DBRS Morningstar Assigns Provisional Credit Ratings to Towd Point Mortgage Funding 2023 - Vantage 3 plc

DBRS Ratings Limited (DBRS Morningstar) assigned provisional credit ratings to the residential mortgage-backed notes to be issued by Towd Point Mortgage Funding 2023 - Vantage 3 plc (the Issuer) as follows:

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

The credit rating on the Class A1 and A2 notes (together, the Class A Notes) addresses the timely payment of interest and the ultimate repayment of principal. The credit rating on the Class B notes addresses the timely payment of interest once they are the most senior class of notes outstanding and the ultimate repayment of principal on or before the final maturity date. The credit ratings on the Class C, Class D, Class E, and Class F notes address the ultimate payment of interest and principal.

DBRS Morningstar does not rate the Class Z notes and Class XB certificates also expected to be issued in this transaction.

CREDIT RATING RATIONALE

The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom (UK). The Issuer will use the proceeds of the notes to fund the purchase of UK residential loans secured over residential properties located in England, Wales, Northern Ireland, and Scotland. The loans were originated by GE Money Home Lending Limited, First National Bank plc, and Igroup Limited and were previously securitised by Towd Point Mortgage Funding 2019-Vantage2 Plc (Vantage 2). On the Closing Date, the beneficial title of the mortgage loans will be purchased from Vantage 2 by CERH Vantage Holdings SARL (the Seller) and immediately transferred to the Issuer. The Retention Holder, Cerberus European Residential Holdings II, S.à r.l., will hold a material economic interest of no less than 5% in the securitisation by retaining at least 5% of the nominal value of each of the tranches sold or transferred to investors.

Capital Home Loans Limited is the Servicer and Legal Title Holder of the loans. Homeloan Management Limited will be appointed as the Backup Servicer at closing and CSC Capital Markets UK Limited will act as the Backup Servicer Facilitator.

The initial mortgage portfolio consists of GBP 442 million of first-lien mortgage loans collateralised by mostly owner-occupied properties in the UK. The weighted-average (WA) current indexed loan-to-value, as calculated by DBRS Morningstar, equals 54.1% and the WA seasoning of the portfolio is 16.9 years. 29.1% of the loans have been in arrears for three months or more, 8.1% of the loans are under litigation, and 2.5% have reached their maturity but not paid their final instalment (overdue). The majority of the loans in the portfolio consist of interest-only loans (66.9%) or part and part loans (12.4%).

The notes pay a coupon linked to the daily compounded Sterling Overnight Index Average. All the loans in the provisional portfolio are floating-rate loans and the majority (98.6% of the portfolio) are linked to the Bank of England Base Rate, with the remaining linked to the Standard Variable Rate. There will be no swap in the structure and thus the basis mismatch remains unhedged. DBRS Morningstar has taken this basis mismatch into account in its cash flow analysis.

Liquidity in the transaction is provided by a liquidity reserve, which shall cover senior fees and interest payment on the Class A notes and Class B notes once most senior up to the Liquidity Facility (LF) Cancellation Date. The Liquidity Reserve Fund will cover senior fees and interest payments on the Class A notes and Class B notes once most senior on and from the LF Cancellation Date, and will be funded by Available Revenue and Principal receipts. In addition, principal borrowing is also envisaged under the transaction documentation and can be used to cover senior costs and expenses as well as interest shortfalls of Classes A to F. The terms and conditions of the Class B to Class F notes allow for interest to be deferred even when they are the most senior classes of notes.

Credit enhancement for the Class A notes is calculated at 28.00% and is provided by the subordination of the Class B to Class Z notes. Credit enhancement for the Class B notes is calculated at 23.25% and is provided by the subordination of the Class C to Class Z notes. Credit enhancement for the Class C notes is calculated at 18.25% and is provided by the subordination of the Class D to Class Z notes. Credit enhancement for the Class D notes is calculated at 15.25% and is provided by the subordination of the Class E to Class Z notes. Credit enhancement for the Class E notes is calculated at 12.25% and is provided by the subordination of the Class F to Class Z notes. Credit enhancement for the Class F notes is calculated at 10.75% and is provided by the subordination of the Class Z notes.

