DBRS Morningstar Finalises Provisional Ratings on Castell 2021-1 plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Castell 2021-1 plc (Castell 2021 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 BBB (sf)
-- Class E notes at BB (low) (sf)
-- Class F notes at B (sf)
-- Class X1 notes at AA (low) (sf)

The ratings on the Class A and Class X1 notes address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date. The ratings on the Class B, Class C, Class D, Class E, and Class F notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. DBRS Morningstar does not rate the Class X2 notes.

Castell 2021 is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom. The proceeds from the issuance of the notes were used to fund the purchase of UK second-lien mortgage loans originated by Optimum Credit Limited (Optimum Credit). Pepper UK Limited (Pepper) is the primary and special servicer of the portfolio. Optimum Credit, established in November 2013, is a specialist provider of second-lien mortgages based in Cardiff, Wales. Both Optimum Credit and Pepper are part of the Pepper Group Limited, a worldwide consumer finance business, third-party loan servicer, and asset manager, which has been operating successfully in Australia since 2001. CSC Capital Markets UK Limited was appointed as the backup servicer facilitator.

Unlike the previous Castell transaction, Castell 2021 includes a prefunding period that allows the Issuer to purchase newly originated mortgages prior to the first interest payment date (IPD) falling in December 2021 with the proceeds of a prefunding principal reserve. A deterioration in credit quality is mitigated by prefunding portfolio conditions. Any funds remaining in the prefunding principal reserve on the first payment date will repay the principal-backed notes pro rata. A prefunding revenue reserve was established to mitigate the effect of negative carry during the first payment period.

DBRS Morningstar was provided with information on a mortgage portfolio as of 30 September 2021. The portfolio consists of 6,976 mortgage loans with an aggregate principal balance of GBP 307.9 million. The average loan per borrower is GBP 44,141.

All of the mortgage loans in the portfolio are owner occupied and almost all loans are repaying on a capital and interest basis. Within the portfolio, 87.6% of the loans are fixed-rate loans that switch to floating rate upon completion of the initial fixed-rate period whereas 9.1% are floating-rate loans for life and the remaining 3.3% are fixed-rate loans for life. Interest rate risk is hedged through a fixed-floating interest rate swap with NatWest Markets Plc (NWM) to mitigate the fixed interest rate risk from the mortgage loans and Sonia payable on the notes. The Issuer pays the swap counterparty an amount equal to the swap notional amount multiplied by the swap rate and, in turn, the Issuer receives the swap notional amount multiplied by Sonia. NWM currently has a DBRS Morningstar Long Term Critical Obligations Rating of A (high) and a Long-Term Issuer Rating of A (low), both with Stable trends. Following a review of the provisions outlined in the swap agreement, DBRS Morningstar concludes that NWM meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade and collateral posting provisions with respect to NWM's role as hedging counterparty, consistent with DBRS Morningstar criteria.

On the first IPD, the Issuer will enter into an additional hedging agreement with a swap counterparty or increase the notional amount under the existing swap agreement with NWM to hedge the exposure of additional fixed-rate loans acquired during the prefunding period. The transaction documentation includes a maximum fixed swap rate that cannot be exceeded.

Furthermore, approximately 2.8% of the portfolio by loan balance comprises loans originated to borrowers with a prior County Court Judgement, 0.3% of the borrowers are in arrears, and 11.4% of the loans were granted to self-employed borrowers, unemployed borrowers, or pensioners (referring to the primary borrower’s employment status only). The weighted-average (WA) seasoning of the portfolio is relatively low at five months and the WA remaining term is approximately 15 years. The WA current loan-to-value ratio, including any prior-ranking balances of the portfolio, is 63.5%.

Credit enhancement for the Class A notes is expected to be 24.75% at closing and is to be provided by the subordination of the Class B to Class G notes (excluding the uncollateralised Class X1 and X2 notes). The Class A notes benefit from further liquidity support provided by an amortising liquidity reserve, which can support the payment of senior fees and interest on the Class A notes. The liquidity reserve fund (LRF) will be unfunded at closing, with the required amount of 1.0% of the outstanding balance of the Class A notes. Initially, the LRF will be funded through principal receipts. Any subsequent use of the LRF will be replenished from revenue receipts. The excess amounts following amortisation of the Class A notes will form part of available principal.

The structure includes a principal deficiency ledger (PDL) comprising seven subledgers (Class A PDL to Class G PDL) that provision for realised losses as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest. The losses are allocated starting from the Class G PDL and then to the subledgers of each class of notes in reverse-sequential order.

Available principal funds can be used to provide liquidity support to the transaction. Following the application of the available revenue funds and liquidity reserve, available principal funds can be used to pay senior fees, swap payments, and interest shortfalls on the Class A to Class F notes. In more detail, principal is available to provide liquidity support to the Class B to Class F notes provided the respective PDL balance is less than 10% of the outstanding balance of the respective class of notes. There is no condition for principal used to provide liquidity support for the Class A notes, given that available revenue funds and the LRF have been applied first. Any use will be recorded as a debit in the PDL.

The coupon on the notes steps up on the interest payment date falling in February 2026, which is also the first optional redemption date. The notes can be redeemed in full, at the outstanding balance plus accrued interest, on any subsequent payment date. DBRS Morningstar considered the increased interest payable on the notes on the step-up date in its cash flow analysis.

The Issuer account bank is Citibank N.A., London Branch. Based on DBRS Morningstar’s private rating on the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the 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 DBRS Morningstar used as inputs into the cash flow tool. DBRS Morningstar analysed the mortgage portfolio 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, Class E, Class F, and Class X1 notes according to the terms of the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker.
-- 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 immediate 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 RMBS transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case of high level of payment moratoria 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 “European RMBS Insight Methodology” (3 June 2021) and the “European RMBS Insight: UK Addendum” (27 October 2021).

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.

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 Optimum Credit and NWM. DBRS Morningstar was provided with loan-level data as of 30 September 2021 and historical performance data (dynamic delinquencies, cumulative delinquencies per cohort for loans one months or more in arrears, payment data, cumulative prepayments, as well as historical payment holiday data). Dynamic delinquency data covered the time from July 2015 to July 2021; cumulative delinquencies per cohort for loans one months or more in arrears and payment data was provided for the time from August 2014 up to June 2021; cumulative prepayments for a period from April 2016 to April 2021; and historical payment holiday data has been received for the period from March 2020 to June 2021.

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 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 24.0% and LGD of 92.4%, 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 21.0% and LGD of 89.1%, 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 17.1% and LGD of 83.5%, 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 12.0% and LGD of 75.7%, 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 E notes, a PD of 6.0% and LGD of 63.5%, corresponding to the BB (low) (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 4.2% and LGD of 58.3%, 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 X1 notes, a PD of 19.6% and LGD of 87.6%, corresponding to the AA (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 AAA (sf)
-- 25% increase in PD, expected rating of AA (high) (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 AA (low) (sf)
-- 50% increase in PD, expected rating of AA (low) (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 (sf)

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

Class E Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (high) (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 Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD, expected rating of B (low) (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 X1 Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (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 AA (low) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://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: 25 October 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. 5.3.0.1., https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (27 October 2021), https://www.dbrsmorningstar.com/research/386599/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].