DBRS Morningstar Finalises Provisional Ratings on Genesis Mortgage Funding 2022-1 plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Genesis Mortgage Funding 2022-1 plc (Genesis 22-1 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 (sf)
-- Class X notes at BB (low) (sf)

The final 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 September 2059. The final ratings on the Class B, Class C, Class D, and Class E notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. The final rating on the Class X notes addresses the ultimate payment of interest and principal on or before the final maturity date.

DBRS Morningstar does not rate the Class F notes or the residual certificates.

Genesis 22-1 is the second securitisation of residential mortgages originated by Bluestone Mortgage Limited (BML). The asset portfolio comprises first-lien owner-occupied and buy-to-let (BTL) mortgages, originated by BML and secured by properties in the United Kingdom. BML is the mortgage portfolio servicer. In order to maintain servicing continuity, CSC Capital Markets UK Limited will be appointed as the backup servicer facilitator. BML is a specialist UK lender that offers a full suite of mortgage products including owner-occupied, BTL, and adverse credit history loans. BML only started originating loans in 2016 and hence has limited performance history.

The structure includes a pre-funding mechanism where BML has the option to sell recently originated mortgage loans to the Issuer, subject to certain conditions to prevent a material deterioration in credit quality. The acquisition of these assets shall occur before the first interest payment date (IPD), using the proceeds standing to the credit of the pre-funding principal reserve. Any funds that are not applied to purchase additional loans will flow through the pre-enforcement principal priority of payments and pay down the notes on a pro rata basis.

The Issuer issued six tranches of collateralised mortgage-backed securities (the Class A, Class B, Class C, Class D, Class E, and Class F notes; the Principal Backed Notes) to finance the purchase of the initial portfolio and fund the pre-funding reserves. Additionally, Genesis 22-1 issued one class of noncollateralised notes, the Class X notes. Part of the proceeds of the Class X notes are used to fully fund the General Reserve Fund (GRF) and the pre-funding revenue reserve ledger at closing. The aim of the pre-funding revenue reserve is to mitigate the risk of negative carry arising during the prefunding period and the risk arising from potential changes in the swap payments as a consequence of any adjustment to the swap fixed notional amount and new swap rate agreed with the swap counterparty for the additional loans. In addition, the GRF is sized at its target level directly as of the closing date. Any funds remaining in the pre-funding principal reserve and pre-funding revenue reserve on the first IPD will flow through the pre-enforcement principal priority of payments and the pre-enforcement revenue priority of payments respectively on the first IPD.

The transaction is structured to initially provide 16.5% of credit enhancement to the Class A notes. This includes subordination of the Class B to Class F notes and the GRF from closing.

The GRF is available to cover shortfalls in senior fees, senior swap payments, interest, and any PDL debits on the Class A to Class E notes after the application of revenue. On the closing date and prior to the redemption in full of the Class A to Class F notes, the required amount will be equal to 1.5% of the Principal Backed Notes as of closing. Any excess will be released as part of available revenue funds through the revenue priority of payments. The reserve target amount will become zero once the Class F notes are redeemed in full and any excess will become part of the available revenue funds.

The liquidity reserve fund (LRF) is available to cover shortfalls of senior fees, senior swap payments, and interest on the Class A notes after the application of revenue and the GRF. The LRF has a balance of zero at closing and is funded through principal receipts as a senior item in the waterfall to its amortising target –1.5% of the outstanding balance of the Class A notes until the LRF reaches its target for the first time. Any time after that, the LRF will be replenished from revenue. The excess amounts following amortisation of the Class A notes will form part of the available principal.

Principal can be used to cure any shortfalls of senior fees or unpaid interest payments on the most-senior class of the Class A to Class F notes outstanding after using revenue funds and both reserves. Any use will be recorded as a debit in the principal deficiency ledger (PDL). The PDL comprises six 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 F subledger.

On the interest payment date in June 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 31 March 2022, the closing portfolio consisted of 1,403 loans with an aggregate principal balance of GBP 241.1 million. Approximately 95.6% of the loans by outstanding balance were owner-occupied mortgages. As is common in the UK mortgage market for owner-occupied loans, the loans were largely scheduled to pay interest and principal on a monthly basis. The remaining 4.4% of the loans by outstanding balance were BTL loans, out of which 3.8% paid on an interest only basis with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage.

