Press Release

DBRS Morningstar Upgrades and Confirms Ratings on Retiro Mortgage Securities DAC with Stable Trends

Nonperforming Loans

April 14, 2023

DBRS Ratings GmbH (DBRS Morningstar) took rating actions on the Class A1, Class A2, Class B and Class C notes (the rated notes) issued by Retiro Mortgage Securities DAC (the Issuer) as follows:

-- Class A1 notes confirmed at A (sf)
-- Class A2 notes upgraded to BBB (high) (sf) from BBB (sf)
-- Class B notes upgraded to BB (high) (sf) from BB (sf)
-- Class C confirmed at BB (low) (sf)

All trends are Stable.

The ratings on the Class A1 and Class A2 notes (together, the Class A notes) address the timely payment of interest and the ultimate repayment of principal by the final 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 E notes (together with the rated notes, the notes) also issued in this transaction.

The notes are collateralised by a portfolio of nonperforming loans (NPLs) and real estate owned (REO) assets. As of November 2020, the balance of the loans was EUR 678.4 million. NPLs represented the vast majority of the portfolio by balance (91.9%) while REOs represented more than half of the portfolio by property valuation. The portfolio resulted from the aggregation of four subportfolios (Wind, Tag, Normandia, and Tambo) acquired over time by OCM Luxembourg OPPS X S.à r.l., which operates as the sponsor and retention holder in this transaction. Redwood MS Limited (Redwood) and VicAsset Holdings, LLC (VicAsset) act as the master servicers in this transaction.

RATING RATIONALE
The rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 31 December 2022, focusing on: (1) a comparison between actual collections and the master servicers’ initial business plan forecast; (2) the collection performance observed over recent months; (3) a comparison between the current performance and DBRS Morningstar’s expectations; and (4) the amortisation of the rated notes.
-- Portfolio characteristics: Portfolio composition as of December 2022 and the 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 A2 notes will begin to amortise following the full repayment of the Class A1 notes unless an enforcement notice has been delivered; the Class B notes will begin to amortise following the full repayment of the Class A2 notes; and the Class C notes will begin to amortise following the full repayment of the Class B notes). Moreover, interest on the Class B notes is fully subordinated to the repayment of both interest (including Class A additional note payments) and principal on the Class A notes, and interest payments on the Class C notes are subordinated to the repayment of both interest (including Class B additional note payments) and principal on the Class B notes.
-- Liquidity support: The transaction benefits from an amortising liquidity reserve fund available to mitigate temporary collection shortfalls on the payment of senior costs and interest on the Class A notes, and from separate nonamortising Class B and Class C reserve funds providing liquidity support to the respective classes of notes. The liquidity reserve fund target amount is equal to 5.0% of the Class A notes’ principal outstanding balance and was fully funded as of the January 2023 payment date.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

TRANSACTION AND PERFORMANCE
According to the latest investor report from January 2023, the outstanding principal amounts of the Class A1, Class A2, Class B, Class C, Class D, and Class E notes were EUR 84.6 million, EUR 77.0 million, EUR 34.0 million, EUR 15.0 million, EUR 30.0 million, and EUR 54.0 million, respectively. As of the January 2023 payment date, the balance of the Class A1 notes had amortised by approximately 67.4% since issuance and the current aggregated transaction balance was EUR 294.6 million.

As of December 2022, the transaction was performing below the master servicers’ business plan expectations. The actual cumulative collections (before servicing fees and corporate costs) equalled EUR 200.5 million whereas the master servicers’ initial business plan estimated cumulative collections (before servicing fees and corporate costs) of EUR 326.7 million for the same period. Therefore, as of December 2022, the transaction was underperforming by EUR 126.1 million (-38.6%) compared with the initial business plan expectations. The underperformance relates to the Normandia and Tambo subportfolios.

At issuance, DBRS Morningstar estimated cumulative collections (before servicing fees and corporate costs) for the same period of EUR 126.7 million at the A (sf) stressed scenario, EUR 136.4 million at the BBB (high) (sf) stressed scenario, EUR 154.1 million at the BB (high) (sf) stressed scenario, and EUR 163.8 million at the BB (low) (sf) stressed scenario. Therefore, as of December 2022, the transaction was overperforming compared with DBRS Morningstar’s initial stressed expectations.

Without including actual collections, the master servicers’ expected collections (before servicing fees and corporate costs) from January 2023 are EUR 317.8 million. The updated DBRS Morningstar A (sf), BBB (high) (sf), BB (high) (sf), and BB (low) (sf) rating stresses assume haircuts of 29.7%, 25.5%, 15.9%, and 12.1% to the master servicers’ executed business plans, respectively, considering future expected collections (before servicing fees and corporate costs).

The final maturity date of the transaction is in July 2075.

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.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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/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, Redwood, VicAsset, and Citibank, N.A. which comprise, in addition to the information received at issuance, the investor report as of January 2023 and the loan-by-loan data as of December 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 14 April 2022, when DBRS Morningstar removed its ratings on the rated notes from Under Review with Positive Implications, where they were placed on 15 March 2022, and confirmed the Class A1, Class A2, Class B, and Class C ratings at A (sf), BBB (sf), BB (sf), and BB (low) (sf), respectively.

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 with the parameters used to determine the rating (the base case):

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 223.5 million, EUR 236.7 million, EUR 267.2 million, and EUR 279.2 million at the A (sf), BBB (high) (sf), BB (high) (sf), and BB (low) (sf) stress levels, respectively, a 5% and a 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 confirmation of the Class A1 notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A1 notes at A (sf).

-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class A2 notes at BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A2 notes at BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class B notes at BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class B notes at BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class C notes at BB (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 C notes to B (high) (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 31 March 2021

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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