The structure includes a Principal Deficiency Ledger (PDL) comprising seven sub-ledgers (one for each class of notes) that provisions for realised losses as well as the use of any principal receipts applied to meet any shortfall in the payment of senior fees and interest on the senior-most class of notes outstanding. The losses will be allocated starting from the Class Z PDL and then to sub-ledgers of each class of notes in reverse-sequential order.

Elavon Financial Services DAC, U.K. Branch, privately rated by DBRS Morningstar, shall act as the Issuer Account Bank. Barclays Bank PLC, which has a DBRS Morningstar Long-Term Issuer Rating of “A” with a Stable trend, will be appointed Collection Account Bank. Both the Issuer Account Bank and the Collection Account Bank meet the eligible ratings in structured finance transactions and are consistent with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its credit ratings on a review of the following analytical considerations:
-- The transaction capital structure, including the 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 estimated stress-level probability of default (PD), loss given default (LGD), and expected losses (EL) on the mortgage portfolio. DBRS Morningstar used the PD, LGD, and EL as inputs into the cash flow engine. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight: UK Addendum”;
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E, and Class F notes according to the terms of the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker. DBRS Morningstar considered additional sensitivity scenarios of 0% constant prepayment rate stress;
-- The sovereign credit rating of AA with a Stable trend on the United Kingdom of Great Britain and Northern Ireland as of the date of this report; and
-- The expected 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 that are expected to address the assignment of the assets to the Issuer.

DBRS Morningstar’s credit ratings on the rated notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Interest Amounts and the related Class Balances.

DBRS Morningstar’s credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) 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 relevant or significant 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, considering the default rates at which the rated notes did not return all specified cash flows.

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

The principal methodologies applicable to the credit ratings are European RMBS Insight Methodology (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology and European RMBS Insight: UK Addendum (11 August 2023),
https://www.dbrsmorningstar.com/research/419141/european-rmbs-insight:-uk-addendum.

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

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 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/421590.

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.

The sources of data and information used for these credit ratings include Capital Home Loans Limited and Merrill Lynch International.

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. DBRS Morningstar applied a haircut of 5% to the original valuations of the properties based on the estimated errors in the audit report.

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.

These credit ratings concern expected-to-be issued new financial instruments. These are the first DBRS Morningstar credit ratings on these financial instruments.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the Base Case):

-- In respect of the Class A notes, a PD of 73.2% and an LGD of 28.8% corresponding to the AAA (sf) credit rating scenario were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B notes, a PD of 69.1% and an LGD of 22.0% corresponding to the AA (low) (sf) credit rating scenario were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C notes, a PD of 63.7% and an LGD of 16.3% corresponding to the A (low) (sf) credit rating scenario were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D notes, a PD of 57.3% and an LGD of 12.9% corresponding to the BBB (low) (sf) credit rating scenario were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E notes, a PD of 46.8% and an LGD of 10.1% corresponding to the BB (low) (sf) credit rating scenario were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F notes, a PD of 41.0% and an LGD of 8.1% corresponding to the B (sf) credit rating scenario were stressed assuming a 25% and 50% increase in the PD and LGD.

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

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

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

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

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

Class F Notes Risk Sensitivity:
-- 25% increase in PD, expected credit rating below B (low) (sf)
-- 50% increase in PD, expected credit rating below B (low) (sf)
-- 25% increase in LGD, expected credit rating of B (low) (sf)
-- 50% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating below 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://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: Lorenzo Coccioli, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 6 November 2023

DBRS Ratings Limited
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London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
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.

-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model version 6.0.0.0, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (11 August 2023),
https://www.dbrsmorningstar.com/research/419141/european-rmbs-insight:-uk-addendum.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-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.
-- 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.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.
-- 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.

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].