Morningstar DBRS Finalises Provisional Credit Ratings on Together Asset Backed Securitisation 2024-2ND1 PLC

DBRS Ratings Limited (Morningstar DBRS) finalised its provisional credit ratings on the residential mortgage-backed notes issued by Together Asset Backed Securitisation 2024-2ND1 PLC (TABS 2024-2ND1 or the Issuer) as follows:

-- Loan note at AAA (sf)
-- Class A notes at AAA (sf)
-- Class B notes at AA (sf)
-- Class C notes at A (low) (sf)
-- Class D notes at BBB (low) (sf)
-- Class E notes at BB (high) (sf)
-- Class F notes at BB (low) (sf)
-- Class X notes at A (high) (sf)

The final credit ratings assigned to the Class E, Class F, and Class X notes differ from the provisional credit ratings of BB (low) (sf), B (sf), and A (low) (sf), respectively, because of the tighter spreads and step-up margins on Classes B through X in the final structure.

The credit ratings on the Loan note and the Class A notes (together, the Class A Debt) and on the Class B notes address the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in August 2055. The credit ratings on the Class B, Class C, Class D, Class E, and Class F 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. The credit rating on the Class X notes addresses the ultimate payment of interest and principal. Morningstar DBRS does not rate the Class Z notes or the residual certificates also issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in England and Wales. The notes issued funded the purchase of residential assets originated by Together Personal Financial Services Limited (TPFL) and Together Commercial Financial Services Limited (TCFL), part of the Together Financial Group (Together or the Group) in the UK. TPFL and TCFL 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 second public securitisation backed by second-ranking assets from the Together Group (TABS 2ND). The mortgage portfolio consists of GBP 302 million of second-lien owner-occupied (OO) and buy-to-let (BTL) mortgages secured by properties in the UK.

The Issuer issued eight tranches of collateralised mortgage-backed securities (the Loan note as well as the Class A, Class B, Class C, Class D, Class E, Class F, and Class Z notes) to finance the purchase of the portfolio. Additionally, the Issuer issued one class of noncollateralised notes, the Class X notes, the proceeds of which the Issuer used to fully fund the liquidity reserve fund (LRF) at closing.

The transaction is structured to initially provide 25.0% of credit enhancement to the Class A Debt. This includes subordination of the Class B to Class Z notes.

In line with the previous TABS 2ND transaction, TABS 2024-2ND1 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 the daily compounded Sterling Overnight Index Average (Sonia). The swap counterparty appointed at closing is Natixis S.A. (Natixis). Based on Morningstar DBRS’ private credit rating on Natixis, the downgrade provisions outlined in the documents, and the transaction structural mitigants, Morningstar DBRS considers the risk arising from the exposure to Natixis to be consistent with the credit ratings assigned to the rated notes as described in Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions” methodology.

Furthermore, Elavon Financial Services DAC, UK Branch acts as the Issuer Account Bank, and National Westminster Bank Plc was appointed as the Collection Account Bank. Both entities are privately rated by Morningstar DBRS, meet the eligible credit ratings in structured finance transactions, and are consistent with the credit ratings assigned to the rated notes as described in Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology.

Liquidity in the transaction is provided by an LRF that was funded at closing through the issuance of the Class X notes. It is amortising, sized at 1.6% of the outstanding Class A Debt and B notes’ 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 revenue 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 (except the Class X and Class Z notes).

Morningstar DBRS 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. Morningstar DBRS estimated stress-level probability of default (PD), loss given default (LGD), and expected losses (EL) on the mortgage portfolio. Morningstar DBRS used the PD, LGD, and EL as inputs into the cash flow engine. Morningstar DBRS analysed the mortgage portfolio in accordance with its “European RMBS Insight: UK Addendum” methodology;
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the Class A Debt and Class B, Class C, Class D, Class E, Class F, and Class X notes according to the terms of the transaction documents;
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as a downgrade, and replacement language in the transaction documents;
-- 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 press release; and
-- The consistency of the transaction’s legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the assignment of the assets to the Issuer.

Morningstar DBRS’ 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.

Morningstar DBRS’ credit rating on the rated notes also addresses the credit risk associated with the increased rate of interest applicable to each of 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 documents.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS 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.

Morningstar DBRS analysed the transaction structure in Intex DealMaker.

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

The principal methodologies applicable to the credit ratings are the: “European RMBS Insight Methodology” (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology and the “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.

The credit rating assigned to the Class X notes materially deviates from the credit rating implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is that the credit rating on the Class X notes reflects its sensitivity to a potential compression of the net excess spread between the assets and liabilities in a rising interest rate scenario.

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

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 Morningstar DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include those provided by Together and its representatives. Morningstar DBRS was provided with loan-level, property, and margin data as of 31 December 2023, and the following historical data:
-- Dynamic yearly vintage delinquencies (three months+), split by OO, BTL, and Commercial BTL (CBTL) for the years 2014 to 2023.
-- Cumulative 90-days+ arrears, split by OO, BTL, and CBTL from 2011 to 2022.
-- Dynamic monthly prepayments from January 2007 to October 2022, split by interest-only and repayment loans.
-- Quarterly vintage repossessions for Q1 2006 to Q3 2023.

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

Morningstar DBRS was supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS 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 Morningstar DBRS credit ratings on these financial instruments.

This is the first credit rating action since the Initial Rating Date.

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

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

-- In respect of the Class A Debt, a PD of 27.8% and an LGD of 80.0% 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 24.5% and an LGD of 71.2% corresponding to the AA (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 18.5% and an LGD of 54.6% 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 14.2% and an LGD of 42.2% 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 E notes, a PD of 11.0% and an LGD of 37.6% corresponding to the BB (high) (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 8.9% and an LGD of 32.0% corresponding to the BB (low) (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 21.1% and an LGD of 62.5% corresponding to the A (high) (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 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)
-- 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 A (high) (sf)
-- 50% increase in PD, 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 (low) (sf)

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

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

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

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

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

Class X Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in LGD, expected credit rating of A (high) (sf)
-- 25% 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, 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 (high) (sf)

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Roger Bickert, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 8 January 2024

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://dbrs.morningstar.com/about/methodologies.

-- European RMBS Insight Methodology (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology and European RMBS Insight Model v. 6.0.1.1.
-- 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 Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].