DBRS Morningstar Assigns Provisional Ratings to Together Asset Backed Securitisation 2022-2ND1 plc

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Together Asset Backed Securitisation 2022-2ND1 plc (TABS 22-2ND1 or the Issuer):

-- Class A Loan note at AAA (sf)
-- Class B notes at AA (sf)
-- Class C notes at A (low) (sf)
-- Class D notes at BBB (sf)
-- Class E notes at BB (low) (sf)
-- Class F notes at B (sf)

The provisional rating on the Class A Loan note addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in February 2054. The provisional ratings on the Class B, Class C, Class D, Class E, and Class F notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date.

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

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 residential mortgages originated by Together Personal Finance Limited, Together Commercial Finance Limited, and Blemain Finance Limited, each of which belongs to the Together Group of companies. The asset portfolio comprises second-lien owner-occupied (OO) and buy-to-let (BTL) mortgages secured by properties in the UK. The originators will be the servicers of the respective loans they have originated. To maintain servicing continuity, BCMGlobal Mortgage Services Limited will be appointed as the backup servicer.

The Issuer is expected to issue seven tranches of collateralised mortgage-backed securities (the Class A Loan note, the Class B, Class C, Class D, Class E, Class F, and Class Z notes) to finance the purchase of the initial portfolio. Additionally, the Issuer is expected to issue one class of noncollateralised notes, the Class X notes, the proceeds of which the Issuer will use to fully fund the liquidity reserve fund (LRF) at closing.

The transaction is structured to initially provide 26.5% of credit enhancement to the Class A Loan note. This includes subordination of the Class B to Class Z notes.

The LRF will be available to cover shortfalls in senior fees, senior swap payments, and interest shortfalls on the Class A Loan note following the application of revenue funds. On the closing date and prior to the full redemption of the Class A Loan note, the required amount will be equal to 1.5% of the Class A Loan note’s balance as of closing. Any excess will be released as part of the available revenue funds through the revenue priority of payments. The reserve target amount will become zero once the Class A Loan note is redeemed in full and any excess will become part of the available revenue funds.

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 the LRF reserves. Any use will be recorded as a debit in the principal deficiency ledger (PDL). The PDL comprises seven 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 Z subledger.

On the interest payment date in May 2026, 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 April 2022, the provisional portfolio consisted of 4,636 loans with an aggregate principal balance of GBP 349.8 million. Approximately 73.7% of the loans by outstanding balance were OO mortgages, 35.6% of which were paid on an interest-only (IO) basis with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage. The remaining 26.3% of the loans by outstanding balance were BTL loans, 19.1% of which were paid on an IO basis.

The mortgages are high yielding, with a weighted-average (WA) coupon of 6.76% and a WA seasoning of 35.5 months. The WA original loan-to-value (LTV) ratio is 60.5%, with 0.1% of the loans that have an original LTV higher than 80%. The DBRS Morningstar-calculated WA indexed current LTV of the portfolio was 59.3%, with no loans that have an indexed current LTV higher than 80%.

Furthermore, 72.9% of the loans were granted to self-employed borrowers and 8.6% of the mortgage portfolio by loan balance have prior county court judgements relating to the primary borrower. As of the provisional cut-off date, no loans have been in arrears for longer than three months.

The majority of loans in the portfolio (68.4%) pay floating-rate interest linked to a standard variable rate (SVR) set by the Together Group. The remaining 31.6% of the portfolio are fixed-rate loans with a compulsory switch to floating rate after the end of the teaser period in two to five years. Once they switch to floating rate, the loans will be indexed to the Together managed rate plus a margin. 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 mismatch will remain unhedged.

The Issuer is expected to enter into a fixed-to-floating swap with Natixis 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 [*%] per annum and will receive the Sonia rate over a scheduled notional. Based on DBRS Morningstar’s private ratings on Natixis, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to Natixis 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 National Westminster Bank Plc and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept within two business days 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. DBRS Morningstar considers the commingling risk to be 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.

Elavon Financial Services DAC, UK Branch (Elavon-UK) is the account bank in the transaction and will hold the Issuer’s transaction account, the LRF, and the swap collateral account. The transaction documents stipulate that, in the event of a breach of DBRS Morningstar’s 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 DBRS Morningstar’s private rating on Elavon-UK, the replacement provisions, and the investment criteria, DBRS Morningstar considers the risk arising from the exposure to Elavon-UK 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 DBRS Morningstar uses as inputs into the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight: UK Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A Loan note and the Class B, Class C, Class D, Class E, and Class F 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 the presence of legal opinions addressing the assignment of the assets to the Issuer.

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.

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/396929.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodologies applicable to the ratings 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.

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 Together Money and Lloyds Bank Plc (the arrangers). DBRS Morningstar was provided with loan-level data as of 30 April 2022 and historical monthly performance data (delinquencies, defaults, and prepayment data) covering the period from January 2004 to December 2020.

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

DBRS Morningstar was not 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 expected-to-be-issued new financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

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 Loan note, a PD of 30.0% and LGD of 89.1%, 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 26.8% and LGD of 84.5%, 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 20.5% and LGD of 72.0%, 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 17.2% and LGD of 63.2%, 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 10.2% and LGD of 44.6%, corresponding to the BB (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 7.7% and LGD of 37.4%, corresponding to the B (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

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

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

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: 19 May 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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].