DBRS Morningstar Confirms Ratings on Gemgarto 2018-1 plc and Gemgarto 2021-1 plc

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the bonds issued by Gemgarto 2018-1 plc and Gemgarto 2021-1 plc (Gemgarto 2018-1 and Gemgarto 2021-1, respectively) as follows:

Gemgarto 2018-1:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at AA (low) (sf)
-- Class D Notes at A (sf)
-- Class E Notes at BB (high) (sf)

The ratings on the Class A, Class B, Class C, Class D, and Class E notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.

Gemgarto 2021-1:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at A (low) (sf)
-- Class X Notes at BB (high) (sf)

The rating on the Class A Notes addresses 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, and Class D notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the legal final maturity date. The rating on the Class X Notes addresses the ultimate payment of interest and repayment of principal on or before the legal final maturity date.

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the December 2021 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables and on potential portfolio migration based on replenishment criteria;
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic; and
-- No revolving termination events have occurred.

The transactions are securitisations of first-ranking owner-occupied residential mortgages originated and serviced by Kensington Mortgage Company Limited (KMC) in England, Wales, and Scotland. Notable features of the portfolio are Help-to-Buy (HTB), Right-to-Buy mortgages, borrowers with adverse borrower features including self-employed borrowers, and borrowers with prior county court judgments (CCJs) and the presence of arrears at closing, albeit in limited proportions.

Both transactions are currently in their four-year replenishment periods, which are scheduled to end on the payment date in September 2022 for Gemgarto 2018-1 and in March 2025 for Gemgarto 2021-1. During the replenishment period, principal funds are first allocated toward the partial amortisation of the Class A Notes according to a target notional schedule before being applied to purchase additional loans. The end of the replenishment period also coincides with a step-up in the margin of the rated notes.

The Gemgarto 2018-1 transaction closed in July 2018 and its legal final maturity is on the September 2065 payment date, and its first call date is on the September 2022 payment date.

The Gemgarto 2021-1 transaction closed in February 2021 and its legal final maturity is on the December 2067 payment date, and its first call date is on the March 2025 payment date.

PORTFOLIO PERFORMANCE
Both transactions saw an increasing trend in delinquencies over 2020 and 2021 in the context of the coronavirus pandemic.

In the case of the Gemgarto 2018-1 transaction, the 90+ delinquency ratio represented 3.0% of the outstanding portfolio balance as of the December 2021 payment date, up from 2.3% at the last annual review, and total arrears were 4.8% of the outstanding portfolio balance, up from 4.4% at the last annual review.

In the case of the Gemgarto 2021-1 transaction, the 90+-day delinquency ratio represented 1.2% of the outstanding portfolio balance as of the December 2021 payment date, up from 0.0% at closing, and total arrears represented 5.1% of the outstanding portfolio balance, up from 2.2% at closing.

Exposure to borrowers with prior CCJs decreased in both transactions. As of the December 2021 payment date, it stood at 10.0% and 10.5% in Gemgarto 2018-1 and Gemgarto 2021-1, respectively, down from 11.0% and 11.5% at last annual review and at closing, respectively.

As of the December 2021 payment date, there were no realised losses in either transaction.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar has analysed stressed collateral portfolios to assess potential deterioration in portfolio characteristics during the revolving periods, subject to portfolio-wide covenants. DBRS Morningstar also conducted a loan-by-loan analysis of the remaining pool of receivables.

In the case of Gemgarto 2018-1, DBRS Morningstar updated its base case PD and LGD assumptions to 8.0% and 13.1% from 7.6% and 16.2%, respectively, at the last annual review.

In the case of Gemgarto 2021-1, DBRS Morningstar updated its base case PD and LGD assumptions to 6.2% and 10.2% from 6.3% and 15.0%, respectively, at closing.

For both transactions, DBRS Morningstar’s analysis factors in the presence of HTB mortgages (12.5% and 13.1%, for Gemgarto 2018-1 and Gemgarto 2021-1, respectively).

CREDIT ENHANCEMENT
As of the December 2021 payment date, the credit enhancement (CE) increased as follows since the last annual review and closing for Gemgarto 2018-1 and Gemgarto 2021-1, respectively:

Gemgarto 2018-1
-- CE to the Class A Notes increased to 21.2% from 20.2%
-- CE to the Class B Notes increased to 15.3% from 14.6%
-- CE to the Class C Notes increased to 12.4% from 11.8%
-- CE to the Class D Notes increased to 10.0% from 9.5%, and
-- CE to the Class E Notes increased to 5.9% from 5.6%

Gemgarto 2021-1
-- CE to the Class A Notes increased to 13.3% from 12.6%,
-- CE to the Class B Notes increased to 8.6% from 8.1%,
-- CE to the Class C Notes increased to 5.9% from 5.6%,
-- CE to the Class D Notes increased to 5.4% from 5.1%, and
-- CE to the Class X Notes remained at 0.0%

The increase in CE is due to the repayment of the Class A Notes, as per the target notional schedule during the replenishment period. Moreover, the Class A Notes in Gemgarto 2018-1 benefited from a further amortisation beyond the target notional schedule at the September 2021 payment as no additional loans were purchased and the principal accumulation account reached its maximum. GBP 11.5 million of remaining proceeds went to repay the Class A Notes, which is expected to remain at its current outstanding balance for the next two payment dates, before the end of the revolving period. DBRS Morningstar understands that there were no additional loans purchased on the September 2021 payment date due to a breach of the HTB concentration limit, which prevented further purchase until it was cured.

