DBRS Morningstar Finalises Provisional Ratings on Together Asset Backed Securitisation 2019-1 Plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following notes issued by Together Asset Backed Securitisation 2019-1 Plc (TABS 2019):

-- 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 BBB (low) (sf)

The ratings assigned to the Class A notes address the timely payment of interest to the noteholders on every monthly interest payment date and the ultimate repayment of principal by the legal final maturity date in July 2061. The ratings on the Class B, C, D and E notes address the ultimate payment of interest and repayment of principal by the legal final maturity date. Once the Class A notes are fully redeemed, the Class B notes and then the most-senior note outstanding will be rated for timely payment of interest. DBRS Morningstar does not rate the Class R or Z notes and residual certificates. Class D has been assigned a final rating of BBB (high) (sf), which is different to the provisional rating of BBB (sf) due to lower final spreads on the Notes, which has had a net positive impact.

TABS 2019 is the third securitisation of residential mortgages by Together Financial Services Limited. The loans were originated by Together Personal Finance Limited (TPFL) and Together Commercial Finance Limited (TCFL), each of which belong to the Together Group of companies. The securitised mortgage portfolio comprises first- and second-lien home loans. Each of the originators will be the servicer of the loans they have originated. Link Mortgage Services Limited acts as the backup servicer.

As of 30 September 2019, the portfolio consisted of 3,145 loans with an average outstanding balance of GBP 105,572, aggregating to GBP 332,024,184. Approximately 38.7% of the loans by outstanding balance are buy-to-let (BTL) mortgages; as is common in the U.K. mortgage market, the loans are largely scheduled to pay interest only on a monthly basis, with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage (54.7% of the loans in the pool are interest only). Just under a third of the mortgages in the portfolio (26.9%) have an existing prior charge over the respective property.

The mortgages are high-yielding with a weighted-average coupon of 5.6% and newly originated with a weighted-average seasoning of six months. Around 10.0% of the mortgage portfolio has prior county court judgements (CCJs). The weighted-average current loan-to-value (CLTV) ratio of the portfolio is 57.2%, with 2.8% of loans exceeding 75% CLTV. A small portion of the portfolio, 0.3%, is more than one month in arrears.

The transaction is structured to initially provide 23.4% of credit enhancement to the Class A notes. This includes subordination of the Class B to Z notes (Class R notes are not collateralised) as well as the non-amortising general reserve fund.

The general reserve fund will be funded from the issuance of the Class R notes and can be applied to cover shortfalls in senior fees, interest on Class A to E and clear principal deficiency ledger (PDL) balances on the Class A to E sub-ledgers. The general reserve fund has a balance equal to 2.5% of the initial balance of the Class A to E notes minus the required balance of the liquidity reserve.

The liquidity reserve is available to support senior fees and interest shortfalls on the Class A notes following the application of available revenue funds, but prior to the general reserve being applied. Whilst the Class A notes are outstanding, the liquidity reserve will have a required balance equal to 1.5% of the outstanding balance of the Class A notes, subject to a floor of 1% of the initial balance of the Class A notes. As the liquidity reserve amortises, excess amounts will become part of the revenue available funds and allow the general reserve to increase in size. The amortisation of this liquidity reserve is subject to performance of the transaction and will not amortise should the notes not be fully redeemed on the optional redemption date.

Principal funds can be diverted to pay shortfalls in senior fees, Class A interest or interest due on the most-senior outstanding class of notes, which remain after applying revenue collections and exhausting both reserve funds.

If principal funds are diverted to pay revenue liabilities, the amount will subsequently be debited to the PDL. The PDL comprises six sub-ledgers that will track principal used to pay interest, as well as realised losses, in a reverse-sequential order that begins with the Z sub-ledger.

The fixed-rate portion of the portfolio and the floating rate liabilities gives rise to interest rate risk. This is mitigated by an interest rate cap provided by HSBC Bank Plc. The documents contain downgrade provisions in line with both the First and Second Rating Thresholds defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

On the interest payment date in September 2023, the coupon due on the notes will step up and the notes may be optionally called. The notes must be redeemed at par plus pay any accrued interest.

Monthly mortgage receipts are deposited into the collections account at National Westminster Bank Plc (NatWest) and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept within two business days to the account bank. The collection account declaration of trust provides that interest in the collection account is in favour of the issuer over the seller. Commingling risk is mitigated by the collection account declaration of trust and the regular sweep of funds. The collection account bank is subject to a DBRS Morningstar investment-grade downgrade trigger.

Elavon Financial Services DAC, UK Branch (Elavon-UK) is the account bank for the transaction. DBRS Morningstar’s private rating of Elavon-UK is consistent with the minimum institution rating given the ratings assigned to the Class A notes, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

In assessing the cash flows, DBRS Morningstar has applied two default timing curves (front-ended and back-ended), its prepayment curves (low, medium and high assumptions) and interest rate stresses as per the DBRS Morningstar “Interest Rate Stresses for European Structured Finance Transactions” methodology. DBRS Morningstar applied an additional 0% constant prepayment rate stress. The cash flows were analysed using Intex DealMaker.

The legal structure and presence of legal opinions are deemed consistent with the DBRS Morningstar “Legal Criteria for European Structured Finance Transactions” methodology.

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

The principal methodology applicable to the ratings are the “European RMBS Insight Methodology” and the “European RMBS Insight: U.K. Addendum”.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Together Financial Services Limited and Lloyds Bank Corporate Markets Plc (the arrangers).

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on these ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case).

DBRS Morningstar expected a base case probability of default (PD) and loss given default (LGD) for the portfolio 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 of the current pool of receivables, respectively for each tranche are:
-- Class A at AAA (sf): 33.5% and 56.2%
-- Class B at AA (high) (sf): 31.6% and 54.0%
-- Class C at A (high) (sf): 26.7% and 47.8%
-- Class D at BBB (high) (sf): 21.1% and 39.9%
-- Class E at BBB (low) (sf): 18.8% and 34.5%

For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to decrease to A (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A notes would be expected to decrease to A (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to decrease to BBB (high) (sf), ceteris paribus.

Class A notes risk sensitivity:
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class B notes risk sensitivity:
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

Class C notes risk sensitivity:
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Class D risk sensitivity:
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)

Class E risk sensitivity:
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Mudasar Chaudhry, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 September 2019

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- European RMBS Insight Methodology
-- European RMBS Insight: U.K. Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.