Morningstar DBRS Assigns Provisional Credit Ratings to Citadel 2024-1 PLC

DBRS Ratings Limited (Morningstar DBRS) assigned provisional credit ratings to the residential mortgage-backed notes to be issued by Citadel 2024-1 PLC (the Issuer) as follows:

-- Class A at (P) AAA (sf)
-- Class B at (P) AA (sf)
-- Class C at (P) A (sf)
-- Class D at (P) BBB (sf)
-- Class E at (P) BB (sf)
-- Class F at (P) B (low) (sf)
-- Class X at (P) B (low) (sf)

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in April 2060. The credit ratings on the Class B, Class C, Class D, Class E, and Class F notes address the timely payment of interest once they are the senior-most class of notes outstanding, otherwise the ultimate payment of interest, and the ultimate repayment of principal on or before the final maturity date. The credit rating on the Class X notes addresses the ultimate payment of interest and principal. Morningstar DBRS does not rate the Class G and Class H notes or the residual certificates also expected to be issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the UK. The notes to be issued shall fund the purchase of UK second-lien mortgage loans originated by UK Mortgage Lending Limited (UKML). Pepper (UK) Limited (Pepper) is the primary and special servicer of the portfolio. UKML, established in November 2013 and previously known as Optimum Credit Ltd (Optimum Credit), is a specialist provider of second-lien mortgages based in Cardiff, Wales. Both UKML and Pepper are part of the Pepper Group Limited (Pepper Group), a worldwide consumer finance business, third-party loan servicer, and asset manager. Law Debenture Corporate Services Limited shall be appointed as the back-up servicer facilitator to the transaction.

The initial mortgage portfolio consists of GBP 294 million of second-lien mortgage loans collateralised by owner-occupied (OO) properties in the UK.

The Issuer is expected to issue eight tranches of collateralised mortgage-backed securities (the Class A, Class B, Class C, Class D, Class E, Class F, Class G, and Class H notes) to finance the purchase of the mortgage portfolio. Additionally, the Issuer is expected to issue one class of non-collateralised notes, the Class X notes.

The transaction is structured to initially provide 30.0% of credit enhancement to the Class A notes comprising of subordination of the Class B to Class H notes. The Class B notes are supported by 25.0% credit enhancement, with 20.0%, 15.0%, 10.5%, and 5.5% credit enhancement available to the Class C, Class D, Class E, and Class F notes, respectively.

Liquidity in the transaction is provided by a liquidity reserve fund (LRF), which shall cover senior costs and expenses as well as interest shortfalls on 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 as well as interest shortfalls on the Class A to Class G notes. However, the latter will be subject to a principal deficiency ledger (PDL) condition, which states that if a given class of notes is not the most senior class outstanding, when a PDL debit of more than 10% of such class exists, principal borrowing will not be available. Interest shortfalls on the Class B to Class G 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 Sonia. The swap counterparty to be appointed as of closing shall be Banco Santander, S.A. Furthermore, Citibank, N.A., London Branch shall act as the Issuer Account Bank, and National Westminster Bank Plc shall be appointed 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" methodology;
-- 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 rating on the rated notes also addresses 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 Risk Factors in Credit Ratings" (13 August 2024) at https://dbrs.morningstar.com/research/437781.

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 the: "European RMBS Insight Methodology" (18 September 2024), https://dbrs.morningstar.com/research/439573 and the "European RMBS Insight: UK Addendum" (16 August 2024), https://dbrs.morningstar.com/research/437988.

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 Waterfall Asset Management, LLC and its representatives. Morningstar DBRS was provided with loan-level, property, and margin data as of 31 August 2024, and the following historical data:
-- Dynamic delinquencies, from January 2017 to July 2024
-- Origination volumes, from Q3 2014 to Q2 2024.
-- Cumulative monthly prepayments by origination vintage, from March 2014 to June 2024
-- Possessions and Litigations, from July 2019 to June 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalise the credit ratings.

These credit ratings concern expected-to-be-issued new financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

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, 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 34.0% and an LGD of 95.6% corresponding to the AAA (sf) 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 30.6% and an LGD of 94.1% corresponding to the AA (sf) 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 26.2% and an LGD of 91.8% corresponding to the A (sf) 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 20.5% and an LGD of 89.0% corresponding to the BBB (sf) 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 14.3% and an LGD of 86.1% corresponding to the BB (sf) 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 8.2% and an LGD of 83.5% corresponding to the B (low) (sf) 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 8.2% and an LGD of 83.5% corresponding to the B (low) (sf) 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 (high) (sf)
-- 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD, expected credit rating of A (high) (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 (high) (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 (high) (sf)

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

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

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

Class X Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of below B (low) (sf)
-- 50% increase in LGD, expected credit rating of below B (low) (sf)
-- 25% increase in PD, expected credit rating of below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of below B (low) (sf)
-- 50% increase in PD, expected credit rating of below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of 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: Roger Bickert, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 22 October 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/278375.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.