DBRS Morningstar Assigns Ratings to Canterbury Finance 5 PLC

DBRS Ratings Limited (DBRS Morningstar) assigned AAA ratings to the Class A1 and Class A2 notes (together, the Class A notes) issued by Canterbury Finance 5 PLC (Canterbury 5 or the Issuer).

The ratings address the timely payment of interest and the ultimate payment of principal. Interest is paid pari passu and pro rata among the Class A1 and A2 notes whereas principal payments on the Class A2 notes are subordinated to principal payments on the Class A1 notes at all times. The transaction also features Class Z notes and uncollateralised Class X notes, which DBRS Morningstar does not rate.

Canterbury 5 includes a general reserve fund (GRF) at closing, which was funded at 1.0% of the Class A to Class Z notes’ outstanding balance (beginning balance of the relevant payment period). The GRF will amortise unless the cumulative defaults on the portfolio reach 5%. If this occurs, the GRF required amount will be 1.0% of the Class A to Z notes’ outstanding balance at the beginning of the relevant interest payment period in which the event occurred.

At closing, credit enhancement was 15.5% for the Class A notes provided by the subordination of the Class Z notes and the GRF. The Class X notes are excess spread notes and only benefit from soft credit enhancement.

As of 30 June 2022, the GBP 1.3 billion portfolio consisted of 5,916 buy-to-let loans originated by OneSavings Bank plc (OSB) to 4,843 borrowers. The weighted-average (WA) seasoning of the portfolio is 1.3 years, with a WA remaining term to maturity of 22.2 years. The WA indexed loan-to-value ratio of the portfolio is 73.3% (as calculated by DBRS Morningstar). The portfolio primarily contains interest-only loans (95.2%), yielding a WA coupon of 3.6%. The WA teaser period on the portfolio is 4.5 years (from the origination date to the cut-off date). About 52.8% of the loans are granted on properties located in London and South East.

Most loans (88.7%) currently pay a fixed rate over a term and the remaining are discount loans. Of the loans, 73.7% have a fixed period between four and six years and 17.9% have a shorter reset period of two to three years. All loans are indexed to the Standard Variable Rate (SVR) after their reversion date. The SVR is currently at 7.08%. Historically, the SVR has followed the Bank of England rate, but the basis risk between the SVR and the daily compounded Sterling Overnight Index Average (Sonia) is hedged via a SVR covenant where the minimum SVR rate can be set at a rate of Sonia plus 3% (with Sonia floored at zero).

The interest rate risk that arises due to fixed-rate loans will be hedged using an interest rate swap agreement between the Issuer and Banco Santander SA (Santander). The notional schedule on the swap was provided to DBRS Morningstar. The current swap rate is 2.41%. Based on DBRS Morningstar’s rating on Santander and the collateral posting provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The Issuer account bank is Elavon Financial Services DAC, UK Branch. Based on the account bank’s private ratings and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings primarily on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the parties to perform servicing and collection activities.
-- The DBRS Morningstar-calculated the portfolio default rate (PD), loss given default (LGD), and expected loss (EL) assumptions on the portfolio, using the European RMBS Insight Model.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes. DBRS Morningstar analysed the transaction cash flows using Intex DealMaker.
-- The consistency of the 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.
-- The relevant counterparties, as rated by DBRS Morningstar, that are appropriately in line with DBRS Morningstar’s criteria to mitigate the risk of counterparty default or insolvency.
-- 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 structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.

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 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 OSB and Merrill Lynch. DBRS Morningstar was provided with loan-level data as of 30 June 2022 as well as received static cumulative three-month arrears and defaults by vintage of origination and dynamic prepayments from 2013 to 2022 and repossession data.

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 newly 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 22.1% and LGD of 56.0%, corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A1 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 AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

Class A2 Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (low) (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 (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (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: Alessandra Maggiora, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 4 August 2022

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 (28 March 2022) and European RMBS Insight Model v.5.6.0.0,
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 (22 July 2022), https://www.dbrsmorningstar.com/research/400166/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].