DBRS Confirms Ratings to Charles Street Conduit Asset Backed Securitisation 1 Limited

DBRS Ratings Limited (DBRS) has today confirmed its rating of AA (sf) to the increased £1.00 billion secured credit facility provided through the purchase of Senior Variable Funding Notes (Senior VFNs) issued by Charles Street Conduit Asset Backed Securitisation 1 Limited (CABS or the Issuer). The credit facility amount until the increase was £675 million. The notes were initially issued on 12 November 2007, and the credit facility as of now is fully drawn down with the current outstanding amount at £675 million (current outstanding Senior VFN amount).

The committed amount available to CABS is now provided, in part, by an additional bank based in the United Kingdom, taking the total number of the facility providers to five. Two of the facility providers are special-purpose entities, and the rest are banks, which are also the noteholders of the Senior VFNs. Three of the existing facility providers have increased the facility limit provided under CABS. The revolving commitment period has been pushed out by two years so that it now expires on 31 January 2020, or following the occurrence of a sale demand event, an event of default or an early amortisation event, whichever is earlier. CABS will continue to purchase the mortgage loans originated by six wholly owned subsidiaries of Jerrold Holdings Limited (Jerrold), thus providing the originators with funding to make new originations.

Jerrold is a specialist lender offering first and second charge mortgage loans secured mostly by residential and semi-commercial properties. Mortgage loans are typically offered to borrowers who would otherwise be unable to obtain credit from a mainstream mortgage lender either on account of their adverse credit history or as a consequence of the nature of the mortgage product that suits the specific requirement of the borrower, such as bridge loans, commercial purpose loans and second charge loans.

Credit enhancement is provided in the form of Subordinated variable funding notes (Subordinated VFNs) plus the amount in the commingling reserve account. The subordination level is dynamic and is calculated on a quarterly basis with a floor equal to 22%. The commingling reserve will always be 1.50% of the Senior VFNs. The sub¬ordination to the Senior VFNs as of 31 January 2016 was 24.30%.

The interest margin payable on the Senior VFNs has been reduced to 2.625% p.a. from 2.875% p.a. (3.50% p.a. at the initial date of rating, October 2014, by DBRS). However, if the rating of the Senior VFNs falls a notch below the current ratings, the interest margin payable will step up to 3% on a weighted-average basis. The overall reduction of the interest liability for the Issuer is positive for the cash flows of the transaction. DBRS has stressed the interest liability for the notes at the step-up interest rate and the margin cap of 4% for 17.50% of the Senior VFNs. The stressed weighted-average interest margin for the Issuer on the Senior VFNs is thus 3.18% p.a., down from 3.63% p.a.

Some of the portfolio covenants for the purchase of new loans during the commitment/revolving period of the facility have been changed. Most of these changes tighten the purchase conditions and are considered positive. The significant of the changes are highlighted below:
-- The proportion of second charge loans cannot exceed 70% of the mortgage portfolio (earlier 75%).
-- The proportion of interest-only loans cannot exceed 70% of the mortgage portfolio (earlier 75%).
-- The weighted-average loan-to-value ratio (WALTV) of the mortgage portfolio has been tightened not to exceed 67.50% (earlier 75%).
-- The proportion of commercial loans cannot exceed 57.50% of the mortgage portfolio (earlier 50%).
-- The WALTV for commercial bridge loans cannot exceed 67.50% (earlier 65%).
-- The WALTV of loans with an original principal balance in excess of £1 million cannot exceed 65%.
-- The proportion of loans where interest and principal are on moratorium for an initial period (not exceeding 18 months) are restricted to 15% of the mortgage portfolio.

The delinquency metrics as defined in the transaction documents have been tightened as well. The above changes to the purchase conditions have been considered by DBRS to stress assess the credit risk of the potential mortgage portfolio. Breach of any of these conditions, if not cured, would trigger an early amortisation of the VFNs or a sale demand event or an event of default in some cases.

The loans with an initial period moratorium on interest and principal form 8.90% of the current mortgage portfolio. Such loans categorised as personal lending have a moratorium period not exceeding three months (4% of the mortgage portfolio) and were originated during and before 2008. The performance history of such loans does not indicate any concern for the overall credit risk of the CABS mortgage portfolio. Approximately 4.90% of the current mortgage portfolio of such loans are categorised under commercial lending where the moratorium period can potentially extend up to 18 months. DBRS will continue to monitor the performance of such new originations in the mortgage portfolio.

The rating on the Senior VFNs is based upon the review by DBRS of the following analytical considerations:

-- Credit Quality of the Mortgage Portfolio: The mortgage loans sold to the Issuer are subject to eligibility criteria and portfolio covenants that mitigate the risk of credit deterioration of the mortgage portfolio.

