OREANDA-NEWS. S&P Global Ratings today assigned its preliminary credit ratings to Dukinfield II PLC's class A notes and to the interest-deferrable class B-Dfrd to E-Dfrd notes. At closing, Dukinfield will also issue unrated class F notes and the unrated class Z certificates (see list below).

At closing, the issuer will purchase the beneficial interest in a portfolio of U. K. residential mortgage loans from the beneficial title sellers Drake Recoveries S. a.r. l. acting in the name of and on behalf of its compartments Tameside and Dukinfield, using the proceeds from the issuance of the rated notes, the unrated class F notes, and the unrated class Z certificates.

At closing, the issuer will use the proceeds from withholding consideration due to the seller following the sale of the portfolio to fund a rated notes' reserve fund at 2.5% of the initial portfolio balance and upfront transaction expenses. The target rated notes' reserve fund after closing will be 3% of the closing portfolio. The reserve fund will be nonamortizing, and is split into a liquidity component and a non-liquidity component.

The preliminary pool (as of June 30, 2016) comprises first-lien U. K. loans made to nonconforming borrowers, some of whom self-certified their income or were otherwise considered by banks and building societies to be nonprime borrowers, or who used the mortgage loan to purchase buy-to-let properties. The preliminary pool also includes loans made to borrowers who may have previously been subject to a county court judgment (CCJ), or the Scottish equivalent, an individual voluntary arrangement, or bankruptcy order.

In addition to the preliminary pool, the issuer will also acquire from the Dukinfield seller, ?2,788,767 of second loans and shortfall loans for which no consideration has been paid. If any losses are incurred in relation to the second loans or shortfall loans, this will not result in a debit entry on the principal deficiency ledger (PDL). However, the issuer is responsible for the servicing costs of these assets, which rank senior to the amounts due on the rated notes. In our analysis, we have given no recovery or income cash flow credit to the second loans and the shortfall loans, but we have modelled the additional servicing expenses payable.

The mortgage loans are owned by Dukinfield II (as beneficial title holder) and Pepper (U. K.) Ltd. (Pepper U. K.; as legal title holder). Pepper U. K. will also be the transaction's servicer.

The preliminary pool includes at least 18.58% of loans with previous CCJs, as well as 2.79% of loans to borrowers who have previously been declared bankrupt. There was no information provided regarding previous bankruptcies for 3.22% of the loans in the pool. We have therefore assumed prior bankruptcies for these loans in our analysis. Of the pool, 45.90% are self-certified loans. The portfolio's weighted-average current loan-to-value (LTV) ratio is 78.2% (according to our methodology, which includes haircuts [discounts] to valuations when the valuation method was not a full surveyor valuation or where the valuation report was missing). The weighted-average original LTV ratio is 85.9%.

At closing, a rated notes' reserve fund will be funded to 2.5% of the collateral balance. The target rated notes' reserve fund after closing will be 3% of the closing portfolio. The reserve fund will be split between a liquidity reserve fund and a non-liquidity reserve fund. The required balance of the liquidity reserve fund will be 1% of the class A notes' outstanding balance, while the non-liquidity reserve will be the difference between the reserve fund required amount and the liquidity reserve. Over time, as the class A notes amortize, the proportion attributable to the liquidity reserve will decrease, while the non-liquidity reserve will increase, providing additional credit enhancement to the notes.

If there are insufficient revenue collections and the non-liquidity reserve has been fully used, the issuer may use the liquidity reserve to meet senior expenses, issuer profit, and interest on the class A notes. If the liquidity reserve fund is depleted, principal receipts can be borrowed to meet revenue shortfalls if the note is the most senior. Any shortfalls covered through the use of principal receipts will result in a corresponding debit to the PDLs. The liquidity reserve will amortize in line with the class A notes.

The class B-Dfrd to E-Dfrd notes are deferrable-interest notes and we treated them as such in our analysis. Under the transaction documents, the issuer can defer interest payments on these notes. Consequently, any deferral of interest on the class B-Dfrd to E-Dfrd notes would not constitute an event of default. While our preliminary 'AAA (sf)' rating on the class A notes addresses the timely payment of interest and the ultimate payment of principal, our preliminary ratings on the class B-Dfrd to E-Dfrd notes address the ultimate payment of principal and the ultimate payment of interest.

The class A to E notes' interest rates are equal to three-month British pound sterling LIBOR plus class-specific margins. There will be basis risk in the pool as the underlying collateral is linked to three-month sterling LIBOR (which will reset at different reset dates than the notes), one-month sterling LIBOR, and the Bank of England Base Rate (BBR). As a result, we stress the historical timing mismatch between the index paid on the assets and that paid on the liabilities. There is no swap in the transaction to mitigate this risk.

Our preliminary ratings reflect our assessment of the transaction's payment structure, cash flow mechanics, and the results of our cash flow analysis to assess whether the notes would be repaid under stress test scenarios. Subordination and the reserve fund provide credit enhancement to the notes that are senior to the unrated class F notes. Taking these factors into account, we consider the available credit enhancement for the rated notes to be commensurate with the preliminary ratings that we have assigned.