DBRS Morningstar Finalises Provisional Ratings on Castell 2022-1 PLC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings of the following classes of notes issued by Castell 2022-1 PLC (the Issuer):

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

DBRS Morningstar does not rate the Class G or Class H notes also issued in this transaction.

The finalised ratings of the Class A notes, Class A Loan note, and Class X notes address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date. The finalised ratings of 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 legal final maturity date.

The ratings are based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release.

The transaction is a bankruptcy-remote special-purpose vehicle incorporated in the UK. The notes were issued to fund the purchase of UK second-lien mortgage loans originated by UK Mortgage Lending Ltd. (UKML). Pepper UK Limited (Pepper) will be the primary and special servicer of the portfolio. UKML, formerly Optimum Credit Ltd. (Optimum Credit), was established in November 2013 as a specialist provider of second-lien mortgages based in Cardiff, Wales. Optimum Credit was fully integrated into Pepper Money (PMB) Limited in January 2022 and its name was changed to UK Mortgage Lending Ltd. on 17 January 2022. Both UKML and Pepper are part of the Pepper Group Limited, a worldwide consumer finance business, third-party loan servicer, and asset manager. CSC Capital Markets UK Limited has been appointed as the backup servicer facilitator.

RATING RATIONALE
DBRS Morningstar was provided with information on the mortgage portfolio as of 31 May 2022. The portfolio consists of 7,268 mortgage loans with an aggregate principal balance of GBP 300 million. The average loan per borrower is GBP 41,277.

All of the mortgage loans in the provisional portfolio are owner occupied and almost all loans are repaying on a capital and interest basis. Within the portfolio, 76.9% of the loans are fixed-rate loans that switch to floating rate upon completion of the initial fixed-rate period whereas 21.0% are floating-rate loans for life and the remaining 2.1% are fixed-rate loans for life. Interest rate risk is expected to be hedged through a fixed-floating interest rate swap with Banco Santander SA (Santander) to mitigate the fixed interest rate risk from the mortgage loans and Sonia payable on the notes. The Issuer will pay the swap counterparty an amount equal to the swap notional amount multiplied by the swap rate and, in turn, the Issuer will receive the swap notional amount multiplied by Sonia. Santander currently has a DBRS Morningstar Long Term Critical Obligations Rating of AA (low) and a Long-Term Issuer Rating of A (high), both with Stable trends. Following a review of the provisions outlined in the swap agreement, DBRS Morningstar concludes that Santander meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade and collateral posting provisions with respect to Santander’s role as hedging counterparty, consistent with DBRS Morningstar’s criteria.

Furthermore, approximately 4.3% of the portfolio by loan balance comprises loans originated to borrowers with a prior county court judgement, 0.1% comprises those with a flagged bankruptcy, and 2.0% comprises those in arrears. In addition, 17.3% of the loans were granted to self-employed borrowers, unemployed borrowers, or pensioners (referring to the primary borrower’s employment status only). The weighted-average (WA) seasoning of the portfolio is relatively low at 22 months and the WA remaining term is approximately 15 years. The WA current loan-to-value ratio, including any prior-ranking balances of the portfolio, is 64.1%.

The initial credit enhancement for the Class A notes and Class A Loan note is 27.25% at closing and is provided by the subordination of the Class B to Class H notes (excluding the uncollateralised Class X notes). The Class A notes benefit from further liquidity support provided by an amortising liquidity reserve, which can support the payment of senior fees and interest on the Class A notes. The liquidity reserve fund (LRF) is zero at closing and its required amount of 1.0% of the outstanding balance of the Class A notes and Class A Loan note balance will be funded through principal receipts. Any subsequent use of the LRF will be replenished from revenue receipts. The excess amounts following amortisation of the Class A notes and Class A Loan note will form part of available principal.

The structure includes a principal deficiency ledger (PDL) comprising seven subledgers (Class A PDL to Class H PDL) that provision for realised losses as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest. The losses will be allocated starting from the Class H PDL and then to the subledgers of each class of notes in reverse-sequential order.

Available principal funds can be used to provide liquidity support to the transaction. Following the application of the available revenue funds and liquidity reserve, available principal funds can be used to pay senior fees, swap payments, and interest shortfalls on the Class A to Class F notes. In more detail, principal is available to provide liquidity support to the Class B to Class G notes, provided that the respective PDL balance is less than 10% of the outstanding balance of the respective class of notes. There is no condition for principal used to provide liquidity support for the Class A notes, given that available revenue funds and the LRF have been applied first. Any use will be recorded as a debit in the PDL.

The coupon on the notes will step up on the interest payment date falling in February 2026, which is also the first optional redemption date. The notes can be redeemed in full, at the outstanding balance plus accrued interest, on any subsequent payment date. DBRS Morningstar considered the increased interest payable on the notes on the step-up date in its cash flow analysis.

The Issuer account bank is Citibank N.A./London Branch. Based on DBRS Morningstar’s private rating on the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the 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 probability of default (PD), loss given default (LGD), and expected loss (EL) 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 its “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, Class F, 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 analysed the transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.
-- 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodologies applicable to the ratings are the “European RMBS Insight Methodology” (28 March 2022) and “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 UKML and HSBC Bank plc. DBRS Morningstar was provided with loan-level data as of 31 May 2022 and historical performance data (dynamic delinquencies, cumulative delinquencies per cohort for loans one month or more in arrears, payment data, and cumulative prepayments). Dynamic delinquency data covered the period from July 2015 to March 2022; cumulative delinquencies per cohort for loans one month or more in arrears and payment data was provided for the period from August 2014 up to March 2022, and cumulative prepayments for a period from April 2016 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 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.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- In respect of the Class A notes, a PD of 26.76% and LGD of 91.78%, 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 A Loan note, a PD of 26.76% and LGD of 91.78%, 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 24.94% and LGD of 89.80%, corresponding to the AA (high) (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 19.66% and LGD of 81.41%, 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 14.50% and LGD of 72.80%, 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 9.27% and LGD of 61.34%, 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 F notes, a PD of 5.88% and LGD of 52.70%, corresponding to the B (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 6.74% and LGD of 55.50%, corresponding to the B (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade of the Class A Notes;
-- 50% increase of the LGD, ceteris paribus, would not lead to a downgrade of the Class A Notes;
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);

DBRS Morningstar concludes the following impact on the Class A Loan note:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade of the Class A Loan note;
-- 50% increase of the LGD, ceteris paribus, would not lead to a downgrade of the Class A Loan note;
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);

DBRS Morningstar concludes the following impact on the Class B notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (sf);

DBRS Morningstar concludes the following impact on the Class C notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BBB (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);

DBRS Morningstar concludes the following impact on the Class D notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (low) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (high) (sf);

DBRS Morningstar concludes the following impact on the Class E notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to B (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to B (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (low) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (high) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (high) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf);

DBRS Morningstar concludes the following impact on the Class F notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to CCC (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to CCC (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to CCC (sf);

DBRS Morningstar concludes the following impact on the Class X notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade of the Class X Notes;
-- 50% increase of the LGD, ceteris paribus, would not lead to a downgrade of the Class X Notes;
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (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: Lorenzo Coccioli, Vice President, Credit Ratings
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 8 July 2022

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960
Tel. +44 20 7855 6609

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.5.5.0.2.
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: 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].