Morningstar DBRS Assigns Credit Ratings to Harbour No. 2 PLC

DBRS Ratings Limited (Morningstar DBRS) assigned credit ratings to the residential mortgage-backed notes issued by Harbour No. 2 PLC (Harbour 2 or the Issuer) as follows:

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class F at B (high) (sf)
-- Class X at B (low) (sf)

The credit ratings on the Class A1 and Class A2 notes (together, the Class A notes) address the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in January 2054. The credit ratings on the Class B, Class C, Class D, Class E, Class F, and Class X 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. Morningstar DBRS does not rate the Class Z or Class R notes or the residual certificates also issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in the UK. The collateralised notes (the Class A to Class F and Class Z notes) are backed by owner-occupied and buy-to-let mortgage loans originated by several originators, which ceased their lending operations after the financial crisis of 2008. The mortgage loans in the pool and their related security are governed by English law, Scottish law, or Northern Irish law.

The portfolio was originally assembled by buying three different portfolios: the Wall portfolio (30.5% of the total pool); the MAQ portfolio (40.4%); and the Morag portfolio (29.1%). Each portfolio is serviced by a different servicer: the Wall portfolio is serviced by Intrum Mortgages UK Finance Limited (formerly Mars Capital Finance Limited), the MAQ portfolio is serviced by Pepper (UK) Limited, and the Morag portfolio is serviced by Topaz Finance Limited. On the closing date, Harbour No. 1 plc (Harbour 1) sold the portfolios to Isle of Wight Home Loans Limited (the Seller), an SPV fully owned by Barclays Bank PLC. On the same date, the Seller transferred all three portfolios to the Issuer.

Harbour 2 is a securitisation where the Seller is not the originator or servicer of the loan portfolio. 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 and services the assets, and consequently has a contractual duty and commercial incentives to support the securitisations of its assets.

Furthermore, the transaction involves more than one sale of the underlying portfolio through different SPVs, which results in representations and warranties that are more limited than usual. Morningstar DBRS reviewed legal opinions on the validity of the transfers (from the vendors to the Seller and from the Seller to Harbour 1 that took place on Harbour 1 transaction's closing date as well as from Harbour 1 to the Seller and from the Seller to the Issuer that took place on the closing date for this transaction).

The pool comprises around 44% of loans that are three or more months in arrears with only 35% of the pool balance currently clear of arrears. In addition to the pool's three-month arrears increasing since early 2023, longer arrears (12 months or longer) have also been increasing.

Interest-only (IO) loans, including part and part loans, make up 83.2% of the mortgage portfolio, where the principal is repaid bullet at loan 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. About 9% of the IO loans have matured in the past and are technically in default status while still, in most cases, paying their regular IO instalment. An additional 27% is scheduled to mature in the next five years.

The portfolio is entirely backed by loans paying a floating rate: 79% track the Bank of England base rate, 16% track Sonia, and the remainder are Standard Variable Rate (SVR) loans. The notes pay interest linked to Sonia, which gives rise to basis risk that is not hedged in the transaction. Compared with peer transactions, the pool shows a higher proportion of trackers, which have lower margins than those typically charged for SVR loans. Morningstar DBRS views the lower margins paid by the portfolio as a credit positive because it implies cheaper instalments for the borrowers; however, at the same time, this results in lower excess spread over the life of the transaction compared with other legacy nonconforming deals.

The mortgage portfolio is almost 18 years seasoned on a weighted-average (WA) basis, which is considered a credit positive. The WA current indexed LTV (WACLTV (ind)) of the mortgage portfolio is 56.3% (as calculated by Morningstar DBRS). The proportion of loans with a WACLTV (ind) of higher than 80% is approximately 7.6%, which reflects favourable house price movements that allowed for the buildup of significant borrower equity despite the high original WA LTV of the portfolio at 84.3 % and the IO nature of most of the pool.

The transaction benefits from a nonamortising general reserve fund (GRF), which provides liquidity and credit support to the Class A to Class F notes, and a liquidity reserve fund (LRF), which provides liquidity support to the Class A notes. The GRF was established and fully funded at closing and has a target amount of 1.25% of the initial portfolio balance. The LRF was also established and fully funded at closing and amortises at the lower of 0.5% of the Class A notes' initial balance and 1.0% of the Class A notes' outstanding balance before a LRF Trigger Event occurs (i.e., when the GRF amount is lower than 1.0% of the initial portfolio), and at 1.0% of the Class A notes' balance while the event is ongoing.

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 servicers 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 consistency of the transaction's legal structure with Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology and the presence of legal opinions addressing 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.

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.

Notes:
All figures are in British pounds 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 historical performance (portfolio payment history, dynamic delinquencies, and dynamic prepayments data from 2015 to 2024) and loan-level data as of 30 September 2024, provided by Barclays Bank PLC, the arranger of the transaction.

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.

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 73.6% and an LGD of 31.1% 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 69.6% and an LGD of 24.0% corresponding to the AA (low) (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 64.3% and an LGD of 18.0% 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 57.8% and an LGD of 14.2% 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 E notes, a PD of 51.9% and an LGD of 12.3% 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 44.0% and an LGD of 9.5% corresponding to the B (high) (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 37.0% and an LGD of 9.0% 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 (high) (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 (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 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 (sf)
-- 25% increase in PD, expected credit rating of BBB (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 (low) (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 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 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 (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 (high) (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 below B (low) (sf)

Class F Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of B (sf)
-- 50% increase in LGD, expected credit rating of B (low) (sf)
-- 25% increase in PD, expected credit rating of 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 B (low) (sf)
-- 50% increase in LGD, expected credit rating of 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: Rehanna Sameja, Senior Vice President
Initial Rating Date: 28 October 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 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
-- 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.

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