DBRS Morningstar Assigns Rating of BBB (sf) with Stable Trend to Titan Financing S.à r.l.

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of BBB (sf) with a Stable trend to the Class A notes issued by Titan Financing S.à r.l. (the Issuer). DBRS Morningstar did not rate the Class Z 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 notes are collateralised by a pool of Cypriot nonperforming loans (NPLs) initially originated by Bank of Cyprus Public Limited Company (BoC) and real estate owned properties (REOs). As of August 2022, the total exposure of the portfolio was approximately EUR 1.0 billion. Most of the portfolio relates to NPLs secured over Cypriot real estate collateral, with an aggregated open market value (OMV) of EUR 472.9 million (including only first-lien properties), as well as REOs with an OMV of EUR 146.5 million.. The properties are concentrated in Nicosia and Limassol districts, the two most stable areas in Cyprus in terms of real estate market.

The portfolio was sold by BoC to B4 Galium Holding S.à r.l. (the sponsor). In January 2023, servicing for the portfolio will transfer from BoC to Themis Portfolio Management Limited (the servicer), an affiliate of the sponsor and the Cypriot credit acquiring company (Themis Portfolio (H3) Management Holdings Limited, the CyCAC).

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

The final maturity date of the transaction is March 2067.

RATING RATIONALE
The credit rating is based on the following analytical considerations:
(1) The transaction’s capital structure, and the form and sufficiency of the available credit enhancement.

(2) The credit quality of the receivables portfolio and the ability of the servicer to perform collections and resolution activities.

(3) The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents.

(4) Actual collections: Collections from the cut-off date until the closing date are not part of the available funds.

(5) Portfolio composition: The portfolio is mostly composed of NPLs secured over residential real estate collateral (83.9% of total OMV) used as a first residence (77.2% of total OMV).

(6) Liquidity support: The transaction benefits from liquidity support provided by a EUR 15.2 million (5.75% of the Class A notes initial balance) liquidity reserve funded through the issuance of the notes. The liquidity reserve is amortising with a target balance equal to 5.75% of the Class A notes’ outstanding balance. The reserve is available to cover any shortfall on interest payments due on the Class A notes and senior fees.

(7) Cash leakage to the subordinated notes and cash sweep event which provides relatively less protection to senior noteholders than in other European NPL securitisations: If no cash sweep event occurs, then 20% of the available funds will be used to pay interest and principal on the Class Z notes. If a cash sweep event occurs, then the transaction benefits from sequential amortisation where the Class Z notes will begin to amortise only following the full repayment of the Class A notes. A cash sweep event occurs if any of the following events has occurred and is continuing on the calculation date immediately prior to such interest payment date (IPD):
-- An event of default;
-- A servicer termination event;
-- Following any amortisation on an IPD, the Class A notes' principal amount outstanding is greater than the target senior note amount (sized such that it is breached when the servicer’s business plan is approximately 30.0% behind expectations in terms of collections) in respect of such IPD;
-- The Class Z notes' principal amount outstanding is, as at that relevant date, less than 10% of the Class Z notes' principal amount outstanding on the closing date; or
-- The value of the remaining properties is 10% or less than the value of the properties on the closing date.

(8) Fixed coupon: The coupon payable on the notes is fixed, which nullifies any risk linked to a floating rate and a potential rise affecting the Issuer’s ability to meet interest payments on the Class A notes.

(9) The sovereign rating on the Republic of Cyprus, which DBRS Morningstar rates at BBB and R-2 (high) with Stable trends as of the date of this press release.

(10) The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its rating on an analysis of the projected recoveries of the underlying collateral, the historical performance, the servicer’s expertise, the availability of liquidity to fund interest shortfalls and expenses, and the transaction’s legal and structural features. The servicer’s recovery expectation in terms of gross collections for the portfolio (business plan) is approximately EUR 500.4 million. DBRS Morningstar’s BBB (sf) rating stress assumes a haircut of approximately 37.0% to the servicer’s business plan. Hence DBRS Morningstar analysis assumes a cash sweep event early during the life of the transaction and the credit rating assigned to the Class A notes is sensitive to scenarios of back-loaded performance deterioration where cash is initially leaked to the Class Z notes.

Citibank Europe plc, Luxembourg Branch has been appointed to act as the Issuer transaction account bank for the transaction. Based on DBRS Morningstar’s private ratings on Citibank Europe plc, Luxembourg Branch and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the Issuer transaction account bank to be consistent with the ratings assigned, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The Coronavirus Disease (COVID-19) pandemic 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 in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating 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 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 this rating include a loan data tape as of the cut-off date (31 August 2022), historical sales data, and the portfolio business plan provided by Morgan Stanley & Co. International plc, the arranger.

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

DBRS Morningstar was supplied with one or more 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 315 million at the BBB (sf) stress level, respectively, and 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 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 BB (sf).

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: Christian Aufsatz , Managing Director
Initial Rating Date: 18 November 2022

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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Nonperforming Loans Securitisations (6 May 2022),
https://www.dbrsmorningstar.com/research/396256/rating-european-nonperforming-loans-securitisations.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- European CMBS Rating and Surveillance Methodology (17 December 2021),
https://www.dbrsmorningstar.com/research/389947/european-cmbs-rating-and-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.