DBRS Morningstar Finalises Provisional Ratings on Tudor Rose Mortgages 2021-1 PLC

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

-- Class A notes at AAA (sf)
-- Class B notes at AA (low) (sf)
-- Class C notes at A (low) (sf)
-- Class D notes at BBB (sf)
-- Class Reserve Fund Notes (RFN) at BB (high) (sf)
-- Class X1 notes at A (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 June 2048. The provisional 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 in June 2048. The provisional ratings on the Class C, the Class D, the Class RFN, and the Class X1 notes address the ultimate payment of interest and the ultimate payment of principal on or before the final maturity date in June 2048. DBRS Morningstar does not rate the Class X2 notes and Class Y Certificates.

Tudor Rose 2021-1 is a securitisation of the residential mortgage loans secured by first-lien mortgages originated by Axis Bank UK Ltd. in the UK. The mortgage portfolio currently backs the notes issued by Tudor Rose Mortgages 2020-1 PLC (Tudor Rose 2020-1) in June 2020. On the closing date, Jepson Limited (the Seller) purchased the portfolio from the Tudor Rose 2020-1 special-purpose vehicle (SPV). On the closing date, the Seller also transferred the portfolio to the Tudor Rose 2021-1 SPV, a bankruptcy-remote SPV incorporated in the UK. BCMGlobal Mortgage Services Limited is the servicer of the transaction. In order to maintain servicing continuity, Intertrust Management Limited will be appointed as the backup servicer facilitator.

The Issuer issued four tranches of collateralised mortgage-backed securities (the Class A to Class D notes) to finance the purchase of the portfolio. Additionally, the Issuer issued three non-collateralised notes, which include the RFN to fund the reserve fund from the closing date, two excess spread notes (the Class X1 and Class X2 notes), as well as the Class Y Certificates and Residual Certificates. The transaction is structured to initially provide 15.0% of credit enhancement to the Class A notes, 8.5% to the Class B notes, 5.8% to the Class C notes, and 2.0% to the Class D notes. This includes subordination of the Class B to D notes plus the reserve fund.

The transaction features an amortising liquidity reserve fund (funded to 2.0% of the Class A and Class B notes’ outstanding balance). The liquidity reserve fund will support the payment of senior expenses, the Class Y Certificate payments, Class A interest, and Class B interest (subject to the Class B principal deficiency ledger (PDL) being not more than 10% of the Class B notes‘ outstanding balance). The excess amounts following amortisation of the Class A and B notes after the step-up date will form part of available principal funds. Further credit enhancement is provided through the nonliquidity reserve fund, which will be equal to 2.0% of the closing balance of the collateralised notes (Classes A, B, C, and D) minus the liquidity reserve fund. Once the Class A to D notes are fully redeemed on or the step-up date if earlier, the non-liquidity reserve required amount will be released as part of available principal funds through the principal priority of payments.

Principal can be used to cure any shortfalls of senior fees or unpaid interest payments on the most-senior class outstanding after using revenue funds and both reserves. Any use will be recorded as a debit in the PDL. The PDL comprises four 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 D subledger.

The coupon on the notes will step up on the interest payment date falling in December 2024, which is also the first optional redemption date. The notes would need to be redeemed in full at the outstanding balance plus accrued interest. DBRS Morningstar considered the increased interest payable on the notes on the step-up date in its cash flow analysis.

As of 31 October 2021, the final portfolio consisted of 879 loans extended to 564 borrowers with an aggregate outstanding balance of GBP 257.5 million. The weighted-average (WA) seasoning of the portfolio was 3.9 years, with a WA remaining term to maturity of 17.5 years. The WA indexed loan-to-value of the portfolio is 69.7%. The final portfolio primarily comprises interest-only loans (99.6%), yielding a WA coupon of 3.9%. The majority of the loans (83.6%) are secured by properties located in London and the South East. As of the cut-off date, a total of nine loans (1.8%) are in arrears for longer than three months. A small portion (1.0%) of the portfolio consists of holiday lets. None of the loans in the pool are in Coronavirus Disease (COVID-19)-related payment holidays.

