DBRS Ratings Limited (DBRS) assigned provisional ratings to the following classes of notes to be issued by European Residential Loan Securitisation 2019-NPL1 DAC (ERLS 2019-NPL1 DAC or the Issuer):
-- Class A at A (sf)
-- Class B at BBB (high) (sf)
-- Class C at BB (sf)
The Class P and Class D notes are unrated and are retained by the sellers. The rating on the Class A notes addresses timely payment of interest and ultimate payment of principal. The ratings on the Class B and Class C notes address ultimate payment of interest and ultimate payment of principal. The transaction benefits from an amortising Class A reserve fund and a separate non-amortising Class B reserve fund and Class C reserve fund which provide liquidity support to the Class A, Class B and Class C notes (the Rated Notes), respectively, and provide principal support to the Rated Notes at maturity, if available.
Proceeds from the issuance of the Class A to D notes were used to purchase non-performing (the majority of the portfolio) Irish residential mortgage loans with a small proportion of first-charge performing loans. The mortgage portfolio to be purchased under ERLS 2019-NPL1 comprises part of the portfolio under European Residential Loan Securitisation 2017-NPL1 DAC (ERLS 2017-NPL1) and the remaining from the part of the portfolios of:LSF IX Java Investments DAC (Java Investments) and of LSF IX Paris Investments DAC (Paris Investments). Java Investments acquired the legal and beneficial title of the loans from Investec Bank plc and Nua Mortgages Limited in September 2014. Paris Investments acquired the legal and beneficial title of the loans from Bank of Scotland (Ireland) Limited (BoSI) in October 2014.
The outstanding balance of the provisional mortgage portfolio is EUR 458.9 million. Approximately 74.2% of the provisional mortgage portfolio is in various stages of the arrears/litigation process and an additional 10.2% is classed as ‘real estate-owned’. A small proportion of about 5.2% is classed as ‘performing’ and an additional 10.4% is in the modifications pipeline.
The mortgage loans were originated by BoSI, Start Mortgages DAC (Start) and Nua Mortgages Limited, and are secured by Irish residential properties. Servicing of the portfolio will be done by Start. Hudson Advisors Ireland DAC will be appointed as the Issuer Administration Consultant and as such will act in an oversight and monitoring capacity and provide input on asset resolution strategies.
The credit enhancement available to the Class A notes as a percentage of the total portfolio is expected to be at 54.5%. Likewise, the credit enhancement available to the Class B notes is expected at 46.5% and that for Class C is expected at 40%.
Following the step-up date in June 2022, the margin above one-month Euribor payable on the Rated Notes is expected to increase. The Issuer will enter into an interest rate cap agreement with Barclays Bank Plc. The cap agreement will terminate on 10 July 2023. On the termination date of the cap agreement, the coupon cap on the notes will become applicable. The Issuer will pay the interest rate cap fees in full on the closing date and will receive payments to the extent one-month Euribor is above 0.5% for the relevant interest period in return. The Issuer can unwind or sell part of the interest rate cap at the mark-to-market position provided that the notional amount of the interest rate cap does not fall below the outstanding balance of the Rated Notes.
The Issuer may sell part of the portfolio subject to sale covenants. The sale price must be at least 70% of the aggregate current balance of the mortgage loans that are subject to a sale.
The Class P notes can receive amounts arising from the unwinding or sale of the interest rate cap. Consequently, the Class P notes may amortise before the Rated Notes. Payments made to the Class P notes are capped at the initial balance of the Class P notes. Following repayment in full of the Class P notes, any amount otherwise due to be paid to the Class P notes will be applied as available funds.
Elavon Financial Services DAC (Elavon) will act as the account bank for this transaction. DBRS privately rates Elavon and has concluded that it meets DBRS’s criteria to act in such capacity. The transaction documents contain downgrade provisions relating to the transaction account bank where, if downgraded below BBB (low) (sf), the Issuer will have to replace the account bank. The downgrade provision is consistent with DBRS’s criteria for the initial rating of A (sf) assigned to the Class A notes. The interest rate received on cash held in the account bank is not subject to a floor of 0%, which can create a potential liability for the issuer. DBRS has assessed potential negative interest rates on the account bank in its cash flow analysis.
The ratings are based on the following analytical considerations:
-- The transaction capital structure including the form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection and resolution activities. DBRS stressed the expected collections from the mortgage portfolio based on the business and resolution strategies. The expected collections are used as an input into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS’s “Rating European Non-Performing Loan Securitisations” and “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” methodologies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents. The transaction cash flows were analysed using the expected collections from the mortgage loans. The transaction structure was analysed using Intex DealMaker.
-- The most current sovereign rating of the Republic of Ireland, which DBRS rates at A(high)/R-1(middle) with a Stable trend as of the date of this report.
-- The consistency of the transaction’s legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating European Non-Performing Loan Securitisations”.
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.
These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
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 Credit Ratings” of the “Rating Sovereign Governments” methodology at: https://www.dbrs.com/research/333487/rating-sovereign-governments.
The sources of data and information used for the ratings include LSF IX Java Investments DAC, LSF IX Paris Investments DAC, Start Mortgages DAC and Morgan Stanley & Co. International Plc.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
These ratings concern a financial instrument to be issued. These are the first DBRS ratings on this financial instrument.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of 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):
-- The expected principal and interest collections in a rising interest rate scenario at the A (sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collections in a rising interest rate scenario at the BBB (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would downgrade the rating of Class A notes to BBB (high) (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would downgrade the rating of the Class A notes to BBB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would downgrade the rating of the Class B notes at BBB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating of the Class B notes to BB (high) (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of the Class C notes at BB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would reduce the rating of the Class C notes to B (sf).
For further information on DBRS 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.
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Kali Sirugudi, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 1 July 2019
DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Rating European Non-Performing Loan Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.
On 29 July 2019, DBRS removed the following inaccurate disclosure from the press release: “DBRS was supplied with one or more third-party assessments. DBRS applied additional cash flow stresses in its rating analysis.”