In both transactions, the General Reserve Fund (GRF) is nonamortising and available to cover senior fees and senior swap payments as well as interest and principal losses via the principal deficiency ledgers (PDLs) on the Class A to Class F notes in Gemgarto 2018-1 and on the Class A to Class E notes in Gemgarto 2021-1. Once the Class E Notes in Gemgarto 2018-1 or the Class D Notes in Gemgarto 2021-1 are fully redeemed, the target balance of the GRF becomes zero. As of the December 2021 payment date, both GRFs were at their target level, equal to 2% of the initial balance of the Class A to Class F notes in Gemgarto 2018-1 and the Class A to Class E notes in Gemgarto 2021-1. As of the December 2021 payment date, all PDLs were clear in both transactions.

In both transactions, a Liquidity Reserve Fund (LRF) provides additional liquidity support to cover senior fees, senior swap payments, and interest on the Class A and Class B notes. The LRF will be funded through available principal funds to 2% of the outstanding Class A and Class B Notes balance, if the GRF balance falls below 1.5% of the outstanding Class A to Class F notes in Gemgarto 2018-1 or Class A to Class E notes in Gemgarto 2021-1.

Both transactions are exposed to interest rate risk as a portion of the portfolio in each transaction pays a fixed rate of interest on a short-term basis and a floating rate of interest indexed to the Kensington Standard Rate or the three-month Term Sonia Reference Rate or a synthetic Libor, while the rated notes are indexed to Sonia. For further details please see: https://www.dbrsmorningstar.com/research/384689/dbrs-morningstar-comments-on-finsbury-square-2019-2-plc-finsbury-square-2019-3-plc-finsbury-square-2020-1-plc-gemgarto-2018-1-plc-and-gemgarto-2021-1-plc-following-amendment.

In addition, loans can be subject to a variation in the length of the fixed-rate period, the applicable interest rate, and maturity date through a “Product Switch” up to 20% of the Class A to Class F notes original balance in the case of Gemgarto 2018-1, Class A to Class E notes original balance in the case of Gemgarto 2021-1. As of the December 2021 payment date, Product Switch loans represented 5.9% and 0.0% for Gemgarto 2018-1 and Gemgarto 2021-1, respectively.

Citibank N.A./London Branch (Citibank London) acts as the account bank for both transactions. Based on DBRS Morningstar’s private rating of Citibank London, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Class A Notes in both transactions, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

BNP Paribas, London Branch (BNP Paribas London) acts as the swap counterparty for both transactions. DBRS Morningstar's private rating on BNP Paribas London is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

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 structured finance 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 these transactions, DBRS Morningstar incorporated an increase in probability of default for self-employed borrowers.

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-ratedsovereigns-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-mortgageperformance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-riskexposure-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 methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2022).

Other methodologies referenced in these transactions 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 methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in each transaction, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transactions’ legal documents.

A review of the transactions’ legal documents was conducted for both transactions in relation to an amendment executed in September 2021. A review of the other legal documents has not been conducted as they have remained unchanged since the most recent rating action for each transaction.

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 investor reports and loan-level data provided by Citibank London.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis for Gemgarto 2018-1. For Gemgarto 2021-1, 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.

The last rating action on the Gemgarto 2018-1 transaction took place on 26 July 2021, when DBRS Morningstar confirmed its ratings on the Class A, Class B, Class C, Class D, and Class E notes and upgraded the rating on the Class X Notes to AA (sf) from CC (sf). On 10 January 2022, DBRS Morningstar discontinued the rating on the Class X Notes following its repayment in full.

The last rating action on the Gemgarto 2021-1 transaction took place on 26 July 2021, when DBRS Morningstar finalised its provisional ratings on the Class A, Class B, Class C, Class D, and Class X notes.

The lead analyst responsibilities for Gemgarto 2021-1 have been transferred to Natalia Coman.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transactions’ parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):
-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD assumptions are 8.0% and 13.1%, respectively, for Gemgarto 2018-1.
-- The base case PD and LGD assumptions are 6.2% and 10.2%, respectively, for Gemgarto 2021-1.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption.

In the case of Gemgarto 2018-1, for example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to A (high) (sf).

In the case of Gemgarto 2021-1, for example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to A (high) (sf).

Gemgarto 2018-1:
Class A Notes 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)
-- 50% increase in PD, expected rating of AA (high) (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 (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 A (high) (sf)

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

Class D 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)
-- 50% 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 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 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 (high) (sf)
-- 50% 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 and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)

Gemgarto 2021-1:
Class A Notes 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)
-- 50% increase in PD, expected rating of AA (high) (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 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 B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (high) (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 and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (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 (sf)
-- 50% 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 (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 D Notes 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 A (low) (sf)
-- 50% 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 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 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 (high) (sf)
-- 50% 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 and 25% increase in LGD, expected rating BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (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: 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: Natalia Coman, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
Gemgarto 2018-1: 12 July 2018
Gemgarto 2021-1: 26 January 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 these transactions can be found at:

--Master European Structured Finance Surveillance Methodology (8 February 2022),
https://www.dbrsmorningstar.com/research/392000/master-european-structured-finance-surveillance-methodology
--European RMBS Insight Methodology (3 June 2021) and European RMBS Insight Model v5.4.1.0,
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.
--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.
--Legal Criteria for European Structured Finance Transactions (29 July 2021),
https://www.dbrsmorningstar.com/research/382171/legal-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].