DBRS Morningstar Finalises Provisional Credit Ratings on Together Asset Backed Securitisation 2023-CRE-1 plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional credit ratings on the residential mortgage-backed notes issued by Together Asset Backed Securitisation 2023-CRE-1 plc (TABS 2023-CRE-1 or the Issuer) as follows:

-- Loan Note at AAA (sf)
-- Class A Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)

The credit ratings on the Loan Note and the Class A Notes (together, the Class A Debt) address the timely payment of interest and the ultimate repayment of principal. The credit ratings on the Class B, Class C, and Class D notes address the timely payment of interest once they are the senior-most class of notes outstanding otherwise the ultimate payment of interest and the ultimate repayment of principal on or before the final maturity date.

DBRS Morningstar does not rate the Class X Notes and Class Z Notes also expected to be issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in England and Wales. The notes to be issued shall fund the purchase of small balance commercial assets originated by Together Commercial Financial Services Limited (TCFL) and Harpmanor Limited (HARP), part of the Together Financial Group (Together or the Group) in the United Kingdom of Great Britain and Northern Ireland (UK). TCFL and HARP both act as the servicers of the respective loans in the portfolio. Together is a UK specialist provider of property finance. BCMGlobal Mortgage Services Limited (BCMG) acts as the standby servicer.

This is the fourth public securitisation backed by small balance commercial assets from the Together Group (TABS CRE). The initial mortgage portfolio consists of GBP 380 million of first- and second-lien mortgage loans secured by owner-occupied (fully or partially) or non-owner-occupied commercial, mixed-use, and residential properties in the UK.

The loans have a relatively low loan-to-value ratio at origination. As of the cut-off date of 31 October 2023, the weighted-average current loan-to-value of the mortgage portfolio was 57.0%, while the weighted-average original loan-to-value ratio was 57.9%. The portfolio is subject to cross-default and cross-collateralisation. DBRS Morningstar assessed the credit risk by aggregating the exposure at the borrower level, including the prior charges for second-lien loans.

Contrary to the previous TABS CRE transactions, TABS 2023-CRE-1 features a fixed-to-floating interest rate swap, given the presence of a portion of fixed-rate loans (with a compulsory reversion to floating in the future) while the liabilities shall pay a coupon linked to Daily compounded Sterling Overnight Index Average (Sonia). The swap counterparty to be appointed as of closing shall be HSBC Bank plc (HSBC). Based on the DBRS Morningstar private rating of HSBC, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to HSBC to be consistent with the ratings assigned to the rated notes as described in 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, meet the eligible ratings in structured finance transactions, and are consistent with DBRS Morningstar's “Legal Criteria for European Structured Finance Transactions” methodology.

Liquidity in the transaction is provided by a liquidity reserve fund that is funded at closing through the issuance of the Class Z Notes. It is sized at 1.5% of the portfolio outstanding balance as of 31 October 2023 and is amortising at the target balance of 1.5% of the outstanding portfolio balance. It covers senior costs and expenses, swap payments as well as interest shortfalls for the Class A Debt and the Class B Notes. It also provides credit support to the rated notes upon the redemption in full of the Class B Notes when it becomes part of principal receipts. In addition, principal borrowing is also envisaged under the transaction documentation and can be used to cover for interest shortfalls of the most senior outstanding class of notes.

Credit enhancement (CE) is expressed as a percentage of the initial portfolio balance, includes the liquidity reserve, and is as follows:
--CE to the Class A Debt at 19.5%.
--CE to the Class B Notes at 13.5%.
--CE to the Class C Notes at 9.0%.
--CE to the Class D Notes at 5.0%.

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 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 Debt and Class B, Class C, and Class D 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;
-- The sovereign rating of AA with a Stable trend on the UK 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 rating does 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 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: “European RMBS Insight Methodology” (27 March 2023) https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.

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 loan-level data, property data and the following historical data, all provided by Together:
-- Yearly vintage delinquencies, split by repayment method for 1-month, 2-month, and 3-month and above arrears over 2014 to 2022.
-- Dynamic monthly data of 1-month and 3-month arrears from January 2014 to July 2023.
-- Dynamic monthly prepayment data from January 2014 to July 2023.
-- Yearly vintage repossession data over 2014 to 2022.

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 this credit rating 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 newly issued financial instruments. 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 rating, 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 Debt, a PD of 31.1% and an LGD of 35.8% 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 29.2% and an LGD of 32.3% 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 21.5% and an LGD of 20.9% corresponding to the A (low) (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 18.2% and an LGD of 17.1% corresponding to the BBB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

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

Class D Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% 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 (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (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: Natalia Coman, Assistant Vice President
Rating Committee Chair: Ketan Tacker, Managing Director
Initial Rating Date: 22 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 v. 6.0.1.0,
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
-- 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
-- Legal Criteria for European Structured Finance Transactions (30 June 2023)
https://www.dbrsmorningstar.com/research/416730/legal-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
-- 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].