Press Release

DBRS Morningstar Confirms and Upgrades Provisional Ratings on Nightingale Securities 2017-1 Limited

Structured Credit

November 12, 2021

DBRS Ratings Limited (DBRS Morningstar) confirmed and upgraded the following provisional ratings on 12 tranches of the unexecuted, unfunded financial guarantee regarding the Nightingale Securities 2017-1 Limited portfolio:

-- GBP 602,033,014 Tranche A confirmed at AAA (sf)
-- GBP 191,807,000 Tranche B confirmed at AAA (sf)
-- GBP 52,311,000 Tranche C confirmed at AA (high) (sf)
-- GBP 60,794,000 Tranche D confirmed at AA (high) (sf)
-- GBP 133,369,000 Tranche E confirmed at AA (sf)
-- GBP 32,989,000 Tranche F confirmed at AA (sf)
-- GBP 78,702,000 Tranche G confirmed at AA (sf)
-- GBP 210,186,000 Tranche H upgraded to AA (sf) from A (high) (sf)
-- GBP 33,931,000 Tranche I upgraded to AA (sf) from A (sf)
-- GBP 44,771,000 Tranche J upgraded to AA (sf) from A (low) (sf)
-- GBP 139,967,000 Tranche K upgraded to AA (low) (sf) from BBB (low) (sf)
-- GBP 21,206,000 Tranche L upgraded to AA (low) (sf) from BBB (low) (sf)

The ratings address the likelihood of a loss under the guarantee on the respective tranche resulting from borrower defaults at the legal final maturity date in November 2027. Borrower default events are limited to failure to pay, bankruptcy, and restructuring events. The ratings that DBRS Morningstar assigned to each tranche are expected to remain provisional until the senior guarantee is executed. The ratings do not address counterparty risk or the likelihood of any event of default or termination events occurring under the agreement.

The transaction is a synthetic balance-sheet collateralised loan obligation structured in the form of a financial guarantee (the Guarantee). The tranches are collateralised by a portfolio of term loans to small and medium-size enterprises (SMEs) and loans backed by income-producing real estate (IPRE), comprising either commercial or residential properties (the Reference Portfolio), granted to borrowers in the United Kingdom and originated by National Westminster Bank plc (NatWest or the Beneficiary). The rated tranches are unfunded and the senior guarantee remains unexecuted. The transaction’s replenishment period ended on 15 November 2019 and the portfolio has been amortising since.

The upgrades and confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of cumulative defaults, and compliance with replenishment criteria during the replenishment period as of the reporting date on August 2021;
-- Updated default rate (PD), recovery rate, and expected loss assumptions for the Reference Portfolio;
-- The current available credit enhancement to the rated tranches to cover expected losses of each tranche at its respective rating level; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

PORTFOLIO PERFORMANCE
As of the latest loan-by-loan data from August 2021, the Reference Portfolio stood at GBP 1,985 million and is granular, composed mainly of secured obligations. Loans to SMEs and loans backed by commercial IPRE and residential IPRE represent 64.7%, 22.9%, and 12.4% of the Reference Portfolio’s outstanding balance, respectively.

As of the latest investor report from June 2021, delinquencies were low with loans that are one to two months in arrears representing 0.04% of the Reference Portfolio’s outstanding balance, down from 0.2% at last annual review, and loans two to three months in arrears representing 0.7%, stable since last annual review. Delinquent loans represented 1.3% of the Reference Portfolio’s outstanding balance as of June 2021, down from 3.1% as of June 2020.

As of August 2021, the transaction recorded defaults leading to a reduction of the Guarantee amount to GBP 383 million from the initial balance of GBP 390 million. The cumulative defaulted amount represented 0.5% of the Reference Portfolio’s initial amount, up from 0.2% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar divided its analysis of the Reference Portfolio into three key subpools, consisting of loans to SMEs, loans backed by commercial IPRE, and loans backed by residential IPRE.

For the SME subpool, the main methodology that DBRS Morningstar applied was its “Rating CLOs Backed by Loans to European SMEs”.

