DBRS Morningstar Assigns Provisional Ratings to Pavillion Mortgages 2021-1 PLC

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Pavillion Mortgages 2021-1 PLC (the Issuer):

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

The provisional ratings assigned to the Class A to C notes address the timely payment of interest and the ultimate payment of principal by the legal final maturity date in August 2064. The provisional ratings assigned to the Class D to E notes address the timely payment of interest once most senior and the ultimate repayment of principal by the legal final maturity date. DBRS Morningstar does not rate the Class R notes in this transaction. The provisional ratings assigned by DBRS Morningstar are based on the final pool data as of 30 November 2021.

The provisional ratings are based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release. These ratings will be finalised upon review of the final version of the transaction documents and of the relevant opinions. If the information therein were substantially different, DBRS Morningstar may assign different final ratings to the notes.

The transaction will be a securitisation of the residential mortgage loans secured by first-lien owner-occupied mortgages originated by Barclays Bank UK PLC (BBUK) in the UK.

BBUK is the servicer of the transaction. CSC Capital Markets UK Limited will be the Backup Servicer Facilitator.

The Issuer is expected to issue five tranches of collateralised mortgage-backed securities, the Class A to Class E notes (the Rated Notes), to finance the purchase of the portfolio. The transaction is structured to initially provide 12.4% of credit enhancement to the Class A notes. This includes subordination of the Class B to E notes.

The liquidity reserve fund (LRF) will be available to cover shortfalls of senior fees and interest on the Class A notes, Class B notes, and the Senior Deferred Consideration payment after the application of revenue and the general reserve fund (GRF). The LRF will be funded from the issuance of the Class R notes on the closing date. The initial balance of the LRF will be 0.5% of the balance of the Class A and Class B notes on the closing date. On each interest payment date (IPD), the target level will be 0.5% of the current Class A and Class B balance subject to the occurrence of a Liquidity Reserve Fund Trigger Event following which the LRF required amount would be equal to 1.0%. The Liquidity Reserve Fund Trigger event means BBUK's long-term issuer default rating is downgraded below "BBB" or its short-term issuer default rating is downgraded below "F2" by Fitch. Any excess amounts above the target will be released to form part of available revenue receipts.

The general reserve fund (GRF) will also provide liquidity and credit support to the Rated Notes subject to the principal deficiency ledger (PDL) Condition being met for those classes. On the closing date and on each IPD following the closing date, the GRF will be equal to 1.75% of the portfolio outstanding balance minus the LRF Required Amount. When Class E is redeemed, the GRF amount is set to zero and released as principal. The GRF will be available to cover shortfalls in senior fees, interest, and any PDL debits on the Class A to Class E notes after the application of revenue funds subject to the PDL Condition being met. When Class E is redeemed, the GRF Required Amount is set to zero and released as principal.

Principal additional amounts can be used if the GRF and LRF were not enough to cover shortfalls in senior fees, Class A interest, and when the relevant PDL balance is less than 10%, Class B to E interest. It cannot be used to cover interest shortfalls for the Senior Deferred Consideration. Any use of principal to cover interest shortfalls will be recorded as a debit in the PDL. The PDL comprises five subledgers that track the principal used to pay interest, as well as realised losses, in a reverse-sequential order that begins with the Class E subledger.

On the IPD in February 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 30 September 2021 , the provisional portfolio consisted of 2,442 loans with an aggregate principal balance of GBP 603.0 million. The portfolio comprises only recent originations with 88.1% of the mortgages originated in 2021, 11.0% in 2020 and remaining 0.9% in 2019. As of the cut-off date, the securitised portfolio had approximately 6.8 months of seasoning.

The weighted-average (WA) original loan-to-value (LTV) ratio of the portfolio is 87.2% whereas the WA indexed current LTV (CLTV) of the portfolio is 86.5% with 99.5% of the mortgage loans having a WA Indexed CLTV of higher than 80%.

The majority of the loans in the portfolio (93.2%) were granted to employed borrowers and the remaining 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 entire portfolio pays a fixed rate at closing and all loans in the mortgage portfolio will switch to a tracker linked to the Bank of England rate + 3.49%. No product switches and further advances are allowed in the transaction. The seller has committed to repurchase all mortgages to which BBUK has granted a product switch unless the relevant loan is seen to be in arrears at the end of the month during which such product switch occurred or a further advance is made. In such cases, the loan will not be repurchased. This may create some divergence between the notional of the and actual fixed-rate balance and result in higher prepayment speed. DBRS Morningstar considered this higher risk of prepayments in its cash flow analysis.

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 in its rating analysis.

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 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, 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 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 many 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 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 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 in this transaction 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: 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 sources of data and information used for these ratings include loan-level data as of 30 September 2021 provided by BBUK. DBRS Morningstar was also provided with historical performance data (delinquencies at three, six, as well as more than six months and prepayment data) from the Q1 2015 to Q4 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. 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 expected-to-be-issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 16.6% and LGD of 45.1%, 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 16.6% and LGD of 45.1%, 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 C notes, a PD of 10.6% and LGD of 34.8% , 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 8.6% and LGD of 30.4%, 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 E notes, a PD of 6.9% and LGD of 27.9% , corresponding to the BBB (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 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 AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

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

Class C 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 (high) (sf)

Class D 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 (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BBB (high) (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 E 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 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 (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: 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: David Lautier, Senior Vice President
Initial Rating Date: 15 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 v. 5.4.0.0,
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].