DBRS Morningstar Upgrades and Confirms Credit Ratings on Pavillion Mortgages 2021-1 PLC and Pavillion Mortgages 2022-1 PLC

DBRS Ratings Limited (DBRS Morningstar) took the following credit rating actions on the Rated Notes issued by Pavillion Mortgages 2021-1 PLC (P2021) and Pavillion Mortgages 2022-1 PLC (P2022) (together, the Issuers):

P2021
-- Class A notes confirmed at AAA (sf)
-- Class B notes confirmed at AAA (sf)
-- Class C notes upgraded to AA (high) (sf) from AA (sf)
-- Class D notes upgraded to AA (low) (sf) from A (high) (sf)
-- Class E notes upgraded to A (sf) from A (low) (sf)

P2022
-- Class A notes confirmed at AAA (sf)
-- Class B notes confirmed at AAA (sf)
-- Class C notes confirmed at AA (high) (sf)
-- Class D notes confirmed at A (sf)
-- Class E notes upgraded to BBB (low) (sf) from BB (high) (sf)

For P2021, the credit ratings on the Class A, Class B, and Class C notes address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date. The credit ratings on the Class D and Class E notes address the timely payment of interest when they are the most senior class of notes outstanding, and the ultimate repayment of principal by the legal final maturity date.

For P2022, the credit 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 credit ratings on the Class C, Class D, and Class E notes address the timely payment of interest when they are the most senior class of notes outstanding, and the ultimate repayment of principal by the legal final maturity date.

The credit rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses.
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.

The transactions are securitisations of U.K. first-lien owner-occupied residential mortgages originated and serviced by Barclays Bank UK plc (BBUK).

PORTFOLIO PERFORMANCE
P2021: As of the 31 July 2023 cut-off date, loans two to three months in arrears represented 0.2% of the outstanding portfolio balance, and loans more than three months in arrears represented 0.1%.

P2022: As of the 30 June 2023 cut-off date, loans two to three months in arrears and loans more than three months in arrears both represented 0.0% of the outstanding portfolio balance.

No foreclosures have been reported for either portfolio since the closing of the transactions.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions at the B (sf) rating level to the following:
-- P2021: The base case PD of 1.4% and a base case LGD of 7.1%.
-- P2022: The base case PD of 1.3% and a base case LGD of 11.2%.

CREDIT ENHANCEMENT
Credit enhancement (CE) is provided by the subordination of the junior notes and the general reserve fund. Current CE levels to the Rated Notes compared to the CE levels at the DBRS Morningstar initial ratings are as follows:

P2021:
-- Class A CE is 35.3%, up from 13.7%
-- Class B CE is 21.3%, up from 8.2%
-- Class C CE is 9.9%, up from 3.7%
-- Class D CE is 6.0%, up from 2.2%
-- Class E CE is 3.7%, up from 1.3%

P2022:
-- Class A CE is 15.8%, up from 15.6%
-- Class B CE is 11.5%, up from 11.3%
-- Class C CE is 7.3%, up from 7.2%
-- Class D CE is 3.2%, up from 3.1%
-- Class E CE is 2.1%, up from 2.0%

The transactions each benefit from a liquidity reserve fund (LRF), which covers senior fees, interest on the Class A and Class B notes, and senior deferred consideration. The LRF is currently at its target level of GBP 1.7 million for P2021, and GBP 2.2 million for P2022, each equal to 0.5% of the outstanding Class A and Class B notes balance.

The transactions also benefit from a general reserve fund (GRF).The GRF covers senior fees, interest on the Class A to Class E notes, and principal losses via the principal deficiency ledgers (PDL) on the Class A to Class E notes (subject to a PDL condition of 10% for each class). The GRF is currently at its target level of GBP 8.8 million for P2021, equal to 1.75% of the outstanding balance of the mortgage loans less the LRF target amount; and GBP 10.2 million for P2022, equal to 2.50% of the outstanding balance of the mortgage loans less the LRF target amount.

Barclays Bank PLC acts as the account bank for both transactions. Based on the DBRS Morningstar private rating of Barclays Bank PLC, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Class A and Class B notes in each transaction, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Barclays Bank UK PLC acts as the swap counterparty for both transactions. DBRS Morningstar's private rating of Barclays Bank UK PLC is consistent the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit ratings on the notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings on the notes also address the credit risk associated with the increased rate of interest applicable to the notes if the notes are not redeemed on the Optional Redemption Date (as defined in and) in accordance with the applicable transaction documents.

DBRS Morningstar’s credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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

The principal methodology applicable to the credit ratings is the “Master European Structured Finance Surveillance Methodology” (7 February 2023): https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in these transactions are listed at the end of this press release.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit ratings include investor reports and loan-level data provided by U.S. Bank Global Corporate Trust Limited.

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

At the time of the initial credit ratings, 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 credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on P2021 took place on 19 December 2022, when DBRS Morningstar confirmed its ratings on the Class A and Class B notes at AAA (sf) and upgraded its ratings of the Class C, Class D, and Class E notes to AA (sf), A (high) (sf), and A (low) (sf), respectively, from A (high) (sf), A (low) (sf), and BBB (high) (sf), respectively.

The last credit rating action on P2022 took place on 19 December 2022, when DBRS Morningstar finalised its provisional ratings on the Class A, Class B, Class C, Class D, and Class E notes at AAA (sf), AAA (sf) AA (high) (sf), A (sf), and BB (high) (sf), respectively.

The lead analyst responsibilities for the P2022 transaction have been transferred to Clare Wootton.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.

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

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuers at the B (sf) credit rating level are as follows:
-- P2021: The base case PD of 1.4% and a base case LGD of 7.1%.
-- P2022: The base case PD of 1.3% and a base case LGD of 11.2%.

-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the credit rating on the P2021 Class A notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the credit rating on the P2021 Class A notes would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the credit rating on the P2021 Class A notes would be expected to remain at AAA (sf).

P2021
Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)

Class B Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)

Class C Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD, expected credit rating of AA (high) (sf)
-- 50% increase in PD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (sf)

Class D Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 50% increase in LGD, expected credit rating of AA (low) (sf)
-- 25% increase in PD, expected credit rating of AA (low) (sf)
-- 50% increase in PD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (high) (sf)

Class E Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of A (sf)
-- 50% increase in LGD, expected credit rating of A (low) (sf)
-- 25% increase in PD, expected credit rating of A (sf)
-- 50% increase in PD, expected credit rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BBB (high) (sf)

P2022
Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)

Class B Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD, expected credit rating of AA (high) (sf)
-- 50% increase in PD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (sf)

Class C Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD, expected credit rating of AA (high) (sf)
-- 50% increase in PD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (high) (sf)

Class D Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of A (sf)
-- 50% increase in LGD, expected credit rating of A (low) (sf)
-- 25% increase in PD, expected credit rating of A (low) (sf)
-- 50% increase in PD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BBB (sf)

Class E Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (low) (sf)
-- 50% increase in LGD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD, expected credit rating of BBB (low) (sf)
-- 50% increase in PD, expected credit rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BB (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://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Clare Wootton, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
P2021: 15 December 2021
P2022: 8 December 2022

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v 6.0.0.0., https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: U.K. Addendum (11 August 2023), https://www.dbrsmorningstar.com/research/419141/european-rmbs-insight-uk-addendum.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions.

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].