DBRS Morningstar Finalises Provisional Credit Ratings on Bowbell No.3 PLC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional credit ratings on the residential mortgage-backed notes to be issued by Bowbell No.3 PLC (the Issuer) as follows:

-- Class A at AAA (sf)

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in July 2065.

DBRS Morningstar does not rate the Class Z notes and the subordinated loan.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the United Kingdom (UK). The Issuer used the proceeds of the notes to fund the purchase of prime and performing owner-occupied (OO) mortgage loans originated by Bank of Ireland (UK) plc (BOIUK) and secured over properties located in the UK. This is the third securitisation of the Bowbell series, the first rated by DBRS Morningstar. The mortgage portfolio as of October 2023 on which DBRS Morningstar based its analysis consists of GBP 383 million of first-lien mortgage loans.

BOIUK is the originator and seller and acts as the servicer of the transaction. The Bank of Ireland was established by Royal Charter in 1783 in Dublin and is one of the traditional “Big Four” Irish banks. BOIUK is a wholly owned subsidiary of The Bank of Ireland, was established in 2009, and has its main headquarters in Belfast, employing over 1,400 staff. As of end-December 2022, BOIUK’s residential mortgage book totalled almost GBP10 billion.

The Issuer issued two tranches of collateralised mortgage-backed securities (the Class A and Class Z notes) to finance the purchase of the portfolio. The transaction is structured to initially provide 10.0% of credit enhancement to the Class A notes. This includes the subordination of the Class Z notes and the General Reserve Fund (GRF).

The GRF was funded at closing through a subordinated loan of the seller. The initial balance of the GRF is 1.5% of the Class A notes’ balance and will then – subject to some conditions – amortise at 1.5% of the Class A notes’ outstanding balance, down to a floor amount of 0.1% of the initial portfolio balance. When the Class A is redeemed in full, the GRF will be released through the interest waterfall. If the GRF is fully depleted, the principal can be used to cure any shortfalls of senior fees or unpaid interest payments on the Class A notes.

On the interest payment date in April 2028, the coupon due on the notes will step up, and the notes may be optionally called. The notes must be redeemed for an amount sufficient to fully repay them, at par, plus pay any accrued interest.

As of 31 October 2023, the provisional portfolio consisted of 2,338 loans with an aggregate principal balance of GBP 383.1 million. The majority of the loans in the pool have been recently originated (with 70.8% of loans originated between 2021 and 2023). The portfolio contains 98.3% fixed-rate loans with a compulsory switch to the originator’s standard variable rate (SVR).

The weighted average (WA) original loan-to-value ratio (LTV) is 76.76%, and the WA indexed current LTV (CLTV) of the portfolio as calculated by DBRS Morningstar is 66.9%, with 29.3% of the loans having an indexed CLTV higher than 80%. All loans in the portfolio were granted to employed borrowers. None of the loans in the pool have prior county court judgements or are currently in arrears, reflecting the good quality of the portfolio.

Elavon Financial Services DAC, U.K. Branch (the Account Bank) holds the Issuer’s transaction account from the closing date. The transaction documents stipulate that in the event of a breach of the DBRS Morningstar rating level of “A”, the account bank will be replaced by, or obtain a guarantee from, an appropriately rated institution within 60 calendar days. Based on DBRS Morningstar’s private rating of the Account Bank, replacement provisions, and investment criteria, DBRS Morningstar considers the risk arising from the exposure to the Account Bank consistent with the ratings assigned to the rated notes as described in DBRS Morningstar's “Legal Criteria for European Structured Finance Transactions” methodology.

BOIUK acts as swap counterparty. If the long-term rating (DBRS Rating Equivalent) of BOIUK is downgraded below "A", then the swap counterparty will start to post collateral within 30 business days and may be replaced. Since the current equivalent rating is A (low), the swap counterparty has started to post collateral from closing. BOIUK posts collateral in the swap collateral account open with the Account Bank. The collateral posting and replacement provisions of the swap counterparty are consistent with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its credit ratings on a review of the following analytical considerations:
-- The transaction’s capital structure and the form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar calculated the probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio. DBRS Morningstar uses the PD, LGD, and ELs as inputs into the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight: UK Addendum” methodology.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A 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.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AA with a Stable trend as of the date of this press release.
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

DBRS Morningstar’s credit rating on the rated notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the rated notes are the related Interest Amounts and the related Class Balance.

DBRS Morningstar’s credit rating on the rated notes also addresses the credit risk associated with the increased rate of interest applicable to 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.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar 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, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

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

The principal methodologies applicable to the credit rating are the “European RMBS Insight Methodology” (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology and the “European RMBS Insight: UK Addendum” (11 August 2023), https://www.dbrsmorningstar.com/research/419141/european-rmbs-insight-uk-addendum.

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

DBRS Morningstar 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 DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/421590.

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.

The sources of data and information used for this credit rating include those provided by BOIUK and its representatives. DBRS Morningstar was provided with loan-level data as of 31 October 2023, historical performance data which included dynamic 90 days+ arrears from Q4-2010 to Q2-2023.

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 credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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

This credit rating concerns a newly issued financial instrument. This is the first DBRS Morningstar credit rating on this financial instrument.

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

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- In respect of the Class A notes, a PD of 13.6% and an LGD of 28.1% corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

For further information on DBRS Morningstar 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 DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Roger Bickert, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 20 October 2023

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://www.dbrsmorningstar.com/about/methodologies.

-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v. 6.0.1.0, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: UK Addendum (11 August 2023), https://www.dbrsmorningstar.com/research/419141/european-rmbs-insight-uk-addendum.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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.