DBRS Morningstar Finalises Provisional Credit Ratings on Castell 2023-2 PLC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional credit ratings to the residential mortgage-backed notes to be issued by Castell 2023-2 PLC (the Issuer) as follows:

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

The credit rating on the Class A1 and Class A2 notes (together the Class A notes) addresses the timely payment of interest and the ultimate repayment of principal. The credit ratings on the Class B notes address the timely payment of interest once they are the senior most 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, Class F, and Class X notes address the ultimate payment of interest and principal.

DBRS Morningstar does not rate the Class G and Class H notes 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 of Great Britain and Northern Ireland (UK). The notes issued shall fund the purchase of British second-lien mortgage loans originated by UKML. Pepper (UK) Limited (Pepper; the Servicer) is the primary and special servicer of the portfolio. UKML, established in November 2013 and previously known as Optimum Credit Ltd (Optimum Credit), is a specialist provider of second-lien mortgages based in Cardiff, Wales. Both UKML and Pepper are part of the Pepper Group Limited (Pepper Group), a worldwide consumer finance business, third-party loan servicer, and asset manager. Law Debenture Corporate Services shall be appointed as the back-up servicer facilitator to the transaction.

This is the second securitisation from the Castell series this year, following Castell 2023-1 Plc issued in April. The initial mortgage portfolio consists of GBP 275 million of second-lien mortgage loans collateralised by owner-occupied (OO) properties in the UK. The portfolio features currently warehoused mortgage loans as well as a portion of loans securitised in the past within the Castell 2020-1 Plc transaction.

Relative to the other Castell transaction issued this year, Castell 2023-2 PLC differs in particular with regard to the existence of prefunding, leading to a total portfolio size of approximately GBP 300 Mn as of 31st October 2023 which DBRS Morningstar has analysed, as well as the increased portion of permitted product switches, now 15% of the portfolio's aggregate current balance as of closing.

Liquidity in the transaction is provided by a liquidity reserve, which shall cover senior costs and expenses as well as interest shortfalls on the Class A1 and Class A2 notes (together, the Class A notes) and Class B notes. 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 on Class A to Class G notes. However, the latter will be subject to a principal deficiency ledger (PDL) condition, which states that if a given class of notes is not the most senior class outstanding, when a PDL debit of more than 10% of such class exists, principal borrowing will not be available. Interest shortfalls on Class B to Class G notes, as long as they are not the most senior class outstanding, shall be deferred and not be recorded as an event of default until the final maturity date or such earlier date on which the notes are fully redeemed.

The transaction also features a fixed-to-floating interest rate swap, given the presence of a large portion of fixed-rate loans (with a compulsory reversion to floating in the future) while the liabilities shall pay a coupon linked to Sonia. The swap counterparty to be appointed as of closing shall be BNP Paribas. DBRS Morningstar currently rates BNPP with a long-term critical obligations rating (COR) of AA (high) and a long-term issuer rating (IR) of AA (low), both with Stable trends. The transaction documents contain downgrade provisions if the DBRS Morningstar long-term rating or the COR on BNPP fall below A or below BBB for the first and second rating thresholds, respectively. The collateral posting and replacement provisions are consistent with DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

Furthermore, Citibank, N.A., London Branch shall act as the Issuer Account Bank, and National Westminster Bank Plc shall be appointed as the Collection Account Bank. Both entities are privately rated by DBRS Morningstar and meet the eligible ratings in structured finance transactions and are consistent with DBRS Morningstar's “Legal Criteria for European Structured Finance Transactions” methodology.

Credit enhancement for the Class A notes is calculated at 25.0% and is provided by the subordination of the Class B to Class H notes. Credit enhancement for the Class B notes is calculated at 18.75% and is provided by the subordination of the Class C to Class H notes. Credit enhancement for the Class C notes is calculated at 13.25% and is provided by the subordination of the Class D to Class H notes. Credit enhancement for the Class D notes is calculated at 8.75% and is provided by the subordination of the Class E to Class H notes. Credit enhancement for the Class E notes is calculated at 6.75% and is provided by the subordination of the Class F to Class H notes. Credit enhancement for the Class F notes is calculated at 5.25% and is provided by the subordination of the Class G and Class H notes. Credit enhancement for the Class G notes is calculated at 2.5% and is provided by the subordination of the Class H notes. Credit enhancement for the Class X notes is calculated at zero, as these are excess spread notes with interest and principal payments flowing through the revenue priority of payments.

DBRS Morningstar based its credit ratings on a review of the following analytical considerations:
-- The transaction’s 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 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, Class F, and Class X 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% CPR;
-- The sovereign 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 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/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 methodology applicable to the credit rating is: “European RMBS Insight Methodology”, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology (27 March 2023).

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 UK Mortgage Lending Ltd and Pepper (UK) Limited. DBRS Morningstar received a loan-by-loan data tape as of 31 October 2023 as well as historical data sets, which included information on arrears, prepayments and repossessions. The data covered the period June 2014 to August 2023 for arrears, January 2015 to August 2023 for prepayments, and July 2019 to August 2023 for repossessions.

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 credit 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.

These credit ratings concern a newly issued financial instrument. These are the first DBRS Morningstar credit ratings on these financial instruments.

These are the first credit rating actions since the Initial Rating Date.

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 25.4% and an LGD of 80.5% 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 23.6% and an LGD of 76.3% 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 19.0% and an LGD of 65.1% corresponding to the A (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 14.1% and an LGD of 54.9% corresponding to the BBB (high) (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 12.2% and an LGD of 49.1% corresponding to the BBB (low) (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 8.4% and an LGD of 42.6% 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 X notes, a PD of 13.3% and an LGD of 51.9% corresponding to the BBB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A1 and Class A2 Notes 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 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 A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

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

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

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

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

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

Class X Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected 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: Lorenzo Coccioli, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 1 November 2023

DBRS Ratings Limited
1 Oliver’s Yard 55-71 City Road, 2nd Floor,
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: UK Addendum (11 August 2023) and European RMBS Insight Model v. 6.0.0.0, https://www.dbrsmorningstar.com/research/419141/european-rmbs-insight-uk-addendum.
-- European RMBS Insight Methodology (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- 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].