Press Release

DBRS Morningstar Changes Trend on European Residential Loan Securitisation 2019-NPL1 DAC to Positive from Stable, Confirms Ratings

Nonperforming Loans

June 24, 2022

DBRS Ratings GmbH (DBRS Morningstar) changed the trend on the notes issued by European Residential Loan Securitisation 2019-NPL1 DAC (the Issuer) to Positive from Stable and confirmed the ratings as follows:

-- Class A confirmed at A (sf)
-- Class B confirmed at BBB (high) (sf)
-- Class C confirmed at BB (high) (sf)

The transaction represents the issuance of Class A, Class B, Class C, Class P, and Class D notes. The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before the final legal maturity date. The ratings on 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.

The Issuer used proceeds from the issuance of the Class A to Class C notes 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 transaction. The remaining loans were part of the LSF IX Java Investments DAC (Java Investments) and LSF IX Paris Investments DAC (Paris Investments) portfolios. Java Investments acquired the legal and beneficial titles of the loans from Investec Bank plc and Nua Mortgages Limited (Nua Mortgages) 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 (Start Mortgages), and Nua Mortgages. Start Mortgages also 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.

RATING RATIONALE
The confirmations follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: Assessment of the portfolio recoveries as of April 2022, with a focus on: (1) Comparison between 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); (3) The ratio Class A to portfolio total outstanding balance, which has reduced from 44% at issuance to 35% as of April 2022; (4) Historical collections trend and average pay rate recorded in the last six months; and
(5) Comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: Loan pool composition as of 30 April 2022 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 despite the disposal of a portion of the underlying pool of receivables in October 2020.
-- 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; and the Class D and the Class P notes will begin to amortise following the full repayment of all the rated notes (except for cases in which the Class B, Class C, and Class P notes may receive excess amounts from portfolio sales). 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.

TRANSACTION AND PERFORMANCE
According to the latest investor report dated 24 May 2022, the principal amount outstanding on the Class A, Class B, Class C, Class P, and Class D notes was equal to EUR 106.0 million, EUR 31.3 million, EUR 26.7 million, EUR 38.2 million, and EUR 151.6 million, respectively. The balance of the Class A, Class B, Class C, and Class P notes amortised by approximately 47.4%, 8.6%, 9.9%, and 1.4%, respectively, since issuance. The current aggregated transaction balance is equal to EUR 353.8 million.

As of May 2022, the transaction was performing below the servicer’s initial expectations. The actual cumulative gross collections were equal to EUR 117.5 million whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 165.7 million for the same period.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 92.5 million at the A (sf) stressed scenario, EUR 107.1 million at the BBB (high) stressed scenario, and EUR 152.4 million in the BB (sf) stress scenario for the same period.

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 rated notes, 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 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 May 2022 investor report, the Class A reserve was fully funded, the Class B reserve had an outstanding balance of EUR 0.6 million, and the Class C reserve had an outstanding balance of EUR 0.5 million.

The final maturity date of the transaction is 24 August 2056.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in commercial real estate prices for certain property types.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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/384146 and https://www.dbrsmorningstar.com/research/360393.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/396929.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include the Issuer, Hudson Advisors Ireland DAC, and U.S. Bank Global Corporate Trust which comprise, in addition to the information received at issuance, the investor report as of May 2022 as well as the loan-by-loan report as of April 2022.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, 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 21 July 2021, when DBRS Morningstar confirmed its ratings on Class A and Class B at A (sf) and BBB (high) (sf), respectively, as well as upgraded its rating on Class C to BB (high) (sf) from BB (sf). DBRS Morningstar also changed the trends on all classes of notes to Stable from Negative.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the ratings (the base case):

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

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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 1 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: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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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