DBRS Morningstar Finalises Provisional Ratings on Harbour No. 1 plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Harbour No. 1 plc (Harbour or the Issuer):

-- Class A1 Notes at AAA (sf)
-- Class A2 Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (sf)
-- Class G Notes at B (high) (sf)
-- Class X Notes at BB (high) (sf)

The ratings on the Class A1 and Class A2 Notes (together, the Class A Notes) address the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in January 2054. The 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 ratings on the Class C, Class D, Class E, Class F, Class G, and Class X Notes address the ultimate payment of interest and repayment of principal by the final maturity date.

The collateralised notes are backed by an owner-occupied (OO) and buy-to-let (BTL) residential mortgage portfolio originated by several defunct originators in and before 2008. The portfolio was assembled by buying three different portfolios: the Wall portfolio, which accounts for 33.1% of the total pool; the MAQ portfolio (39.5%); and the Morag portfolio (27.4%). Each portfolio is serviced by a different servicer: Mars Capital Finance Limited services the Wall portfolio, Pepper (UK) Limited services the MAQ portfolio, and Topaz Finance Limited services the Morag portfolio.

On the closing date, the seller, Isle of Wight Home Loans Limited, a special-purpose vehicle (SPV) fully owned by Barclays Bank plc, purchased the three portfolios from their current owners: Wall Finance SPV for the Wall and MAQ portfolios, and Morag Finance 1 Sarl for the Morag portfolio. On the same date (the closing date), the seller transferred all the three portfolios to the Issuer, a bankruptcy-remote SPV incorporated in the United Kingdom.

Harbour is a securitisation where the seller is not the originator or servicer of the loan portfolio. The seller, an entity that is part of the Barclays Group, sold to the Issuer loans that were originated by several originators that have ceased their lending operations after the financial crisis of 2008. This poses more risks than a traditional RMBS transaction, where the originator remains a mortgage lender in the jurisdiction of the securitised portfolio and services the assets, and consequently has a contractual duty and commercial incentives to support the securitisations of their assets.

Furthermore, the transaction involved more than one sale of the underlying portfolio through different SPVs, something that results in representations and warranties (R&Ws) that are more limited than usual. DBRS Morningstar has reviewed legal opinions on the validity of the two transfers (from the vendors to the seller and from the seller to the Issuer) that took place on the closing date.

The pool comprises 25% of loans that are three or more months in arrears with only 65% of pool balance being currently clear of arrears. While the pool's overall three months-plus arrears are declining, only one third of the borrowers that were three months or more in arrears 12 months ago have been able to decrease their arrears balance since then.

IO loans (including part & part loans) make up 80.5% of the mortgage portfolio, where the principal is repaid bullet at maturity of the loan. This poses a risk at the maturity of the loan if the borrower does not have a repayment strategy in place or is unable to refinance before the maturity date. About 2.4% of the IO loans have matured in the past and are technically in default status while still in most cases paying their regular IO instalment. A further 16% is scheduled in the next five years.

The portfolio is entirely backed by loans paying a floating rate: 55% of loans track the Bank of England Base Rate (BBR), 39% track three-month Libor with the remaining 6% being Standard Variable Rate (SVR) loans. Compared with peer transactions, the pool shows a higher proportion of trackers, which have lower margins than what is typically charged for SVR loans. The lower margin paid by the portfolio can be seen as a credit positive because it implies cheaper instalments for the borrowers. At the same time, this results in a lower amount of excess spread over the life of the transaction when compared with other legacy nonconforming deals.

The mortgage portfolio is almost 15 years seasoned on a weighted-average (WA) basis, which is considered a credit positive.

The weighted-average current indexed LTV (WACLTV (ind) of the mortgage portfolio is 66.2% as calculated by DBRS Morningstar in the Insight model), which is in the higher range of peer transactions comprising similar vintages. The proportion of loans with a WACLTV (ind) above 80% is approximately 23.2% of the mortgage portfolio, a reflection of the high Original LTV of the portfolio (WA of 84.2%), which, combined with the IO nature of most of the pool, did not allow for the build-up of significant borrower equity despite rather favourable house price movements.

The transaction benefits from a nonamortising general reserve, which provides liquidity and credit support to the rated notes, and a liquidity reserve, which provides liquidity support to the Class A1 and Class A2 Notes. The general reserve was established and fully funded at closing and has a target amount of 1.25% of the initial portfolio balance. The liquidity reserve was also established and fully funded at closing and amortises at 0.5% of the Class A1 and Class A2 Notes balance before a Liquidity Reserve Fund Trigger occurs (i.e., when the general reserve is lower than 1% of the initial portfolio), and at 1% of the Class A Notes balance thereafter.

The notes pay interest linked to Sonia whereas 55% of the loans in the mortgage portfolio pay interest linked to BBR, 39% pay a rate tracking three-month Libor, and the remainder pay a SVR rate. This gives rise to basis risk, which is not hedged in the transaction. Moreover, for Libor trackers additional basis differential may arise once Libor is discontinued and alternative base rates are enforced on the loans.

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 servicers to perform collection and resolution activities. DBRS Morningstar calculated PD, loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio, which DBRS Morningstar then 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 A1, Class A2, Class B, Class C, Class D, Class E, Class F, Class G, and Class X Notes according to the terms of the transaction documents. While a failure to timely pay interest on the Class B Notes when most senior is not an event of default under the transaction documents, DBRS Morningstar tested its Class B Notes rating for timely interest when they become most senior. 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 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 in some cases to 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 RMBS transactions. The rating is 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 incorporated an increase in default probability for self-employed borrowers in its analysis and conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case there is a 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 euros 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.

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 (portfolio payment history, dynamic delinquencies, and dynamic prepayments data from 2015 to 2021) and loan-level data as at 30 September 2021, provided by Barclays Bank Plc and Citigroup Global Markets Limited, the co-arrangers of the transaction.

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 A1 Notes, a PD of 64.5% and LGD of 43.2%, 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 A2 Notes, a PD of 64.5% and LGD of 43.2%, 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 61.3% and LGD of 37.7%, 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 57.4% and LGD of 32.9%, 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 50.3% and LGD of 26.6%, 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 47.1% and LGD of 22.9%, 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 F Notes, a PD of 39.5% and LGD of 18.6%, corresponding to the BB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class G Notes, a PD of 33.6% and LGD of 15.8%, corresponding to the B (high) (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 41.1% and LGD of 20.3%, corresponding to the BB (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A1 Notes 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 AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AAA (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 A (high) (sf)

Class A2 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of A (high) (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 (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class B Notes 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 (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

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

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

Class F Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (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 (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating of B (high) (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 G Notes 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 CCC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD, expected rating of CCC (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 X Notes 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 (sf)
-- 25% 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, expected rating of B (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: Lorenzo Coccioli, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 3 December 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 v5.3.0.2, https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (27 October 2021), https://www.dbrsmorningstar.com/research/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.
-- 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].