Morningstar DBRS Confirms Credit Ratings on Together Asset Backed Securitisation 2022-2ND1 plc

DBRS Ratings Limited (Morningstar DBRS) confirmed its credit ratings on the notes issued by Together Asset Backed Securitisation 2022-2ND1 plc as follows:

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

The credit rating on the Class A Loan Note addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date. The credit ratings on the Class B, Class C, Class D, Class E, and Class F notes address the ultimate payment of interest and the ultimate payment of principal on or before the legal final maturity date, and the timely payment of interest while the senior-most class is outstanding.

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 May 2024 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement (CE) to the notes to cover the expected losses at their respective credit rating levels.

The transaction is a securitisation of second-lien mortgage loans, both owner-occupied and buy-to-let, backed by residential properties in the United Kingdom (UK). The loans are originated and serviced by Blemain Finance Limited, Together Personal Finance Limited, and Together Commercial Finance Limited, all of which belong to the Together Group of companies. BCMGlobal Mortgage Services Limited acts as the standby servicer.

The first optional redemption date is at the November 2026 payment date and coincides with a step-up of the coupon. The legal final maturity date is at the payment date in February 2054.

PORTFOLIO PERFORMANCE
As of the May 2024 payment date, 60- to 90-day delinquencies and 90+-day delinquencies were 1.3% and 4.2% of the outstanding portfolio balance, respectively, up from 0.8% and 0.9% at the last annual review.

As of the May 2024 payment date, cumulative repossessions represented 0.1% and cumulative principal losses were zero. Loans in Law of Property Act receivership represented 0.4% of the initial portfolio balance, up from 0.1% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables for each transaction and updated its base case PD and LGD assumptions to 12.4% and 26.2%, respectively, from 9.2% and 16.7% at the last annual review, respectively. The increase in the base case PD assumption reflects the continued increase in total delinquencies since the last annual review while the increase in the base case LGD reflects the increased concentration of properties in London (due to portfolio amortisation), which has the highest market value decline assumption among the regions in the UK.

CREDIT ENHANCEMENT AND RESERVES
The credit enhancement consists of the subordination of the junior notes. As of the May 2024 payment date, the CE increased since the last annual review as follows:
-- CE to the Class A Loan Note to 43.6% from 33.0%
-- CE to the Class B to 37.0% from 28.0%
-- CE to the Class C to 26.7% from 20.2%
-- CE to the Class D to 16.8% from 12.8%
-- CE to the Class E to 8.2% from 6.2%
-- CE to the Class F to 5.8% from 4.4%

The transaction benefits from an amortising liquidity reserve, which covers senior fees, swap payments, and interest shortfalls on the Class A Loan Note. As of the May 2024 payment date, the liquidity reserve was at its target level of approximately GBP 1.8 million.

Elavon Financial Services DAC, U.K. Branch (Elavon UK) acts as the account bank for the transaction. Based on Morningstar DBRS’ private credit rating on Elavon UK, 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 credit rating assigned to the Class A Loan Note, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Natixis S.A., London Branch (Natixis) act as the swap counterparty for the transaction. Morningstar DBRS' private credit rating on Natixis 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 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).

Morningstar DBRS' credit ratings do 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 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 ratings is “Master European Structured Finance Surveillance Methodology” (7 March 2024), https://dbrs.morningstar.com/research/429051.

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.

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://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include loan-level data and investor reports provided by the Together group.

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 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.

The last credit rating action on this transaction took place on 26 May 2023, when Morningstar DBRS confirmed its credit ratings on the Class A Loan Note, the Class B, the Class E, and Class F notes at AAA (sf), AA (sf), BB (low) (sf), and B (sf), respectively, and upgraded its credit ratings on the Class D and Class E notes to A (high) (sf) and BBB (high) (sf), respectively, from A (low) (sf) and BBB (sf), respectively.

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 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 12.4% and 26.2%, 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 assumptions.

Class A Loan Note 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 AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (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 (sf)

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

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

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

Class F Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of B (low) (sf)
-- 50% increase in LGD, expected credit rating of B (low) (sf)
-- 25% increase in PD, expected credit rating of B (low) (sf)
-- 50% increase in PD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating below B (low) (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: Natalia Coman, Assistant Vice President
Rating Committee Chair: Rehanna Sameja, Senior Vice President
Initial Rating Date: 19 May 2022

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

--Master European Structured Finance Surveillance Methodology (7 March 2024),
https://dbrs.morningstar.com/research/429051
--European RMBS Insight Methodology (25 March 2024) and European RMBS Insight Model v.7.0.1.0,
https://dbrs.morningstar.com/research/430103
--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
--Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
--Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
--Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

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].