Press Release

DBRS Morningstar Assigns Ratings of AA (low) (sf) and A (sf) to PRPM Lagado 2022-1 DAC, Stable Trends

Nonperforming Loans

November 04, 2022

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to the following classes of notes issued by PRPM Lagado 2022-1 DAC (the Issuer):

-- Class A Notes at AA (low) (sf)
-- Class B Notes at A (sf)

All trends are Stable.

DBRS Morningstar does not rate the Class Z Notes (together with Class A and Class B Notes, the Notes) also issued in the transaction.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final legal maturity date. The rating on the Class B Notes addresses the ultimate payment of interest and principal by the final legal maturity date. DBRS Morningstar’s ratings do not address additional note payments (as defined in the transaction documents).

The transaction benefits from an amortising Class A reserve fund that provides liquidity support to the Class A Notes as well as principal support at maturity, if available.

The Issuer will use proceeds from the issuance of the Notes to purchase first-charge nonperforming and reperforming Irish (mainly) residential mortgage loans portfolio (the portfolio).

Various Irish banks including GE Capital Woodchester Home Loans Limited; Bank of Scotland Ireland; Irish Nationwide Building Society; Anglo Irish Bank; KBC Bank; Allied Irish Banks, p.l.c.; and Danske Bank A/S (together, the original lenders) originated the portfolio. The original lenders sold the loans in various closings to vehicles controlled by different investment funds between 2012 and 2018 (the original acquisitions). Subsequently, in 2020 and 2021, these investment funds sold the loans to the current transaction’s seller and, consequently, this is considered a secondary trade transaction.

After the original acquisitions, Pepper Finance Corporation (Ireland) DAC (Pepper) conducted the servicing and administration activities and remained administrator after closing. Mars Capital Finance Ireland DAC (Mars) also entered into an administration agreement with the Issuer at closing and acts as backup servicer to the transaction.

The portfolio’s total gross book value as of the 31 July 2022 cut-off date was EUR 690.5 million, composed mainly of secured residential loans held by individuals.

The final maturity date of the transaction is October 2075.

RATING RATIONALE
The ratings are based on the following analytical considerations:
-- Transaction structure: The transaction’s capital structure and form and sufficiency of the available credit enhancement.
-- Portfolio composition: The portfolio’s credit quality and Pepper’s and Mars’ ability to perform collections and resolution activities. DBRS Morningstar estimated the expected collections from the mortgage loans based on the proposed recovery strategies and used them as an input into the cash flow analysis.
-- Recovery stresses: The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents.
-- Actual collections: Actual gross collections from the cut-off date to 15 October 2022 were EUR 5.2 million and will be part of the Issuer’s available funds on the first interest payment date (IPD).
-- Liquidity support: The notes benefit from the liquidity support provided by the EUR 8.15 million Class A liquidity reserve. The cash reserve is amortising with a target balance equal to 6.2% of the Class A Notes’ balance at closing and with a variable target schedule for the first 12 IPDs and 4.0% thereafter. The reserve is available to cover Class A interest and precedent items in the waterfall. The amounts released from the liquidity reserve on each IPD will be part of the available funds.
-- Sequential amortisation: The Class B Notes will begin to amortise following the full repayment of the Class A Notes.
-- Liquidating structure: Class B interest will be subordinated to principal payments on the Class A Notes if a Class B subordination event occurs, defined as the cumulative collection ratio and the net present value (NPV) ratio falling below 90%.
-- Second servicer: The current administrator and legal titleholder of all the loans in the portfolio is Pepper, which will be retained as administrator at closing; however, the Issuer has the right, but not the obligation, to transfer the administration and the legal title to certain loans to Mars from Pepper in accordance with the terms of the Pepper administration agreement.
-- Portfolio sales: The initial optionholder will be authorised to instruct Pepper and/or Mars, on the Issuer’s behalf, to provide reasonable assistance to the sale of part of the portfolio to a third party. The net sale proceeds will become Issuer available funds. For the sale of the first 20% of the total portfolio value (as defined by the NPV of its total future net cash flows), the minimum price established in the documents is 86% of the loan’s value (defined by the NPV of the loans future net cash flows). For sales of more than 20% of the total portfolio value, the minimum price is 100% of the loan’s value. The applicable discount rate for the NPV calculations is 7%.
-- Interest rate cap agreement: At closing, the Issuer entered into an interest rate cap agreement terminating in October 2025. The interest rate cap fees will be paid in full on the closing date and, in return, the Issuer will receive payments to the extent that the one-month Euribor rate is higher than 4% (the strike rate). The initial notional balance of the interest rate cap is equal to the sum of Class A and Class B Notes’ balances, and the Issuer can unwind any balance surplus on any IPD, so the notes are fully hedged at all times.
-- Coupon cap rate: The coupons on the Class A and Class B Notes are subject to a cap from the October 2027 IPD onward.
-- The sovereign rating on the Republic of Ireland, which DBRS Morningstar currently rates at AA (low) and R-1 (middle) with Stable trends as of the date of this press release.
-- The expected consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

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 19 September 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/402907/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-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/402357 and https://www.dbrsmorningstar.com/research/360393.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transaction structure using Intex DealMaker, considering the stresses at which the rated notes did not return all the specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating European Nonperforming Loans Securitisations” (6 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.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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/401817/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, Pepper, Mars, and J.P. Morgan SE, which comprise the data tape as of 31 July 2022; a business plan; and servicer historical repossession and sale data.

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit 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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on credit ratings, DBRS Morningstar considered the following stress scenarios as compared to the parameters used to confirm ratings (the base case):

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 191.5 million at the AA (low) (sf) stress level and approximately EUR 216.7 million at the A (sf) stress level, a 5% and 10% decrease in the 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 A (sf) and Class B Notes would be confirmed at A (sf) rating level.
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to downgrades of the Class A and B Notes to A (sf) and BBB (high) (sf), respectively.

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: Alberto Cruces de la Rosa, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 4 November 2022

DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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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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