Press Release

DBRS Morningstar Confirms Ratings on Ares Lusitani – STC, S.A. (Project Gaia), Trend Remains Negative

Nonperforming Loans

May 29, 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the following classes of notes issued by Ares Lusitani – STC, S.A. (the Issuer):

-- Class A at BBB (low) (sf)
-- Class B at CCC (sf)

The trend on all ratings remains Negative.

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. DBRS Morningstar does not rate the Class J notes issued by the Issuer.

Proceeds from the issuance of the Class A to J notes were used to purchase a Portuguese nonperforming loan portfolio originated by Caixa Económica Montepio Geral, Caixa Económica Bancária, S.A. and sold to the Issuer by Mimulus Finance D.A.C. The total outstanding balance (OB) of the portfolio was equal to EUR 234.3 million as of December 2018 (Cutoff Date). The loan pool is composed of secured commercial and residential loans (41% of the OB) and unsecured receivables (59% of the OB) granted to corporate and individual borrowers (with the latter accounting for approximately 30% of the OB). The servicer for both secured and unsecured pool is Proteus Asset Management, Unipessoal, Lda. (Altamira).

RATING RATIONALE
The rating confirmations follow the first annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance in terms of actual cumulative gross collections as of 30 April 2020 and trend observed over the last six months, with a specific focus on the period following the outbreak of the Coronavirus Disease (COVID-19).
-- Profitability levels recorded on closed receivables as of 30 April 2020.
-- Updated business plan forecast analysis and comparison with both the servicer’s and DBRS Morningstar’s initial expectations.
-- Liquidity support currently available to mitigate temporary shortfalls on the payment of senior costs and interest on senior notes.
-- Consistency of the loan pool composition as of the 30 April 2020 with the features observed at issuance.

According to the latest investor report dated November 2019, the principal amount outstanding of the Class A, Class B, and Class J notes was equal to EUR 35.9 million, EUR 7.6 million, and EUR 15.0 million, respectively. The balance of the Class A notes amortised by approximately 24% since issuance. The current aggregated transaction balance is equal to EUR 58.5 million.

As of April 2020, the transaction is performing below the initial servicer’s expectations. The actual cumulative gross collections equal EUR 27.7 million, whereas the servicer’s initial business plan (Initial BP) estimated cumulative gross collections of EUR 32.5 million for the same period. However, it is important to note that the portfolio performance has recorded an improvement since the first interest payment date (November 2019), when the actual cumulative gross collections were 21.3% below the servicer Initial BP (compared with 14.7% as of April 2020). Additionally, the profitability levels of the transaction on closed receivables recorded so far are positive, with a ratio equal to 137.0% as of 30 April 2020.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 3.6 million at a BBB (low) (sf) stressed scenario and of EUR 4.0 million at a CCC (sf) scenario. All of them are significantly below the actual cumulative gross collections as of April 2020.

The transaction benefits from a cash reserve that was fully funded at closing through interim collections and part of the proceeds from issuance of the Class J notes for an initial amount of EUR 1.9 million (equal to 3% of the initial balance of the Class A notes), which starts amortising after the third payment date (i.e. November 2020). As of the last investor report dated November 2019, the Class A reserve fund amounted to EUR 1.9 million.

The final maturity date of the transaction is 30 November 2039.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp economic contraction, increases in unemployment rates and reduced investment activities. DBRS Morningstar anticipates that collections in European nonperforming loan securitisations will be disrupted in coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from nonperforming loans and the related real estate collateral. On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. For details see the following commentaries: https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit-ratings and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
For more information on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360393/european-npl-transactions-risk-exposure-to-coronavirus-covid-19-effects.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euro unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (22 April 2020).

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 at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include the Issuer and/or its agents, that comprise the latest servicer report as of 30 April 2020, including detailed information on monthly collections and transaction performance data, the updated data tape pertaining to the nonperforming loan portfolio as of 30 April 2020, an updated business plan prepared by Altamira, and the investor report as of the latest interest payment date (i.e. 30 November 2019).

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 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 8 May 2020, when DBRS Morningstar assigned a Negative trend to the ratings of the Class A and Class B notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.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):

-- Recovery Rates Used: Cumulative Base Case Recovery Amount of approximately EUR 67 million at the BBB (low) (sf) stress level, a 5% and 10% decrease of the Cumulative Base Case Recovery Rate.

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A Notes to B (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 A Notes to CCC (sf).

-- Recovery Rates Used: Cumulative Base Case Recovery Amount of approximately EUR 81 million at the CCC (sf) stress level, a 5% and 10% decrease of the Cumulative Base Case Recovery Rate.

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class B Notes to below CCC (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 below CCC (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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 U.S. regulations only.

Lead Analyst: Sebastiano Romano, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 May 2019

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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