DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the following classes of notes issued by European Residential Loan Securitisation 2018-1 DAC (the Issuer):
-- Class A at A (sf)
-- Class B at BBB (sf)
The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal. The rating on the Class B notes addresses ultimate payment of interest and ultimate payment of principal. The Class P and Class Z notes also issued by the Issuer are unrated.
Proceeds from the issuance of the Class A to Z notes were used to purchase a portfolio of first-charge performing and nonperforming Irish residential mortgage loans originated by Irish Nationwide Building Society (INBS) and predominantly secured by Irish residential properties (loans secured by non-Irish properties represent 0.3% of the mortgage portfolio at issuance). INBS was effectively nationalised in August 2010 following a state bailout. In 2011, INBS under state ownership, was merged with Anglo Irish Bank to form the Irish Banking Resolution Corporation (IBRC). In February 2013, IBRC was put into special liquidation by the Irish government as part of its strategy to resolve legacy bank assets. The mortgage loans were acquired by Lone Star Funds through Shoreline Residential DAC in March 2014. Servicing of the portfolio was subsequently migrated over to Pepper Finance Corporation (Ireland) DAC (PAS). PAS is the appointed administrator of the assets for the transaction. Hudson Advisors Ireland DAC (Hudson) is the appointed issuer administration consultant and as such acts in an oversight and monitoring capacity and provides input on asset resolution strategies.
According to the latest investor report of February 2020, the principal amount outstanding of the Class A, Class B, Class P, and Class Z notes was equal to EUR 47.8 million, EUR 18.7 million, EUR 23.3 million, and EUR 95.5 million, respectively. The balance of the Class A notes amortised by approximately 78% since issuance. The current aggregated transaction balance is equal to EUR 185.2 million.
As of January 2020, the transaction is performing above the initial servicer’s expectations, with actual cumulative gross collections amounting to EUR 51.0 million (interest and principal repayments only) and EUR 131.9 million proceeds deriving from loan sales . The servicer’s initial business plan estimated cumulative gross collections of EUR 89.1 million for the same period.
At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 22.9 million in a rising interest rate scenario and EUR 22.3 million in a declining interest rate scenario, of EUR 33.4 million in the BBB rising interest rate scenario and of EUR 32.8 million in the BBB declining interest rate scenario. All of them are significantly below the actual cumulative gross collections to date.
To date, the transaction has been performing better than initially expected, to a large extent because of the sale of performing assets. DBRS Morningstar will monitor whether such performance is sustainable considering that the remaining portfolio does now include predominantly non-performing loans, and the currently challenging macroeconomic environment and market conditions.
The transaction benefits from two reserve funds: (1) a Class A reserve fund, amortising at 3.0% of the outstanding balance of the Class A notes, and (2) a Class B reserve fund, providing liquidity to support interest payments on the Class B notes, with an initial amount equal to 9.0% of the original balance of the Class B notes. The Class B reserve fund does not amortise. As of the last investor report dated February 2020, the Class A reserve fund amounted to EUR 1.5 million and the Class B reserve fund amounted to EUR 0.8 million.
The Issuer entered into an interest rate cap agreement with HSBC Bank Plc. The cap agreement will terminate on 24 March 2023, on which date the coupon cap on the notes will become applicable. The Class A notes have a coupon cap rate of 5% and the Class B notes have a 6% cap.
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.
-- 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 sovereign rating of the Republic of Ireland, which DBRS Morningstar currently rates at A (high) with a Positive trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.
For additional disclosure related to the impact of the Coronavirus Disease (COVID-19) on DBRS Morningstar rating methodologies, please see the following link: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology”.
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
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 Shoreline Residential DAC and its agents, Pepper Finance Corporation (Ireland) DAC and Citibank, N.A., London Branch.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 21 March 2019, when DBRS Morningstar confirmed its ratings of the Class A and Class B notes.
The lead analyst responsibilities for this transaction have been transferred to Sebastiano Romano.
Information regarding DBRS Morningstar 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 Morningstar 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 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 BBB (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS Morningstar concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of Class A notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating of the Class A notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of the Class B notes at BBB (sf).
-- DBRS Morningstar 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 at BBB (sf).
For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.
Lead Analyst: Sebastiano Romano, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 March 2018
DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Master European Structured Finance Surveillance Methodology
-- Rating European Non-Performing Loans Securitisations
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- European CMBS Rating and Surveillance Methodology
-- 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.