The mortgages are high-yielding, with a weighted-average coupon of 4.89% and a weighted-average reversionary margin of 3.0% over the Bluestone Variable Rate (BVR). The weighted-average seasoning of the pool is relatively low at 11.8 months. The weighted-average original loan-to-value (LTV) is 68.6%, with 25.7% of the loans having an original LTV above 80%. The weighted-average indexed current LTV of the portfolio as calculated by DBRS Morningstar is 68.9%, with 25.8% of the loans having an indexed current LTV above 80%.

Furthermore, 30.4% of the loans were granted to self-employed borrowers and 7.2% of the loans were granted under the Help-to-Buy scheme. Moreover, 23.7% of the mortgage portfolio by loan balance have prior county court judgements (CCJ) relating to the primary borrower and 3.0% of the borrowers having a bankruptcy or individual voluntary arrangement recorded. As of the final cut-off date, loans between one and three months in arrears represent 1.3% of the outstanding principal balance of the portfolio; loans more than three months in arrears were 1.4%.

The majority of loans in the portfolio (87.6%) will revert to floating rate referenced to BVR after the initial fixed-rate period in the next one to five years. The remaining 12.4% of the portfolio is currently paying a floating rate linked to BVR. The interest on the notes is calculated based on the daily-compounded Sterling Overnight Index Average (Sonia), which gives rise to interest rate risk. The basis risk exposure is partially mitigated through a minimum BVR covenant, which will provide that the variable rate is not set below Sonia (rolling daily compounded SONIA over the previous calendar) plus 1.0%.

The Issuer is entering into a fixed-to-floating balanced guarantee swap with NatWest Markets Limited S.A. (NatWest) to mitigate the fixed interest rate risk from the mortgage loans and Sonia payable on the notes. The Issuer will pay a swap rate equivalent to 1.05% per annum and will receive the Sonia rate. The Issuer can enter into further hedging agreements with the existing swap counterparty and adjust the notional of the original swap agreement in order to hedge the exposure to additional fixed-rate loans resulting from additional loans during the pre-funding period. In addition, a new swap fixed rate (applicable market rate) will be applicable for the increased notional amount with no upfront swap premium payable. The minimum WA post-swap margin of the total portfolio (including the loans that are purchased during the pre-funding period is 3.75%. Based on the DBRS Morningstar ratings of NatWest, which has a long-term issuer rating of A (low) and a Long Term Critical Obligations Rating of A (high), the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to NatWest to be consistent with the ratings assigned to the notes as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

Monthly mortgage receipts are deposited into the collections account at NatWest and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept daily to the Issuer’s account. The collection account declaration of trust provides that interest in the collection account is in favour of the Issuer over the Seller. Commingling risk is considered mitigated by the collection account declaration of trust and the regular sweep of funds. If the collection account provider is downgraded below BBB (low), the collection account bank will be replaced by an appropriately rated bank within 60 calendar days.

Citibank N.A., London Branch (Citibank) is the account bank in the transaction and will hold the Issuer’s transaction account, the GRF, the LRF, the prefunding reserves, and the swap collateral account. The transaction documents stipulate in the event of a breach of the DBRS Morningstar rating level of “A”, the account bank will be replaced by, or obtain a guarantee from, an appropriately rated institution within 30 calendar days. Based on the DBRS Morningstar private rating of Citibank, replacement provisions, and investment criteria, DBRS Morningstar considers the risk arising from the exposure to Citibank 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 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 are used as inputs into the cash flow tool. The mortgage portfolio was analysed 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, and Class X notes according to the terms of the transaction documents.
-- 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 transaction structure was analysed using Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

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” (28 March 2022) 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 BML and Macquarie Bank Limited, London Branch. DBRS Morningstar was provided with loan-level data for the completion loans as of 31 March 2022, and historical monthly performance data (delinquencies and payment data) covering the period from January 2019 to December 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 a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

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 33.0% and LGD of 39.3%, 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 29.8% and LGD of 33.6%, 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 25.4% and LGD of 26.5%, 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 19.9% and LGD of 19.9%, 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 13.9% and LGD of 13.7%, 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 X notes, a PD of 12.5% and LGD of 12.7%, corresponding to the BB (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 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 (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (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 (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (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 (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 (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 BB (high) (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 (sf)

Class E 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 (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 (low) (sf)

Class X 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)

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: Belen Bulnes, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 21 April 2022

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 (28 March 2022) and European RMBS Insight Model v.5.5.0.0, https://www.dbrsmorningstar.com/research/394309/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: 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].