Morningstar DBRS Confirms Credit Ratings on Castell 2023-1 PLC

DBRS Ratings Limited (Morningstar DBRS) confirmed its credit ratings on the notes issued by Castell 2023-1 PLC (the Issuer), as follows:

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

The credit rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in May 2055. The credit ratings on the Class B, Class C, Class D, Class E, and Class F notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date.

CREDIT RATING RATIONALE
The credit rating confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the January 2025 payment date.
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement (CE) to the notes to cover the expected losses at their respective credit rating levels.

The transaction is a securitisation of UK second-lien mortgage loans originated by UK Mortgage Lending Limited (UKML; formerly Optimum Credit Limited). UKML is a specialist UK second charge mortgage lender based in Cardiff, UK, and has offered financing to homeowners in England, Wales, and Scotland since its launch in November 2013. Pepper UK Limited is the primary and special servicer of the portfolio.

PORTFOLIO PERFORMANCE
As of the January 2025 payment date, loans two to three months in arrears represented 0.9% of the outstanding portfolio balance, and loans more than three months in arrears represented 4.8%. Cumulative defaults amounted to 1.1% of the original portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base-case PD and LGD assumptions at the B (sf) credit rating level to 7.3% and 44.0%, respectively.

CREDIT ENHANCEMENT
CE is provided by the subordination of the respective junior notes. Current CE levels to the rated notes compared with the CE levels at closing are as follows:
-- Class A CE is 41.2%, up from 32.6%
-- Class B CE is 31.3%, up from 24.7%
-- Class C CE is 22.5%, up from 17.8%
-- Class D CE is 14.9%, up from 11.8%
-- Class E CE is 11.5%, up from 9.0%
-- Class F CE is 9.2%, up from 7.2%

The transaction benefits from a liquidity reserve fund (LRF), which covers senior fees, interest on the Class A notes, and senior deferred consideration. The LRF is currently at its target level of GBP 1.5 million, equal to 1.0% of the outstanding Class A note balance.

Citibank N.A., London Branch acts as the account bank for the transaction. Based on the Morningstar DBRS private credit rating on Citibank N.A., London Branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A notes, as described in Morningstar DBRS' "Legal and Derivative Criteria for European Structured Finance Transactions" methodology.

Banco Santander SA acts as the swap counterparty. Morningstar DBRS' Long Term Critical Obligations Rating on the swap counterparty, currently AA (low), is above the first credit rating threshold as described in Morningstar DBRS' "Legal and Derivative Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 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) 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 methodology applicable to the credit ratings is: "Master European Structured Finance Surveillance Methodology" (4 February 2025). https://dbrs.morningstar.com/research/447080.

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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Credit 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 investor reports provided by Citibank N.A./London Branch and loan-level data provided by EuroABS Ltd.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit rating, 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.

The last credit rating action on this issuer took place on 2 July 2024, when Morningstar DBRS discontinued its credit rating on the Class X notes following their repayment in full. Prior to that on 22 April 2024, Morningstar DBRS confirmed its credit ratings on the Class A, Class B, Class C, Class D, Class E and Class F Notes at AAA (sf), AA (high) (sf), AA (low) (sf), A (low) (sf), BB (high) and BB (high), respectively and upgraded its credit rating on the Class X Notes to AAA (sf) from BB (high) (sf).

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 rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Morningstar DBRS expected a lifetime base-case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base-case assumptions and therefore have a negative effect on credit ratings.
-- The base-case PD and LGD assumptions at the B (sf) credit rating level for the collateral pool are 7.3% and 44.0%, respectively.
-- The Risk Sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base-case assumption.

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)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)

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

Class C Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in LGD, expected credit rating of A (low) (sf)
-- 25% increase in PD, expected credit rating of A (high) (sf)
-- 50% increase in PD, expected credit rating of A (low) (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 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 (sf)
-- 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD, expected credit rating of BBB (low) (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 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 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)
-- 50% increase in PD, expected credit rating of BB (low) (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 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 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)
-- 50% increase in PD, expected credit rating of B (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 and 25% increase in LGD, expected credit rating of B (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of 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: Petter Wettestad, Vice President
Rating Committee Chair: Rehanna Sameja, Senior Vice President
Initial Rating Date: 17 April 2023

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.

-- Master European Structured Finance Surveillance Methodology (4 February 2025),
https://dbrs.morningstar.com/research/447080
-- European RMBS Insight Methodology (28 February 2025) and European RMBS Insight Model v10.1.0.0,
https://dbrs.morningstar.com/research/449129
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024),
https://dbrs.morningstar.com/research/443196
-- 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.