf)
-- Class D notes at BBB (high) (sf)
-- Class E notes at BBB (low) (sf)

The finalised 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 October 2063. The finalised 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 finalised ratings on the Class C, Class D and Class E notes address the ultimate payment of interest and the ultimate payment of principal on or before the final maturity date. DBRS Morningstar does not rate the Class Z notes, the VRR notes, or the certificates. The VRR notes represent 5% of the portfolio.

Elvet 2021-1 is a securitisation of the residential mortgage loans secured by first-lien mortgages originated by Atom Bank plc (Atom Bank) in the UK. This is the fourth securitisation of residential mortgages by Atom Bank and the first that is rated by DBRS Morningstar. The asset portfolio comprises first-lien and owner-occupied mortgages originated by Atom Bank and secured by properties in the UK. Atom Bank is the servicer of the transaction. In order to maintain servicing continuity, BCMGlobal Mortgage Services Limited will be appointed as the backup servicer and Law Debenture Corporate Services Limited as the backup servicer facilitator. Atom Bank is also the originator and the seller of this transaction. Atom Bank was founded in 2014 in Durham, UK, as the UK’s first app-based bank with no physical branches. It launched its residential mortgage platform in December 2016. As a result, there is limited performance history for mortgage loans originated by Atom Bank available.

The Issuer issued six tranches of collateralised mortgage-backed securities (the Class A to Class Z notes) to finance the purchase of the portfolio. The transaction is structured to initially provide 9.75% of credit enhancement to the Class A notes. This includes subordination of the Class B to Z notes.

The liquidity reserve fund (LRF) is available to cover shortfalls of senior fees and interest on the Class A and Class B notes after the application of revenue and the general reserve fund (GRF). The LRF is funded from the issuance of the notes on the closing date and its initial balance is 1.5% of the current balance of the portfolio as at the cut-off date. On each interest payment date (IPD), the target level will be 1.5% of the current balance of the portfolio as at the end of the collection period until the Class B notes have redeemed. The excess amounts following amortisation of the Class A notes and the Class B notes will form part of available revenue funds.

The GRF provides liquidity and credit support to the Rated Notes. It has a zero balance at closing but, on each IPD, thereafter the target level will be 1.5% of the current balance of the portfolio as at the cut-off date minus the LRF. The GRF is available to cover shortfalls in senior fees, interest, and any principal deficiency ledger (PDL) debits on the Class A to Class Z notes after the application of revenue. The GRF will form part of available revenue funds until the payment date that the Class Z notes will be redeemed in full.

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 Z notes outstanding after using revenue funds and both reserves. Principal can also be used to cure any shortfalls on the notes that are not the most-senior class of notes outstanding as long as the relevant PDL balance for each of those notes is less than 10%. Any use will be recorded as a debit in the PDL. The PDL comprises six 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 Z subledger.

On the interest payment date in October 2026, 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 August 2021, the final portfolio consisted of 2,012 loans with an aggregate principal balance of GBP 366.9 million. The majority of the loans in the pool were originated during 2021 (79.5%) and 2020 (14.1%). Because of this, the weighted-average (WA) seasoning of the pool is relatively low at 7.6 years. The WA original loan-to-value (LTV) is 79.7% and the WA indexed current LTV (CLTV) of the portfolio as calculated by DBRS Morningstar is 78.5%, with 61.0% of the loans having an indexed CLTV equal to or higher than 80%. The pool is primarily concentrated in the South East (12.7%), North West (12.6%), and Scotland (11.9%). The majority of the loans in the portfolio (94.0%) were granted to employed borrowers and the remaining 6.0% included self-employed borrowers. None of the loans in the pool have prior county court judgements or are currently in arrears, reflecting the good quality of the portfolio.

The majority of loans in the portfolio (99.4%) are fixed-rate loans for an initial period of time (2.5 years on a WA basis) and then will revert to Atom Bank’s standard variable rate (SVR), currently set at 3.5%. The remaining 0.6% of the portfolio's balance are floating-rate loans for life and refer to Atom Bank’s SVR. The current WA coupon of the portfolio is 2.63%. The interest on the notes is calculated based on the daily-compounded Sterling Overnight Index Average (Sonia), which gives rise to interest rate risk. DBRS Morningstar has accounted for this fixed-floating interest rate risk and SVR-Sonia basis risk in its rating analysis.

The Issuer has entered into a fixed-floating swap with NatWest Markets plc (NatWest) to mitigate the interest rate risk from the fixed-rate mortgage loans and Sonia payable on the notes. Based on DBRS Morningstar’s ratings on NatWest (which has a Long-Term Issuer Rating of A (low) and a Critical Obligations Rating of A (high)), the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to NatWest 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 National Westminster Bank plc and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept on the next business day to the Issuer’s account. 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 35 calendar days.

Citibank, N.A., London Branch (Citibank London) holds the Issuer’s transaction account from the closing date. The transaction documents stipulate that, 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 60 calendar days. The Issuer will also hold an additional transaction account at Elavon Financial Services DAC, UK Branch (Elavon London) and, after the closing date, any amounts standing in the Citibank London transaction account can be transferred to the Elavon London transaction account on any business day. Based on DBRS Morningstar’s private rating on Citibank London and Elavon London, replacement provisions, and investment criteria, DBRS Morningstar considers the risk arising from the exposure to Citibank London and Elavon 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 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 E notes according to the terms of the transaction documents. DBRS Morningstar analysed the transaction structure 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 expected consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the 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 immediate economic contraction, leading 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 RMBS transactions. The ratings are based on additional analysis and 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 default probability of self-employed borrowers in its analysis and conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case of high level of payment moratoriums in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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 are the “European RMBS Insight Methodology” (3 June 2021) and the “European RMBS Insight: UK Addendum” (9 October 2020).

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.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include Citigroup Global Markets Limited and Atom Bank. DBRS Morningstar was provided with loan-level data as of 31 August 2021 and historical monthly performance data (delinquencies) covering the period from December 2018 to June 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 newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 15.6% and LGD of 44.1%, 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 13.7% and LGD of 40.9%, corresponding to the AA (high) (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 9.8% and LGD of 33.8%, corresponding to the A (high) (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 6.4% and LGD of 27.0%, corresponding to the BBB (high) (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 5.8% and LGD of 22.7%, corresponding to the BBB (low) (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 AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (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 (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Class B 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 AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (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 C Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (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 (high) (sf)

Class D Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BBB (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 (low) (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 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 (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: Belen Bulnes, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 4 October 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. 5.2.0.0., 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 (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/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].