Press Release

DBRS Morningstar Upgrades and Confirms Credit Ratings on Gemgarto 2021-1 Plc

RMBS

December 15, 2023

DBRS Ratings Limited (DBRS Morningstar) upgraded and confirmed its ratings on the notes issued by Gemgarto 2021-1 Plc as follows:

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

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date. The credit ratings on the Class B, Class C, and Class D notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the legal final maturity date.

The credit rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance in terms of delinquencies, defaults, and losses, as of the September 2023 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables and on potential portfolio migration based on replenishment criteria;
-- Current available credit enhancement to the notes to cover the expected losses at their respective credit rating levels; and
-- No revolving termination events have occurred.

The transaction is a securitisation of first-ranking owner-occupied residential mortgages originated and serviced by Kensington Mortgage Company Limited (KMC) in England, Wales, and Scotland. Notable features of the portfolio are Help-to-Buy (HTB), Right-to-Buy mortgages, borrowers with adverse borrower features including self-employed borrowers, and borrowers with prior county court judgments and the presence of arrears at closing, albeit in limited proportions.

The transaction is currently in its four-year replenishment period, which is scheduled to end on the payment date in March 2025. During the replenishment period, principal funds are first allocated toward the partial amortisation of the Class A notes according to a target notional schedule before being applied to purchase additional loans. The end of the replenishment period also coincides with a step-up in the margin of the rated notes.

The transaction closed in February 2021, its legal final maturity is on the December 2067 payment date, and its first optional redemption date is on the March 2025 payment date.

PORTFOLIO PERFORMANCE
There is a persistent increasing trend in all buckets. As of the September 2023 payment date, loans 60 to 90 days in arrears and more than 90 days in arrears represented 1.6% and 4.9%, respectively, up from 0.4% and 1.3% at the last rating action. If loans more than three months in arrears exceed 5.0% of the portfolio outstanding balance, the replenishment period will end.

As of the September 2023 payment date, there were no realised losses.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar has analysed a stressed collateral portfolio to assess potential deterioration in portfolio characteristics during the replenishment period, subject to portfolio-wide covenants. DBRS Morningstar also conducted a loan-by-loan analysis of the remaining pool of receivables.

DBRS Morningstar updated its base case PD and LGD assumptions at the B (sf) credit rating level to 10.3% and 6.7%, respectively, from 5.9% and 5.5%, respectively, at the last rating action. The increase in the base case PD reflects the increase in the arrears buckets below three months, which are not limited by the portfolio-wide covenants. The increase in the LGD reflects the increase in HTB loans to 17.9% beyond the portfolio-wide covenant of 17.5% because of the amortisation of the remaining pool of receivables. Therefore, DBRS Morningstar has aligned the stresses on the collateral portfolio on the performance of the remaining pool of receivables.

CREDIT ENHANCEMENT
As of the September 2023 payment date, the credit enhancement (CE) increased as follows since the last rating action:

-- CE to the Class A notes increased to 26.9% from 15.5%,
-- CE to the Class B notes increased to 17.2% from 9.9%,
-- CE to the Class C notes increased to 11.8% from 6.8%, and
-- CE to the Class D notes increased to 10.8% from 6.2%.

The substantial increase in CE is because of the repayment of the Class A Notes beyond the target notional schedule as no additional loans were purchased and the principal accumulation account reached its maximum from the March 2022 payment date. This increase compensates for the performance deterioration of the portfolio and drives the upgrades on the Class B, Class C, and Class D notes.

The transaction benefits from the General Reserve Fund (GRF), which is nonamortising and available to cover senior fees and senior swap payments as well as interest and principal losses via the principal deficiency ledgers (PDLs) on the Class A to Class E notes. Once the Class D notes are fully redeemed, the target balance of the GRF becomes zero. As of the September 2023 payment date, the GRF is at its target level, equal to 2% of the initial balance of the Class A to Class E notes. As of the September 2023 payment date, all PDLs were clear.

The transaction also benefits from a Liquidity Reserve Fund (LRF), which provides additional liquidity support to cover senior fees, senior swap payments, and interest on the Class A and Class B notes. The LRF will be funded through available principal funds to 2% of the outstanding Class A and Class B notes balance, if the GRF balance falls below 1.5% of the outstanding Class A to Class E notes.

The transaction is exposed to interest rate risk as a portion of the portfolio pays a fixed rate of interest on a short-term basis and a floating rate of interest indexed to the Kensington Standard Rate or the three-month Term Sonia Reference Rate or a synthetic Libor, while the rated notes are indexed to Sonia.

In addition, loans can be subject to a variation in the length of the fixed-rate period, the applicable interest rate, and maturity date through a “Product Switch” of up to 20% of the original balance of the Class A to Class E notes. As of the September 2023 payment date, Product Switch loans represented 10.3% of the original balance of the Class A to Class E notes.

Citibank N.A./London Branch (Citibank London) acts as the account bank for the transaction. Based on DBRS Morningstar’s private credit rating of Citibank London, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

BNP Paribas, London Branch (BNP Paribas London) acts as the swap counterparty for the transaction. DBRS Morningstar's private credit rating on BNP Paribas London is above 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 rated 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 rated notes also address the credit risk associated with the increased rate of interest applicable to the rated notes if the rated notes are not redeemed on the Optional Redemption Date (as defined in and) in accordance with the applicable transaction document(s).

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
Social (S) factors
DBRS Morningstar considers the help-to-buy (HTB) scheme applicable to a proportion of the portfolio to be a relevant social factor (social impact of products and services) as outlined in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. The HTB scheme is credit negative, but DBRS Morningstar does not consider this to be a significant social factor given the limited exposure to HTB loans in the transaction.

There were no environmental or 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 pounds sterling unless otherwise noted.

The principal methodology applicable to the credit ratings is: “Master European Structured Finance Surveillance Methodology” (11 December 2023; https://www.dbrsmorningstar.com/research/425148/master-european-structured-finance-surveillance-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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a replenishment period in the transaction, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

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, investor reports provided by Citibank London and additional information provided by KMC.

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 one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its 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.

The last credit rating action on this transaction took place on 19 December 2022, DBRS Morningstar confirmed its credit ratings on Class A and Class B notes at AAA (sf) and AA (sf), respectively, and upgraded its credit ratings on the Class C, Class D, and Class X notes to A (high) (sf), A (high) (sf) and AA (high) (sf), respectively, from A (sf), A (low) (sf), and BB (high) (sf), respectively and removed the Under Review with Positive Implications status on the Class B, Class C, Class D, and Class X notes following the finalisation of DBRS Morningstar’s “European RMBS Insight: UK Addendum” methodology.

On 9 October 2023, DBRS Morningstar discontinued its credit rating on the Class X notes, following its repayment in full.

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

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

To assess the impact of changing the transaction’s 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 assumptions at B (sf) credit rating level are 10.3% and 6.7%, respectively.
-- 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.

Class A notes 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 notes 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 (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 C notes 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 A (high) (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 (high) (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 (low) (sf)

Class D notes risk sensitivity:
-- 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 50% increase in LGD, expected credit rating of A (high) (sf)
-- 25% increase in PD, expected credit rating of AA (low) (sf)
-- 50% increase in PD, expected credit rating of A (high) (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 (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (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: Clare Wootton, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 26 January 2021

DBRS Ratings Limited
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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.

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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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