To assess the change in portfolio characteristics and impact on defaults and losses during the revolving period, DBRS stressed the current mortgage portfolio in accordance with the portfolio covenants applicable for purchase of new loans during the commitment/revolving period of the facility. DBRS calculated probability of default, loss given default and expected losses on the stressed mortgage loan portfolio as output by the DBRS European RMBS Default Model.

DBRS analysed the historical loan-level payment history of the underlying borrowers, which covered all the relevant product types originated by the lenders.

-- The transaction’s cash flow structure and form and sufficiency of available credit enhancement: The subordination provided by the Subordinated VFNs can vary based on the lower of the advanced rate per an advance rate model or an advance rate table based on the weighted-average current loan-to-value (WACLTV) of the mortgage portfolio. DBRS does not give any credit to the advance rate model in the cash flow analysis for the transaction. The minimum subordination for the Senior VFNs is 22% (corresponding to a WACLTV of 62% in the advance rate table). For the cash flow analysis, DBRS has stressed the mortgage portfolio based on the variance of WACLTV and tested nine different scenarios of subordination per the advance rate table. As per the advance rate table, the maximum subordination available will be 26%, corresponding to a WACLTV of 70%.
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-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Senior VFNs according to the terms of the transaction documents: For each of the nine scenarios mentioned above, DBRS utilised front- and back-loaded default timing curves, rising and declining interest rates and low, mid and high prepayment scenarios. The DBRS cash flow analysis, using Intex, tested for the repayment of timely interest and ultimate principal on the Senior VFNs.

The transaction includes a commingling reserve equal to 1.5% of the Senior VFNs (1.16% of the collateral balance) and is available to provide liquidity to the Senior VFNs in the form of payments of interest/commitment fees. This commingling reserve has been built up to the required level using principal receipts from the mortgage portfolio. The reserve is amortising, and the amounts released will form part of the available funds to pay the liabilities under the revenue waterfall. The commingling reserve account is maintained with Lloyds Bank Plc (rated A (high) with a Stable trend/rated R-1 (middle) with a Stable trend).

-- The legal structure: The transaction structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions has been assessed.

A Sale Demand Event linked to the breach of delinquencies level at 14% has been tightened (15% earlier). The transaction includes several Sale Demand Events or conditions, a breach of which results in the sale of the mortgage portfolio. The sale of the portfolio is conditional on the recovery proceeds from the sale being enough to pay the entire amount outstanding of the Senior VFNs along with accrued interest. DBRS considers the tightening of the delinquencies trigger to be positive overall for the Issuer.

Notes:
All figures are in British pounds unless otherwise noted. The principal methodology applicable is
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.

DBRS 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. This may be found at http://www.dbrs.com/about/methodologies.

For a discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include a loan-by-loan data tape of the mortgage loans portfolio currently owned by the issuer; recovery data, historical performance data of loans currently with the issuer, those repurchased by Jerrold from the issuer, and loans which are eligible to be sold to the issuer during the revolving period; transaction reports for CABS. The historical performance stretched from the date of origination of loans; the origination vintages included loans originated from the year 2002.

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

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

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 12 January 2016 when DBRS
-- confirmed its AA (sf) rating on the Senior VFNs;
-- removed the Under Review with Negative Implications status on the Senior VFNs

An amendment to the transaction on 25 November 2015 resulted in the transfer of Control Account Bank to Lloyds Bank plc.

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

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

-- Probability of Default Rates Used: Base Case PD of 44.76% (corresponding to the AA (sf) rating stress level).
-- Loss Given Default (LGD) Used: Base Case LGD of 54.18% (corresponding to AA (sf) rating stress level).

DBRS concludes that a hypothetical increase of the base case PD by 25% with the LGD remaining the same or the base case LGD by 25% with PD remaining the same would each lead to a downgrade of the Senior VFNs to single A (sf) rating.

Again, a hypothetical increase of LGD by 25% with the PD remaining the same would lead to a downgrade of the Senior VFNs to BBB (high) (sf) rating.

Again a hypothetical increase of the base case PD by 50% with the LGD remaining the same or the base case PD by 25% and LGD also by 25% would each lead to a downgrade of the Senior VFNs to BBB (sf) rating.

Again a hypothetical increase of the base case PD by 50% and LGD by 25% or the base case PD by 25% and LGD by 50% would each lead to a downgrade of the Senior VFNs to BBB (low) (sf) rating.

Finally a hypothetical increase of the base case PD and LGD by 50% would lead to a downgrade of the Senior VFNs to BB(high) (sf) rating.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (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 regulations only.

Initial Lead Analyst: Kali Sirugudi, Vice President
Initial Rating Date: 28 October 2014
Initial Rating Committee Chair: Erin Stafford
Lead Surveillance Analyst: Kevin Ma
Rating Committee Chair for the current Rating Action: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane, London EC3R 7AA
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.

The methodologies applicable are:
Legal Criteria for European Structured Finance Transactions
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations

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