Morningstar DBRS Confirms Credit Ratings on Charles Street Conduit Asset Backed Securitisation 2 Limited

DBRS Ratings Limited (Morningstar DBRS) confirmed its credit ratings on the notes issued by Charles Street Conduit Asset Backed Securitisation 2 Limited (the Issuer) as follows:

-- Class A1/Class A2 Notes (collectively, the Class A Notes) at AA (sf)
-- Class B Notes at BBB (high) (sf)
-- Class C Notes at BB (high) (sf)

The credit ratings on the Class A, Class B, and Class C Notes (collectively, the rated notes) address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date.

The confirmations 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 January 2024 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective credit rating levels; and
-- No early termination events have occurred.

The transaction is a revolving warehouse securitisation of first and second lien buy-to-let and owner-occupied mortgages backed by residential properties located in the United Kingdom. The mortgages were originated by various subsidiaries of Together Financial Services Limited (Together) including Blemain Finance Limited, Together Commercial Finance Limited, Harpmanor Limited, and Together Personal Finance Limited. Each of the originators is the servicer of the loans they have originated. BCM Global Mortgage Services Limited acts as the standby servicer.

Until the initial maturity date falling in March 2026 (48 months from the issuance date), the Issuer may use the principal receipts or available/undrawn facility commitment amounts to purchase new loan receivables. Each purchased loan needs to meet the eligibility criteria and adhere to the portfolio covenants.

PORTFOLIO PERFORMANCE
As of 31 December 2023, loans two to three months in arrears represented 0.5% of the outstanding portfolio balance, down from 0.9% a year prior. Loans more than three months in arrears represented 0.6%, up from 0.4% a year prior. Cumulative defaults since closing were 1.3%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-level analysis of the receivables based on the worst-case portfolio composition given the transaction revolving period. Morningstar DBRS assumes a base case PD and LGD at the B (sf) credit rating level of 14.3% and 14.3%, respectively. The assumptions continue to be based on the worst-case portfolio composition outlined in the portfolio covenants.

CREDIT ENHANCEMENT AND RESERVES
Subordination to the notes increases with changes in the advance rate or decreases to a floor determined by the advance rate caps. The Class A, Class B, and Class C Notes benefit from a minimum subordination of 15.0%, 10.0%, and 7.5%, respectively.

A co-mingling reserve is in place to cover shortfalls in senior fees, swap payments, and Class A interest. The target amount is 1.5% of the outstanding balance of the notes and is replenished through principal collections prior to the initial maturity date. The reserve is currently funded to its target balance of GBP 12.3 million.

Lloyds Bank plc acts as the account bank for the transaction. Based on the account bank reference rating of Lloyds Bank plc at AA - being one notch below the Morningstar DBRS public Long Term Critical Obligations Rating of AA (high), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A Notes, as described in Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology.

Natixis S.A. acts as the swap counterparty for the transaction. Morningstar DBRS’ private rating of Natixis S.A. is consistent with the First Rating Threshold as described in Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions” methodology.

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.

Morningstar DBRS’ credit ratings do not address non-payment 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 “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS 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 rating is the “Master European Structured Finance Surveillance Methodology” (11 December 2023), https://dbrs.morningstar.com/research/425148.

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

Morningstar DBRS 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 revolving period in the transaction, the analysis considers potential portfolio migration based on the 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 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 investor reports and loan-level data provided by Together.

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

At the time of the initial credit ratings, Morningstar DBRS was supplied with third-party assessments. However, this did not impact the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purpose 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.

The last credit rating action on this transaction took place on 7 March 2023, when Morningstar DBRS confirmed its credit ratings on the Class A, Class B, and Class C Notes at AA (sf), BBB (high) (sf), and BB (high) (sf), respectively.

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

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

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

-- Morningstar DBRS 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 of the current pool of loans for the Issuer at the B (sf) credit rating level are 14.3% and 14.3%, 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 rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

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

Class C 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 BB (sf)
-- 50% increase in PD, expected rating of B (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 BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (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: Clare Wootton, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 8 March 2022

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730.
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://dbrs.morningstar.com/research/420573.
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v6.0.2.0, https://dbrs.morningstar.com/research/411634.
-- European RMBS Insight: UK Addendum (11 August 2023),
https://dbrs.morningstar.com/research/419141.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754/.

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 info-DBRS@morningstar.com.