DBRS Morningstar Finalises Provisional Ratings on Finsbury Square 2019-3 plc

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the notes issued by Finsbury Square 2019-3 plc (the Issuer):

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (high) (sf)
-- Class C Notes rated A (sf)
-- Class D Notes rated BBB (high) (sf)
-- Class E Notes rated BBB (low) (sf)
-- Class X Notes rated B (low) (sf)

The final ratings assigned to the Class B, Class C, Class D, Class E and Class X notes differ from the provisional ratings of AA (sf), A (low) (sf), BBB (sf), BB (high) (sf) and CCC (sf), respectively, firstly, because of the better composition of the closing portfolio in comparison to the provisional portfolio, which has led to an improvement in the credit quality and secondly, because of the tighter spreads and step-up margins on Classes A through X in the final structure.

The rating on the Class A Notes addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date in December 2069. The ratings on the Classes B, C, D and E notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. The rating on the Class X notes addresses the ultimate payment of interest and repayment of principal by the final maturity date. DBRS does not rate the Class F Notes and Class Z Notes.

The Issuer is a securitisation collateralised by a portfolio of owner-occupied (69.2% of the portfolio balance) and buy-to-let (30.8%) residential mortgage loans granted by Kensington Mortgage Company Limited (KMC) in England, Wales and Scotland.

The Issuer issued six tranches of mortgage-backed securities (the Class A Notes to Class F Notes) to finance the purchase of the initial portfolio and to fund the pre-funding principal reserve. Additionally, the Issuer issued two classes of non-collateralised notes, the Class X Notes and Class Z Notes, to fund the general reserve fund (GRF) and the pre-funding revenue reserve and cover initial costs and expenses. The Class X Notes are primarily intended to amortise using revenue funds; however, if excess spread is insufficient to fully redeem the Class X Notes, principal funds will be used to amortise the Class X Notes in priority to the Class F Notes.

The structure includes a pre-funding mechanism where the seller has the option to sell recently originated mortgage loans to the Issuer, subject to certain conditions. The acquisition of these assets shall occur before the first payment date using the proceeds standing to the credit of the pre-funding reserves.

The GRF, which was funded at closing with GBP 9.1 million (equivalent to 2.15% of the balance of the Class A Notes to the Class F Notes), will be available to provide liquidity and credit support to the Class A Notes to Class E Notes. From the first payment date onward, the GRF’s required balance will be 2.0% of the total balance of the Class A through Class F notes and, if its balance falls below 1.5% of that balance, principal available funds will be used to fund the liquidity reserve fund (LRF) to a target of 2.0% of the balance of the Class A Notes and Class B Notes. The LRF will be available to cover interest shortfalls on the Class A Notes and Class B Notes as well as senior items on the pre-enforcement revenue priority of payment. The availability for paying interest on the Class B Notes is subject to a 10% principal deficiency ledger condition.

As of 30 September 2019, the portfolio consisted of 1,833 loans extended to 1,761 borrowers with an aggregate principal balance of GBP 295.8 million. Loans in arrears for one to three months represent 1.7% of the outstanding principal balance of the portfolio and loans three or more months’ delinquent represent 1.4%.

The portfolio includes 4.8% of help-to-buy (HTB) loans that have borrowers supported by government loans (i.e., the equity loans, which rank in a subordinated position to the mortgages). HTB loans are used to fund the purchase of new-build properties with a minimum deposit of 5% from the borrowers. The weighted-average current loan-to-value ratio of the portfolio is 71.6%, which increased to 72.7% in DBRS Morningstar’s analysis to include the HTB equity loan balances.

The majority of the portfolio (76.5%) relates to a fixed-to-floating product, where borrowers have an initial fixed-rate period of one to five years before switching to floating-rate interest indexed to three-month LIBOR. Interest rate risk is hedged through an interest rate swap. DBRS Morningstar has considered the basis risk between three-month LIBOR after the switch and SONIA due on the notes in its cash flow analysis. Approximately 9.5% of the portfolio by loan balance comprises loans originated to borrowers with at least one prior County Court Judgment and 33.9% are either interest-only loans for life or loans that pay on a part-and-part basis.

The Issuer has entered into a fixed-floating swap with BNP Paribas, London branch (BNP London) to mitigate the fixed-interest rate risk from the mortgage loans and the SONIA (i.e., the Sterling Overnight Interbank Average Rate) payable on the notes. Based on the DBRS Morningstar private rating on BNP London, the downgrade provisions outlined in the documents and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to BNP London to be consistent with the ratings assigned to the rated notes as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

Citibank, N.A., London branch (Citibank London) holds the Issuer’s transaction account, the GRF, the LRF, the pre-funding reserves and the swap collateral account. Based on the DBRS Morningstar private rating on Citibank London, the downgrade provisions outlined in the documents and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to Citibank London to be consistent with the ratings assigned to the rated notes as described in DBRS's Morningstar “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure as well as form and sufficiency of available credit enhancement to support DBRS Morningstar-projected expected cumulative losses under various stressed scenarios.
-- The credit quality of the portfolio and DBRS Morningstar’s qualitative assessment of KMC’s capabilities with regard to originations, underwriting and servicing.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes.
-- The transaction parties’ financial strength to fulfil their respective roles.
-- The transaction’s legal structure and its consistency with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology as well as the presence of the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland of AAA with a Stable trend as of the date of this press release.

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

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

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

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 “Global Methodology for Rating Sovereign Governments” at: https://ww.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include KMC and its agents.

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 newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

The following scenarios constitute the parameters used to determining the ratings (the Base Case):
-- In respect of the Class A Notes, the PD and LGD at the AAA (sf) stress scenario of 25.4% and 48.9%, respectively.
-- In respect of the Class B Notes, the PD and LGD at the AA (high) (sf) stress scenario of 23.4% and 46.8%, respectively.
-- In respect of the Class C Notes, the PD and LGD at the A (sf) stress scenario of 18.2% and 38.9%, respectively.
-- In respect of the Class D Notes, the PD and LGD at the BBB (high) (sf) stress scenario of 14.5% and 34.3%, respectively.
-- In respect of the Class E Notes, the PD and LGD at the BBB (low) (sf) stress scenario of 12.9% and 30.1%, respectively.
-- In respect of the Class X Notes, the PD and LGD at the B (low) (sf) stress scenario of 5.1% and 18.9%, respectively.

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

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

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

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

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

Class X Notes risk sensitivity:
-- 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD, expected rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CC (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 GmbH are subject to EU and US regulations only.

Lead Analyst: Ronja Dahmen, Assistant Vice President, Global Structured Finance
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 27 September 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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.