Morningstar DBRS Finalises Provisional Credit Ratings on Fylde Funding 2024-1 PLC
RMBSDBRS Ratings Limited (Morningstar DBRS) finalised its provisional credit ratings on the following classes of notes issued by Fylde Funding 2024-1 PLC (the Issuer):
-- Class A Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BB (high) (sf)
-- Class F Notes at BB (low) (sf)
-- Class X Notes at BB (high) (sf)
The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal. The credit rating on the Class X notes addresses the ultimate payment of interest and principal on or before the legal final maturity date. The credit ratings on the remaining classes of rated notes address the timely payment of interest once each becomes the most senior class of notes outstanding and the ultimate repayment of principal.
The credit ratings of Class F and Class X notes are higher than the provisional credit ratings previously assigned to those notes because the final weighted average cost of funding of the notes is lower than what Morningstar DBRS modelled in its provisional ratings analysis.
CREDIT RATING RATIONALE
The transaction represents the issuance of United Kingdom of Great Britain and Northern Ireland (UK) residential mortgage-backed securities (RMBS) backed by second-lien mortgage loans originated by Tandem Home Loans Limited (the Originator), a subsidiary of Tandem Bank Limited (Tandem or the Seller).
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the UK. The notes issued will fund the purchase of UK second-lien mortgage loans originated and serviced by Tandem Home Loans Limited.
Tandem is a UK provider of second charge mortgages, home improvement loans, and motor finance. Tandem was established in 2014 as a digital challenger bank in the UK and subsequently acquired Harrods Bank in 2018 and Allium Lending Group in 2020. Tandem merged with Oplo (established in 2009) in 2022 to form a green digital bank. The company, which is authorised and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), held a 20% market share of the UK second charge market in 2023.
This is the first securitisation from Tandem. The provisional mortgage portfolio as of August 2024 consists of GBP 276.1 million of second-lien mortgage loans collateralised by a large majority of owner-occupied (OO) properties (96%) and buy-to-let (BTL) properties (4%) in the UK. The pool has a short seasoning of 16 months, comprising only mortgages originated in the past 33 months, and yields a current weighted-average (WA) coupon of 8.05%.
The structure includes a principal deficiency ledger (PDL) comprising seven subledgers (Class A PDL to Class Z PDL) that provision for defaulted amounts (equal to or greater than 12 months in arrears) as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest. The losses will be allocated starting from the Class Z PDL and then to the subledgers of each class of notes in reverse-sequential order.
Liquidity in the transaction is provided by a liquidity reserve fund (LRF), which shall cover senior costs and expenses as well as interest shortfalls for the Class A and Class B notes. In addition, principal borrowing is also envisaged under the transaction documentation and can be used to cover senior costs and expenses, including swap payments, as well as interest shortfalls of Classes A to F. However, the latter is subject to the Principal Deficiency Ledger (PDL) Condition, which states that if a class of notes is not the most senior outstanding, in case of a PDL debit of more than 10% of the respective class outstanding balance, principal will not be available to cover the aforementioned shortfalls.
The transaction also features a fixed-to-floating interest rate swap, given the presence of fixed-rate loans (which would revert to a floating rate in the future), while the liabilities pay a coupon linked to Sonia. The swap counterparty appointed as of closing is Citibank Europe plc, UK Branch. Furthermore, Citibank, N.A., London Branch was appointed as the Issuer Account Bank, and National Westminster Bank Plc acts as the Collection Account Bank.
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 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. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (18 September 2024), https://dbrs.morningstar.com/research/439573.
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 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 the credit ratings include Tandem. Morningstar DBRS received a loan-by-loan data tape as of 30 June 2024 and quarterly historical data, which included information on defaults, recoveries, arrears, and prepayments. The data covered the Q1 2016 to Q2 2024 period for defaults, prepayments, and arrears, and Q1 2017 to Q2 2024 for recoveries.
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 this credit rating 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.
This credit rating concerns a newly issued financial instrument.
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 https://dbrs.morningstar.com.
-- In respect of the Class A notes, a PD of 24.4% and an LGD of 77.2% 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 22.6% and an LGD of 73.3% 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 18.1% and an LGD of 63.5% corresponding to the A (high) (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 13.1% and an LGD of 54.3% 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 8.1% and an LGD of 45.6% 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 6.4% and an LGD of 41.4% corresponding to the BB (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 8.1% and an LGD of 45.6% corresponding to the BB (high) (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 AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (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 (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (high) (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)
-- 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 C 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 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 (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 (low) (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 BBB (low) (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 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 BB (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 (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (low) (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 B (high) (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 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 BB (sf)
-- 50% increase in LGD, expected credit rating of BB (low) (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 BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of below B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating below 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: Lorenzo Coccioli, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 24 September 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 (18 September 2024) and European RMBS Insight model v 10.0.0.0, https://dbrs.morningstar.com/research/439573
-- 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 (6 September 2024), https://dbrs.morningstar.com/research/439043
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024),
https://dbrs.morningstar.com/research/439571
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- 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/439604.
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