Morningstar DBRS Finalises Provisional Credit Ratings on Atlas Funding 2024-1 PLC

DBRS Ratings Limited (Morningstar DBRS) finalised its provisional credit ratings on the residential mortgage-backed notes (collectively, the Rated Notes) issued by Atlas Funding 2024-1 PLC (the Issuer) as follows:

-- 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)
-- Class E Notes at BBB (low) (sf)
-- Class X Notes at BBB (high) (sf)

The finalised credit ratings on the Class D and the Class E Notes are one notch higher than the provisional credit ratings Morningstar DBRS assigned, because of the lower cost of funding of the transaction after the rated notes have priced.

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, Class D, and Class E Notes address the ultimate payment of interest and the ultimate repayment of principal on or before the legal final maturity date while junior, and the timely payment of interest once such class of notes becomes the most senior class of notes outstanding. The credit rating on the Class X Notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

CREDIT RATING RATIONALE
The transaction represents the issuance of residential mortgage-backed securities (RMBS) backed by first-lien, buy-to-let (BTL) mortgage loans granted by Lendco Limited (Lendco; the Seller or the Originator) in the UK.

The Issuer is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in the UK. Lendco is a UK specialist property finance lender, which has been offering loans to customers in England and Wales since 2018. Lendco's BTL business targets professional portfolio landlords, often real estate companies or SPVs, which they acquire through the broker marketplace.

This is Lendco's fourth securitisation with the inaugural transaction, Atlas Funding 2021-1, closing in January 2021; then followed by Atlas Funding 2022-1 in May 2022; and Atlas Funding 2023-1 in May 2023. The provisional initial portfolio consists of GBP 308 million of performing first-lien mortgage loans collateralised by BTL residential properties in the UK. The weighted-average (WA) seasoning of the portfolio is 18 months, with half of the pool (56%) originated in the past three quarters. The mortgage loans will be serviced by Lendco Mortgage Servicing Limited (the Servicer), a fully owned subsidiary of the Originator.

Liquidity in the transaction is provided by the combination of a liquidity facility (LF) available from closing and a liquidity reserve fund (LRF) that will be funded through excess spread. The LF shall cover senior costs and expenses, senior swap payments, and interest shortfalls on Class A notes only whereas the LRF shall cover the same items plus interest shortfalls on Class B Notes. In addition, principal borrowing is also envisaged under the transaction documentation and can be used to cover senior costs and expenses as well as interest shortfalls on the most senior outstanding class of notes but subject to some conditions for Class B to Class E notes.

Interest shortfalls on Class B to E Notes, as long as they are not the most senior class outstanding, shall be deferred and not be recorded as an event of default until the final maturity date or such earlier date on which the notes are fully redeemed.

The transaction also features a fixed-to-floating interest rate swap, given the presence of a large portion of fixed-rate loans (with a compulsory reversion to floating in the future), while the liabilities shall pay a coupon linked to daily Sterling Overnight Index Average.

Credit enhancement (CE) is expressed as a percentage of the initial portfolio balance and is as follows:
-- Class A Notes CE: 11.2%;
-- Class B Notes CE: 6.5%;
-- Class C Notes CE: 2.5%;
-- Class D Notes CE: 0.5%;
-- Class E Notes CE: 0.0%; and
-- Class X Notes CE: 0.0%.

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”;
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E, and Class X Notes according to the terms of the transaction documents. Morningstar DBRS analysed the transaction structure using Intex DealMaker. Morningstar DBRS considered additional sensitivity scenarios of 0% CPR;
-- 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 report; and
-- The expected 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 are expected to 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 ratings on the Rated Notes also address the credit risk associated with the increased rate of interest applicable to the Rated Notes if they are not redeemed on the Optional Redemption Date (as defined in and) in accordance with the applicable transaction documents.

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, or Governance factors that had a relevant or significant 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 (23 January 2024), 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 methodologies applicable to the credit ratings are
-- European RMBS Insight: UK Addendum (11 August 2023),
https://dbrs.morningstar.com/research/419141
-- European RMBS Insight Methodology (25 March 2024)
https://dbrs.morningstar.com/research/430103

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.

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 Lendco Limited. Morningstar DBRS received a loan-by-loan data tape as of 20 May 2024.

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 an expected to be issued new financial instrument. These are the first credit rating actions since the Initial Rating Date.

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

Sensitivity Analysis: To assess the impact of changing the transaction 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):

-- In respect of the Class A Notes, a PD of 20.0% and an LGD of 41.1% corresponding to the AAA (sf) credit 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 18.1% and an LGD of 38.0% corresponding to the AA (high) (sf) credit 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 11.8% and an LGD of 26.4% corresponding to the A (low) (sf) credit 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 9.3% and an LGD of 22.6% corresponding to the BBB (sf) credit 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 8.5% and an LGD of 21.1% corresponding to the BBB (low) (sf) credit 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 9.9% and an LGD of 24.4% corresponding to the BBB (high) (sf) credit rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.

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

Class B Notes 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 (low) (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 (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 (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (low) (sf)

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

Class E Notes 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 (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BB (low) (sf)

Class X Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in LGD, expected credit rating of BBB (high) (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 (high) (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 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 BBB (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: Lorenzo Coccioli, Vice President
Rating Committee Chair: Rehanna Sameja, Senior Vice President
Initial Rating Date: 15 May 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: UK Addendum (11 August 2023) and European RMBS Insight Model v. 7.0.1.0, https://dbrs.morningstar.com/research/419141
-- European RMBS Insight Methodology (25 March 2024), https://dbrs.morningstar.com/research/430103
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754
-- 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 (7 March 2024), https://dbrs.morningstar.com/research/429054
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602

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].