DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by European Residential Loan Securitisation 2019-NPL2 DAC (ERLS 2019-NPL2 or the Issuer):
-- Class A at A (sf)
-- Class B at BBB (high) (sf)
-- Class C at BBB (low) (sf)
The Class P and Class D notes are unrated and retained by LSF XI Glas Investments DAC. The rating of the Class A notes addresses the timely payment of interest and ultimate payment of principal by the final legal maturity date in February 2058. The ratings of the Class B and Class C notes address the ultimate payment of interest and principal. The transaction benefits from an amortising Class A reserve fund, a separate non-amortising Class B reserve fund and a non-amortising Class C reserve fund that respectively provide liquidity support to the Class A, Class B and Class C notes (collectively, the Rated Notes) and principal support to the Rated Notes at maturity, if available.
Proceeds from the issuance of the Class A to Class D notes were used to purchase performing and non-performing Irish first-charge residential mortgage loans originated by Permanent TSB p.l.c. The non-performing loans (NPLs) comprise the majority of the portfolio. Lone Star International Finance DAC (Lone Star) acquired the mortgage loans in 2018. Servicing of the mortgage loans is conducted by Start Mortgages DAC (Start), which also acts as the administrator of the assets for the transaction. Hudson Advisors Ireland DAC (Hudson) was appointed as the Issuer administration consultant and, as such, acts in an oversight and monitoring capacity and provides input on asset resolution strategies.
Following the step-up date in November 2022, the margin above one-month Euribor payable on the Rated Notes will increase. The Issuer entered into an interest rate cap agreement with Goldman Sachs International. The cap agreement will terminate in December 2024. From 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 0.0% for the first three years and 0.5% for the fourth and fifth year after closing. 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 80% 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 full repayment of the Class P notes, any amount otherwise due to be paid to the Class P notes will be applied as available funds.
The ratings are based on DBRS Morningstar’s analysis of the projected recoveries of the underlying collateral, the historical performance and expertise of Start Mortgages DAC (the special servicer), the availability of liquidity to fund interest shortfalls and special-purpose vehicle expenses, the cap agreement and the transaction’s legal and structural features. In its analysis, DBRS Morningstar does not provide credit to portfolio sales. In flat interest rate scenarios, DBRS Morningstar’s A (sf) rating stress assumes a haircut of approximately 44.8% to the special servicers’ business plan for the portfolio, while DBRS Morningstar’s BBB (high) (sf) and BBB (low) (sf) rating stresses respectively assume haircuts of approximately 40.8% and 36.8% to the special servicers’ business plan.
DBRS Morningstar analysed the transaction structure using Intex DealMaker.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating European Non-Performing Loans Securitisations”.
DBRS Morningstar 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for the ratings include the Originators and the special servicer.
DBRS Morningstar did not rely upon third-party due diligence to conduct its analysis.
DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the information available to it for the purposes of providing the ratings was of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
These ratings concern a newly issued financial instrument.
These are the first DBRS ratings on this financial instrument.
This is the first rating action since the Initial Rating Date.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies are available on www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings (the Base Case):
-- The expected principal and interest collections in a rising, flat and decreasing interest rate scenario at the A (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would maintain the rating of the Class A notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (high) (sf).
-- The expected principal and interest collections in a rising, flat and decreasing interest rate scenario at the BBB (high) (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would maintain the rating of the Class B notes at BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class B notes to BBB (low) (sf).
-- The expected principal and interest collections in a rising, flat and decreasing interest rate scenario at the BBB (low) (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (low) (sf).
For further information on DBRS Morningstar historic 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: Alessio Pignataro, Senior Vice President, Global Structured Finance
Rating Committee Chair: Christian Aufsatz, Managing Director, Global Structured Finance
Initial Rating Date: 12 November 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 Loans Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Servicers
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
A description of how DBRS Morningstar 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.