Morningstar DBRS Finalises Provisional Credit Ratings on Durham Mortgages B Plc Refinancing Notes

DBRS Ratings Limited (Morningstar DBRS) finalised its provisional credit ratings on the residential mortgage-backed notes (the rated notes) issued by Durham Mortgages B Plc (Durham or the Issuer) as follows:

-- Class A Notes (Reg S ISIN XS2873487206) at AAA (sf)
-- Class B Notes (Reg S ISIN XS2873487388) at AA (sf)
-- Class C Notes (Reg S ISIN XS2873487545) at A (sf)
-- Class D Notes (Reg S ISIN XS2873487628) at BBB (high) (sf)
-- Class E Notes (Reg S ISIN XS2873488279) at BB (high) (sf)
-- Class F Notes (Reg S ISIN XS2873489830) at BB (sf)
-- Class X Notes (Reg S ISIN XS2873490093) at B (low) (sf)

The rating assigned to Class A Notes addresses the timely payment of interest and the ultimate payment of principal. The rating assigned to Class B Notes addresses the timely payment of interest when most senior and the ultimate payment of principal. The ratings on the Class C, Class D, Class E, Class F, and Class X Notes address the ultimate payment of interest and principal.

CREDIT RATING RATIONALE
The transaction represents the issuance of residential mortgage-backed securities (RMBS) backed by first-lien mortgage loans.

The Issuer is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in the United Kingdom. The collateralised notes are backed by a buy-to-let (BTL) residential mortgage portfolio originated by Mortgage Express, GMAC, Kensington Mortgages Limited, Bradford & Bingley and plc, and Close Brothers Group plc (together, the Originators), sold by Cornwall Home Loans Limited (the Seller) and serviced by Topaz Finance Limited (the Servicer).

As of the end of June 2024, the mortgage portfolio consisted of GBP 1.1 billion of first-lien mortgage loans collateralised by BTL residential properties in England and Wales, with a concentration in Scotland (22% of the closing pool), Outer Metro (15%), and the North West of England (15%). The majority of the pool (82.3%) was originated before 2008.

Durham is a securitisation where the Seller is not the Originator or Servicer of the loan portfolio. In 2018, the Seller, an entity that is part of the Barclays Group PLC (Barclays), sold loans to the Issuer that were granted by the Originators, which had ceased their lending operations. This poses more risks than a traditional residential mortgage-backed security (RMBS) transaction where the originator remains a mortgage lender in the jurisdiction of the securitised portfolio, services the assets, and consequently has a contractual duty and commercial incentives to support the securitisations of its assets. Furthermore, traded portfolio securitisations usually involve more than one sale of the underlying portfolio, often through SPVs and limitations to traditional representations and warranties. Morningstar DBRS has reviewed legal opinions on the validity of the sales.

IO loans make up 97% of the mortgage portfolio, where the principal is repaid as a bullet at the loan's maturity. This poses a risk at loan maturity if the borrower does not have a repayment strategy in place or is unable to refinance before the maturity date. 3.0% of the portfolio is composed of IO loans that have matured in the past and are technically in default status, but still pay their regular IO instalments in most cases.

The transaction includes both a general reserve fund (GRF) and a liquidity reserve fund (LRF). The GRF provides credit and liquidity support to the rated notes (with the exception of Class X Notes). The GRF can be used to cover interest shortfalls on payments for the Class A Notes and other rated notes if the relevant principal deficiency ledger (PDL) condition (no more than 10% debited) is satisfied. The GRF will be funded at 1.25% of the initial portfolio balance at closing and will not amortise. The GRF will be released through the principal waterfall on the payment date Class F notes are fully redeemed.

The LRF is available to provide liquidity support to the senior fees payments, Class X certificate payments, and interest on the Class A Notes. The initial amount of 1.0% of the original Class A Notes balance will mainly be funded at closing through Class R Notes proceeds. The LRF will then amortise at the lower of: 1% of the Class A initial notes balance and 1.5% of Class A Notes outstanding balance; however, if the GRF is depleted to a level lower than 1% of the outstanding portfolio balance, then the LRF replenishment target will be 1.5% of the outstanding Class A notes balance

Citibank, N.A., London Branch (Citibank London) will hold the Issuer's transaction account and reserves. Based on our private rating on Citibank London, the downgrade provisions outlined in the documents, and the transaction structural mitigants, Morningstar DBRS considers the risk arising from the exposure to Citibank London to be consistent with the ratings assigned to the rated notes as described in our "Legal Criteria for European Structured Finance Transactions" methodology.

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, 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 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 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS analysed the transaction structure in Intex Dealmaker, considering the default rates at which the rated notes did not return all specified cash flows.

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

The principal methodologies applicable to the credit ratings are the European RMBS Insight: UK Addendum (16 August 2024), https://dbrs.morningstar.com/research/437988, and the 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 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/436000.

The sources of data and information used for these credit ratings include those provided by Barclays and their representatives. Morningstar DBRS received a loan-by-loan data tape as of 31 July 2024 and historical performance data of the traded portfolio from June 2019 to May 2024, including loan by loan payment history, arrears and repossession data.

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.

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 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 Notes, a PD of 38.1% and an LGD of 41.0% 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 35.0% and an LGD of 35.6% corresponding to the AA (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 30.6% and an LGD of 29.5% corresponding to the A (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 25.3% and an LGD of 25.8% corresponding to the BBB (high) (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 18.3% and an LGD of 21.4% corresponding to the BB (high) (sf) credit 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 17.3% and an LGD of 20.3% corresponding to the BB (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 10.0% and an LGD of 17.5% corresponding to the B (low) (sf) credit rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.

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

Class F 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 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, expected credit rating of B (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of B (low) (sf)

Class X Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of CCC (sf)
-- 50% increase in LGD, expected credit rating of CCC (sf)
-- 25% increase in PD, expected credit rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of CCC (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of CCC (sf)
-- 50% increase in PD, expected credit rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of below CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating below CCC (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: 22 August 2024

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.

-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight model v 9.0.0.0, https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: UK Addendum (16 August 2024), https://dbrs.morningstar.com/research/437988
-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- Derivative Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435260
-- Operational Risk Assessment for European Structured Finance Servicers (6 August 2024), https://dbrs.morningstar.com/research/437543
-- Operational Risk Assessment for European Structured Finance Originators (6 August 2024), https://dbrs.morningstar.com/research/437541
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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.