Press Release

Morningstar DBRS Assigns Provisional Credit Ratings to Elstree Funding No. 4 PLC

RMBS

January 25, 2024

DBRS Ratings Limited (Morningstar DBRS) assigned provisional credit ratings to the residential mortgage-backed notes to be issued by Elstree Funding No. 4 PLC (Elstree 4 or the Issuer) as follows:

-- 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 (sf)
-- Class E notes at BB (sf)
-- Class F notes at B (high) (sf)
-- Class X notes at BB (low) (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 October 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 they are the senior-most class of notes outstanding, otherwise the ultimate payment of interest, and the ultimate repayment of principal on or before the final maturity date. The credit rating on the Class X notes addresses the ultimate payment of interest and principal. Morningstar DBRS does not rate the Class Z notes or the residual certificates also expected to be issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in England and Wales. The notes to be issued shall fund the purchase of residential assets originated by West One Secured Loans Limited (WOSL) and West One Loan Limited (WOLL), part of the ENRA Specialist Finance (ENRA) in the UK. WOSL acts as the servicer of the respective loans in the portfolio. ENRA is a UK specialist provider of property finance. CEC Capital Markets UK Limited (CSC Capital) will act as the back-up servicer facilitator.

The initial mortgage portfolio consists of GBP 344 million of first- and second-lien owner-occupied (OO) and buy-to-let (BTL) mortgages secured by properties in the UK.

The Issuer is expected to issue seven tranches of collateralised mortgage-backed securities (the Class A notes as well as the Class B, Class C, Class D, Class E, Class F, and Class Z notes) to finance the purchase of the portfolio. Additionally, the Issuer is expected to issue one class of noncollateralised notes, the Class X notes, the proceeds of which the Issuer will use to fully fund the general reserve fund (GRF) and liquidity reserve fund (LRF) at closing.

The transaction is structured to initially provide 14.0% of credit enhancement to the Class A notes comprising of subordination of the Class B to Class Z notes.

The transaction features a fixed-to-floating interest rate swap, given the presence of a portion of fixed-rate loans (with a compulsory reversion to floating in the future) while the liabilities shall pay a coupon linked to the daily compounded Sterling Overnight Index Average (Sonia). The swap counterparty to be appointed at closing will be Barclays Bank PLC (Barclays). Based on Morningstar DBRS’ credit rating on Barclays, the downgrade provisions outlined in the documents, and the transaction structural mitigants, Morningstar DBRS considers the risk arising from the exposure to Barclays to be consistent with the credit ratings assigned to the rated notes as described in Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions” methodology.

Furthermore, Citibank N.A., London Branch shall act as the Issuer Account Bank and National Westminster Bank Plc shall be appointed as the Collection Account Bank. Both entities are privately rated by Morningstar DBRS, meet the eligible credit ratings in structured finance transactions, and are consistent with the credit ratings assigned to the rated notes as described in Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology.

Credit and liquidity support is provided by a GRF that is funded at closing from the issuance if the Class X notes. The GRF is nonamortising, sized at 1.25% of the collateralized notes balance at closing (Class A to Class Z notes), minus the LRF. It covers senior fees and expenses, swap payments, interest as well as principal deficiency ledger (PDL) balances. An amortising LRF provides further liquidity support and covers senior fees and expenses, swap payments as well as interest shortfalls for the Class A and the Class B notes. The LRF is sized at 1.25% of Class A and Class B notes. The LRF amortises in line with these notes with no triggers. In addition, principal borrowing is also envisaged under the transaction documentation and can be used to cover for interest shortfalls of the most senior outstanding class of notes (except the Class X and Class Z notes).

Morningstar DBRS based its credit ratings on a review of the following analytical considerations:
-- The transaction’s capital structure, including 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. Morningstar DBRS estimated stress-level probability of default (PD), loss given default (LGD), and expected losses (EL) on the mortgage portfolio. Morningstar DBRS used the PD, LGD, and EL as inputs into the cash flow engine. Morningstar DBRS analysed the mortgage portfolio in accordance with its “European RMBS Insight: UK Addendum” methodology;
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E, Class F, and Class X 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;
-- The sovereign credit rating of AA with a Stable trend on the United Kingdom of Great Britain and Northern Ireland as of the date of this press release; and
-- The expected consistency of the transaction’s legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that are expected to address the assignment of the assets to the Issuer.

Morningstar DBRS’ credit ratings on the rated notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Interest Amounts and the related Class Balances.

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

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

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 factors 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 Risk Factors in Credit Ratings” at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Morningstar DBRS analysed the transaction structure in Intex DealMaker.

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

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

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

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

The sources of data and information used for these credit ratings include those provided by ENRA and its representatives. Morningstar DBRS was provided with loan-level, property, and margin data as of 30 November 2023, and the following historical data:
-- Origination volumes, from Q1 2017 to Q3 2023.
-- Dynamic delinquencies, from February 2017 to October 2023
-- Dynamic monthly prepayments, from February 2017 to October 2023

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

Morningstar DBRS was not supplied with third-party assessments.

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalise the credit ratings.

These credit ratings concern expected-to-be-issued new financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

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

-- In respect of the Class A notes, a PD of 25.6% and an LGD of 57.3% corresponding to the AAA (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B notes, a PD of 23.7% and an LGD of 52.8% corresponding to the AA (high) (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C notes, a PD of 19.1% and an LGD of 41.6% corresponding to the A (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D notes, a PD of 13.7% and an LGD of 29.9% corresponding to the BBB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E notes, a PD of 8.8% and an LGD of 22.4% corresponding to the BB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F notes, a PD of 6.5% and an LGD of 19.0% corresponding to the B (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class X notes, a PD of 5.6% and an LGD of 17.8% corresponding to the B (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

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

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

Class C Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD, expected credit rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (low) (sf)
-- 50% increase in PD, 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 (low) (sf)
-- 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD, expected credit rating of BBB (low) (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 (low) (sf)
-- 50% increase in LGD, expected credit rating of B (high) (sf)
-- 25% increase in PD, expected credit rating of BB (low) (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 (high) (sf)
-- 50% increase in PD, expected credit rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of B (sf)

Class F Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of B (sf)
-- 50% increase in LGD, expected credit rating of Below B (sf)
-- 25% increase in PD, expected credit rating of B (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of Below B (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of Below B (sf)
-- 50% increase in PD, expected credit rating of Below B (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of Below B (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of Below B (sf)

Class X Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of B (high) (sf)
-- 50% increase in LGD, expected credit rating of B (high) (sf)
-- 25% increase in PD, expected credit rating of B (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of B (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of B (sf)
-- 50% increase in PD, expected credit rating of B (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of Below B (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of Below B (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: Rehanna Sameja, Senior Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 25 January 2024

DBRS Ratings Limited
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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.

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/278375.

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