DBRS Morningstar Finalises Provisional Ratings on Pavillion Mortgages 2022-1 PLC

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

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

The finalised ratings on the Class A and Class B notes address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date. The finalised ratings on the Class C to Class E notes (together with the Class A and Class B notes, the rated notes) address the timely payment of interest once most senior and the ultimate repayment of principal by the legal final maturity date. DBRS Morningstar does not rate the Class R notes also issued in this transaction.

RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the UK. The collateralised notes are backed by first-lien owner-occupied residential mortgage loans originated by Barclays Bank UK PLC (BBUK).

A liquidity reserve fund (LRF) provides liquidity support to the Class A and Class B notes and to the senior deferred consideration in the priority of payments. The LRF’s initial balance will be 0.5% of the Class A and Class B notes’ outstanding balance at closing. On each interest payment date (IPD), the target level will be 0.5% of the Class A and Class B notes’ outstanding balance as at the end of the collection period until the Class B notes are redeemed.

A general reserve fund (GRF) provides liquidity and credit support to the rated notes. On the closing date and on each IPD thereafter, the GRF will have a target balance equal to 2.50% of the portfolio’s outstanding balance at closing, minus the LRF required amount.

DBRS Morningstar calculated the credit enhancement to the Class A notes at 15.55%, provided by the subordination of the Class B to Class E notes and the GRF’s initial balance. Credit enhancement to the Class B notes will be 11.30%, provided by the subordination of the Class C to Class E notes and the GRF’s initial balance. Credit enhancement to the Class C notes will be 7.20%, provided by the subordination of the Class D to Class E notes and the GRF’s initial balance. Credit enhancement to the Class D notes will be 3.15%, provided by the subordination of the Class E notes and the GRF’s initial balance. Credit enhancement to the Class E notes will be 2.05%, provided by the GRF’s initial balance.

As of 31 October 2022, the mortgage portfolio consisted of 2,044 loans with an aggregate principal balance of GBP 498.5 million. The majority of the loans in the pool (77% of the initial collateral balance) were originated in the third quarter of 2022 while the rest were granted in the remaining part of 2022. The mortgage loans in the asset portfolio are all secured by a first-ranking mortgage right and almost all were granted to employed borrowers (94.2%).

The portfolio’s weighted-average (WA) original loan-to-value (LTV) ratio and WA indexed current LTV are substantially the same at 89.7% because the properties have not benefitted from material price rises in the short time that has elapsed since origination, and the loans have amortised by less than 0.5% compared with their original balance. This relatively high LTV compared with peer transactions in the UK reflects the pool selection criteria that target high LTV loans in the BBUK book that were granted to first-time buyers.

The final portfolio contains 100% fixed-rate loans with a fixed-rate period. Once their fixed-rate period is over, the loans will switch to a floating rate. As of the final cut-off date, all mortgage loans were performing. The Issuer has entered into a fixed-to-floating swap with BBUK to hedge the interest rate mismatch between the fixed-rate mortgage loans and the compounded Sterling Overnight Index Average (Sonia) rate payable on the notes.

BBUK originated and services the mortgages. CSC Capital Markets UK Limited will be the backup servicer facilitator in the transaction.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction’s capital structure and form and the 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 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, and Class E notes according to the terms of the transaction documents. 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.
-- 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), Under Review with Negative Implications, as of the date of this press release.
-- The expected consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions that are expected to address the assignment of the assets to the Issuer.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (17 May 2022).

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

The principal methodologies applicable to the ratings are: “European RMBS Insight: UK Addendum” (16 September 2022) and “European RMBS Insight Methodology” (28 March 2022).

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 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/401817/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 BBUK and its agents. DBRS Morningstar received a loan-by-loan data tape as of 31 October 2022, as well as historical performance data for the period ranging from October 2017 to September 2022. In addition, DBRS Morningstar also considered historical performance data corresponding with the period between January 2015 and September 2017, made available in the rating process for Pavillion Mortgages 2021-1 PLC, in its analysis.

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 15.6% and LGD of 37.3%, 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 15.6% and LGD of 37.3%, 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 C notes, a PD of 13.7% and LGD of 33.9% , 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 D notes, a PD of 9.1% and LGD of 24.6%, 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 E notes, a PD of 3.2% and LGD of 16.0% , corresponding to the BB (high) (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 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 AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

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

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

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Lorenzo Coccioli, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 8 December 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: UK Addendum (16 September 2022) and European RMBS Insight Model v. 5.7.1.0,
https://www.dbrsmorningstar.com/research/402864/european-rmbs-insight-uk-addendum.
-- European RMBS Insight Methodology (28 March 2022), https://www.dbrsmorningstar.com/research/394309/european-rmbs-insight-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-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.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
https://www.dbrsmorningstar.com/research/402773/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].