DBRS Ratings GmbH (DBRS Morningstar) downgraded its rating on the Class A Notes issued by Prosil Acquisition S.A. (the Issuer) to BB (high) (sf) from BBB (low) (sf). The trend on the rating remains Negative.
The transaction included the issuance of Class A, Class B, Class J, and Class Z Notes (the Notes). The rating of the Class A Notes addresses timely payment of interest and ultimate payment of principal on or before the final legal maturity date. DBRS Morningstar does not rate the Class B, Class J, or Class Z Notes.
The Notes are collateralised by a pool of mostly secured Spanish nonperforming loans. Abanca Corporación Bancaria, S.A. and Abanca Corporación División Immobilaria S.L originated the securitised loans. ProSil Acquisition S.A., Cell Number 1, Cell Number 2, and Cell Number 3 (the Transferor) sold the receivables to ProSil Acquisition S.A., Cell Number 5 (the Issuer). As of closing (March 2019), the gross book value (GBV) of the loan pool was approximately EUR 494.7 million. Cortland Investors II S.à r.l. operates as sponsor and retention holder in the transaction and over time acquired the three portfolios that are part of the pool (Avia, Lor, and Sil). HipoGes Iberia S.L. (HipoGes) services the loans and manages the following Spanish Propcos as at the date of closing: Beautmoon Spain, S.L., Osgood Invest, S.L., Butepala Servicios y Gestiones S.L., and Vetapana Servicios y Gestiones S.L.
The rating downgrade follows the first annual review of the transaction and is based on the following analytical key considerations:
-- Transaction performance: assessment of the portfolio recoveries as of June 2020, with a focus on:
(1) Comparison of actual gross collections and the servicer’s initial business plan forecast;
(2) Recovery performance observed over the last six months including the period following the outbreak of the Coronavirus Disease (COVID-19); and
(3) Comparison of current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: loan pool composition as of April 2020 and evolution of its core features 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 and the Class J Notes will amortise following the repayment of the Class B Notes. Additionally, interest payments on the Class B Notes becomes subordinated to principal payments on the Class A Notes if the Cumulative Collection Ratio or NPV Cumulative Profitability Ratio are lower than 90%. This trigger has been breached on the April 2020 interest payment date (IPD).
-- Liquidity support: The transaction benefits from an amortising Cash Reserve providing liquidity to the structure covering against potential interest shortfall on the Class A Notes and senior fees. The current amount of the Cash Reserve is equal to EUR 7.2 million and the target amount is equal to 4.5% of the Class A notes (EUR 7.65 million at closing).
TRANSACTION AND PERFORMANCE
According to the latest investor report dated 30 April 2020, the principal amount outstanding of the Class A, Class B, Class J, and Class Z Notes was equal to EUR 157.8 million, EUR 30.0 million, EUR 15.0 million and EUR 16.0 million, respectively. The balance of the Class A Notes amortised by approximately 7.2% since issuance.
As of June 2020, the transaction is performing below the initial servicer’s expectations. The actual cumulative gross collections equal EUR 31.7 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 58.3 million for the same period. The Cumulative Net Collection Ratio at 54% is below the 90% trigger level and interest on the Class B Notes has been subordinated to principal payments on the Class A Notes since the April IPD.
In May 2020, HipoGes provided DBRS Morningstar with a reviewed business plan post-coronavirus. In this updated business plan, HipoGes assumed lower recoveries this year and next year as a result of coronavirus uncertainties and further delays in courts because they were closed for three months. The total cumulative gross collections from the updated business plan account for EUR 318.4 million which is 2.1% lower than the EUR 325.4 million expected in the initial business plan.
Without including actual collections, the expected future collections from April 2020 are now accounting for EUR 289.1 million (EUR 284,1 million in the initial business plan). DBRS Morningstar’s BB (high) (sf) rating stress assume a haircut of approximately 20.4% to the Servicer’s Hipoges Iberia S.L. updated business plan.
Although as of June 2020 the transaction was performing above DBRS Morningstar’s initial BBB (low) (sf) rating stress assumptions, the decision to downgrade the rating on the Class A Notes by one notch and retain the Negative trend is based on the observed underperformance of the transaction to date, on the analysis of the updated business plan provided by the servicer in May 2020 as well as DBRS Morningstar’s expectations with regards to Spain’s economy and real estate markets amid COVID-19.
In its rating review, DBRS Morningstar used the Spanish residential market value decline (MVD) rates outlined in the European RMBS Insight: Spanish Addendum methodology published on 10 July 2019. DBRS Morningstar notes that the currently proposed update of Spanish residential MVDs in the European RMBS Insight: Spanish Addendum - Request for Comment methodology published on DBRS Morningstar website on 17 July 2020 are not likely to lead to a further rating action. For details, see the following methodology: https://www.dbrsmorningstar.com/research/364179/european-rmbs-insight-spanish-addendum-request-for-comment.
The final maturity date of the transaction is the 31 October 2039.
DBRS Morningstar analysed the transaction structure using Intex DealMaker.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an 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 incorporated its expectation of a moderate medium-term decline in property prices, but gave partial credit to house price increases from 2023 onwards in noninvestment grade rating stress 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 rating 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 Morningstar 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 this rating include the Issuer and/or its agents, which comprise an updated business plan as of 30 April 2020, detailed servicer report as of June 2020 and monthly investor report dated 30 April 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 this rating 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 rating of the Class A 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 230.3 million at the BB (high) (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 maintain the rating of the Class A Notes at 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 A Notes to B (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: 31 July 2019
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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)
-- European RMBS Insight Methodology (2 April 2020)
-- European RMBS Insight: Spanish Addendum (10 July 2019)
-- European CMBS Rating and Surveillance Methodology (13 December 2019)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020)
-- 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.