DBRS Morningstar conducted the asset analysis on the commercial IPRE subpool in line with its “European CMBS Rating and Surveillance Methodology” to determine expected stressed recovery rates. Given the granularity of the commercial IPRE subpool, DBRS Morningstar relied on historical performance data to determine a base case PD. DBRS Morningstar conducted analysis of the residential IPRE subpool in accordance with its “European RMBS Insight Methodology” and the “European RMBS Insight: UK Addendum”.

DBRS Morningstar conducted a review of the current Reference Portfolio and updated its base case PD and recovery rate assumptions to 10.4% and 58.0%, respectively, from 11.4% and 64.1%, respectively, at the last annual review. DBRS Morningstar’s updated assumptions include adjustments within the context of the coronavirus pandemic.

CREDIT ENHANCEMENT
Credit enhancement (CE) in this transaction consists of the subordination of the junior tranches and takes into account the Maximum Reference Portfolio balance. As of June 2021, the CE increased as follows since one year ago:

-- CE to Tranche A increased to 69.7%, up from 43.7%;
-- CE to Tranche B increased to 60.0%, up from 37.6%;
-- CE to Tranche C increased to 57.4%, up from 36.0%;
-- CE to Tranche D increased to 54.3%, up from 34.1%;
-- CE to Tranche E increased to 47.6%, up from 29.9%;
-- CE to Tranche F increased to 45.9%, up from 28.9%;
-- CE to Tranche G increased to 42.0%, up from 26.4%;
-- CE to Tranche H increased to 31.4%, up from 19.8%;
-- CE to Tranche I increased to 29.7%, up from 18.7%;
-- CE to Tranche J increased to 27.4%, up from 17.3%;
-- CE to Tranche K increased to 20.4%, up from 12.9%; and
-- CE to Tranche L increased to 19.3%, up from 12.2%.

The substantial increase in CE drives the upgrades on the provisional ratings.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many structured finance transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar applied a 1.5 times (x) or a 2.0x adjustment factor on the underlying one-year PDs for obligors in mid-high or high-risk industries based on their perceived exposure to the adverse disruptions of the coronavirus, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For this transaction, DBRS Morningstar also applied haircut to the recoveries as per DBRS Morningstar’s “European CMBS Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 16 June 2020. For more details, please see: https://www.dbrsmorningstar.com/research/362693/european-cmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries:
https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology applicable to the ratings is: “Rating CLOs Backed by Loans to European SMEs” (28 June 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

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

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

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include loan-level data and investor reports provided by NatWest.

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

At the time of the initial ratings, DBRS Morningstar was not 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.

The last rating action on this transaction took place on 13 November 2020, when DBRS Morningstar confirmed the provisional ratings on Tranche A at AAA (sf) and upgraded the provisional ratings on Tranche B, Tranche C, Tranche D, Tranche E, Tranche F, Tranche G, Tranche H, Tranche I, Tranche J, Tranche K, and Tranche L to AAA (sf), AA (high) (sf), AA (high) (sf), AA (sf), AA (sf), AA (sf), A (high) (sf), A (sf), A (low) (sf), BBB (low) (sf), and BBB (low) (sf) from AA (high) (sf), AA (sf), AA (low) (sf), A (high) (sf), A (sf), A (low) (sf), BBB (high) (sf), BBB (sf), BBB (low) (sf), BB (high) (sf), and BB (sf), respectively.

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

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

-- Default Rate Used: Portfolio Default Rate (ranging between 33.6% and 10.4% at the AAA (sf) to B (sf) stress level), a 10% and 20% increase in the Portfolio Default Rate.
-- Recovery Rates Used: Recovery Rate (ranging between 36.0% and 58.0% at the AAA (sf) to B (sf) stress level), a 10% and 20% decrease in the Recovery Rate.

DBRS Morningstar concludes that a hypothetical increase of the PD rate by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a downgrade of the rated tranches up to one notch. A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the rated tranches up to one notch.

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Natalia Coman, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 15 November 2017

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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

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

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

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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