The majority of loans in the portfolio (81.8%) are fixed-rate loans for an initial period of time (1.5 years on a WA basis) and then will revert to three-month Libor. The remaining 18.2% of the portfolio's balance are floating-rate loans for life also indexed to three-month Libor. The current WA coupon of the portfolio is 3.9%. 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 three-month Libor-Sonia basis risk in its rating analysis.

The Issuer is expected to enter into a fixed-floating swap with BNP Paribas 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 BNP Paribas (which has a Long-Term Issuer Rating of AA (low) and a Critical Obligations Rating of AA (high)), the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to BNP Paribas to be consistent with the ratings assigned to the notes as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

The Issuer account bank is Elavon Financial Services, D.A.C., UK Branch. The transaction documents stipulate that, in the event of a breach of the DBRS Morningstar rating level of AA (low), the account bank will be replaced by an appropriately rated institution within 60 calendar days, with the possibility to be extended for an additional 60 days under certain conditions. Based on the DBRS Morningstar’s private rating of the account bank and the replacement provisions included in the transaction documents (the replacement time frame is longer than expected as per the methodology, but provides comfort by providing a higher rating trigger), DBRS Morningstar considers the risk of such counterparty 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 is of the opinion that the representation and warranties outlined in the draft transaction documents are weak. In the case of a material breach of any of the representations or warranties by the Seller on the closing date, if not remedied within 30 business days, the Issuer's only remedy will be a claim to damages. Such claims are limited to 5.0% of the current balance of the relevant mortgage loan, with a minimum of claim level of GBP 5,000 per mortgage loan. If the Issuer wishes to make a claim, it must do so by sending a notice on or before 24 months from the closing date. Furthermore, many of the representation and warranties in the draft transaction documents provided by the Seller are based on knowledge qualifiers (until the Issuer becomes aware). DBRS Morningstar’s commentary on traded portfolios can be found here: https://www.dbrsmorningstar.com/research/346240/dbrs-comments-on-analytical-considerations-when-analysing-securitisations-backed-by-traded-residential-mortgage-portfolios-in-europe.

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 RFN, 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.

DBRS Morningstar also ran additional cash flow sensitivities to test prepayment behaviour as indicated by historical data (i.e., low prepayment during fixed-rate periods and high prepayments around the reversion date) to assign its ratings.

The Class X1 notes would have achieved a higher rating using the cash flow assumptions outlined in DBRS Morningstar’s “European RMBS Insight Methodology” and “European RMBS Insight: UK Addendum”. However, the rating on the Class X1 notes was limited because the Class X1 notes are very sensitive to the level of excess spread in the portfolio and prepayment rates since the payment of interest and principal relies on the level of excess spread. In addition, DBRS Morningstar considered a lower recovery time for the Class X1 notes to assess the impact that early losses in the transaction can have on the rating on the Class X1 notes.

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 moratoriums in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update 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” (27 October 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

The rating on the Class X1 notes at A (low) (sf) materially deviates from the higher rating implied by the principal methodology. DBRS Morningstar considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the principal methodology; in this case, DBRS Morningstar assumed a shorter recovery lag in case of loan defaults to assess the impact that early losses in the transaction can have on the rating on the Class X1 notes.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 historical performance (loan-level payment and arrears history from July 2015 to October 2021) and loan-level data as at 31 October 2021, provided by Morgan Stanley & Co. International plc (the Arranger).

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.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- In respect of the Class A notes, a PD of 24.6% and LGD of 53.5%, 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 19.9% and LGD of 48.6%, 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 15.9% and LGD of 39.0%, 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 13.1% and LGD of 34.0%, 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 RFN, a PD of 9.4% and LGD of 28.8%, corresponding to the BB (high) (low) (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 15.9% and LGD of 39.0%, corresponding to the A (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 (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 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 (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 (low) (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 BBB (low) (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 (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 (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 RFN Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (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)

Class X1 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 BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (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: 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: 22 November 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: http://www.dbrsmorningstar.com/about/methodologies.

-- European RMBS Insight Methodology (3 June 2021) and European RMBS Insight Model v. 5.3.0.2., https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (27 October 2021),
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.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-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.
-- 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: http://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].