DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the following classes of notes issued by European Residential Loan Securitisation 2019-NPL1 DAC (the Issuer):
-- Class A at A (sf)
-- Class B at BBB (high) (sf)
-- Class C at BB (sf)
The trend on all ratings remains Negative.
The transaction represents the issuance of Class A, Class B, Class C, Class P and Class D notes. The rating of the Class A notes addresses the timely payment of interest and ultimate payment of principal on or before the final legal maturity date. The ratings of the Class B and Class C notes address the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class D or Class P notes.
Proceeds from the issuance of the Class A to Class C notes were used to purchase a portfolio mostly comprising first-charge nonperforming Irish residential mortgage loans. As of 31 May 2019, the portfolio had a total outstanding balance of EUR 455.9 million and included part of the receivables securitised in the European Residential Loan Securitisation 2017-NPL1 DAC transaction. The remaining loans were part of the LSF IX Java Investments DAC and LSF IX Paris Investments DAC portfolios. Java Investments acquired the legal and beneficial titles of the loans from Investec Bank plc and Nua Mortgages Limited in September 2014. Paris Investments acquired the legal and beneficial titles of the loans from Bank of Scotland (Ireland) Limited (BoSI) in October 2014.
The mortgage loans were originated by BoSI, Start Mortgages DAC, and Nua Mortgages Limited, and are secured by Irish residential properties. Start Mortgages DAC services the portfolio. Hudson Advisors Ireland DAC was appointed as the issuer administration consultant and as such acts in an oversight and monitoring capacity and provides input on asset resolution strategies.
The rating confirmations follow the first annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of the portfolio recoveries as of 30 June 2020, with a focus on:
(1) Comparison between actual gross collections and servicer initial business plan’s forecast;
(2) Recovery performance observed over the last six months, including the period following the outbreak of the Coronavirus Disease (COVID-19);
(3) Historical collections trend and average pay rate recorded in the last six months; and
(4) Comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: loan pool composition as of 30 June 2020 and evolution of its core features, including the portfolio breakdown by arrears status and the observed increase in the share of reperforming loans since issuance.
-- Transaction liquidating structure: the order of priority entails a fully sequential amortisation of the notes – i.e. the Class B notes will begin to amortise following the full repayment of the Class A notes; the Class C notes will amortise following the repayment of the Class B notes; the Class D and the Class P notes will begin to amortise following the full repayment of all the rated notes. Additionally, the repayment of interest on the Class B notes is fully subordinated to the repayment of both interest and principal on the Class A notes, and the repayment of interest on the Class C notes has a lower ranking to the payments due on the Class B notes.
-- Liquidity support: the transaction benefits from a liquidity structure which entails the existence of three reserve funds available to mitigate temporary collection shortfalls on the payment of (1) senior costs and interest on the Class A notes, (2) interest on the Class B notes, and (3) interest on Class C notes, respectively.
According to the latest investor report dated 24 July 2020, the principal amount outstanding of the Class A, Class B, Class C, Class P, and Class D notes was equal to EUR 189.0 million, EUR 34.2 million, EUR 29.6 million, EUR 38.8 million, and EUR 151.6 million, respectively. The balance of the Class A notes amortised by approximately 6.7% since issuance. The current aggregated transaction balance is equal to EUR 443.2 million.
As of June 2020, the transaction was performing below the initial servicer’s expectations. The actual cumulative gross collections equal EUR 21.2 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 59.8 million for the same period.
Although the transaction is performing above DBRS Morningstar’s expectations as of 30 June 2020, the negative trend assigned to the ratings is retained with a view to closely monitoring the significant underperformance observed thus far compared with the servicer’s business plan, as well as the development of the macroeconomic and real estate scenarios within the current market environment.
The transaction benefits from three reserve funds to support liquidity shortfalls on senior costs, interest due in relation to the rated notes and, ultimately, the repayment of principal on the same, if available:
-- The Class A reserve fund, which was fully funded at closing to an initial amount equal to 6.5% of the Class A notes balance and amortises based on the same;
-- The Class B reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 6.5% of the Class B notes balance; and
-- The Class C reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 10.0% of the Class C notes balance;
Credits to the Class B and C reserves are made outside of the waterfall based on the proceeds of the interest rate cap allocated proportionately to the respective size of the Class B and C notes relative to the cap notional.
According to the investor report dated 24 July 2020, the Class A reserve fund amounted to EUR 12.4 million, which is in line with the target balance, and the Class B and Class C notes reserve fund balance amounted to EUR 1.6 million and EUR 2.0 million, respectively.
The final maturity date of the transaction is 24 August 2056.
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. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar assumed reduced collections for the next two quarters and incorporated its revised expectation of a moderate medium-term decline in residential property prices, albeit partial credit to house price increases from 2023 onwards is given on non-investment grade scenarios.
The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 22 July 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update 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 on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393
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.
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.
All figures are in euros 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/364527/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include the Issuer and/or its agents, which comprise an updated data tape as of 30 June 2020, detailed performance data as of June 2020, and monthly investor report dated 24 July 2020.
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, Class B, and Class C 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 confirm the rating (the Base Case):
-- The expected principal and interest collections in a declining 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 declining interest rate scenario at the BBB (high) (sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collections in a declining interest rate scenario at the BB (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).
-- 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 BBB (low) (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 BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would maintain the rating of the Class C notes at BB (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).
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: David Lautier, Senior Vice President
Initial Rating Date: 29 July 2019
DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
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.dbrsmorningstar.com/about/methodologies
-- Rating European Non-Performing Loans Securitisations (13 May 2020)
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 July 2020)
-- European CMBS Rating and Surveillance Methodology (13 December 2019)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019)
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
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 firstname.lastname@example.org.