DBRS Morningstar Assigns Ratings to Burlington Mortgages No.2 DAC

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings of AAA (sf) to both the Class A1 and Class A2 Notes issued by Burlington Mortgages No.2 DAC (the Issuer or Burlington).

DBRS Morningstar does not rate the Class Z, Class R1A, Class R1B, Class R2A, and Class R2B Notes also issued in this transaction.

The ratings on the Class A1 and Class A2 Notes address the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in September 2062.

The transaction is a securitisation collateralised by a portfolio of owner-occupied (OO) residential mortgage loans granted by EBS DAC (EBS) and its fully owned subsidiary, Haven Mortgages Limited (Haven) in Ireland. Both originators – which are also the sellers in the transaction – are part of the Allied Irish Bank, p.l.c. (AIB) banking group.

The Issuer issued three tranches of collateralised mortgage-backed securities to finance the purchase of the mortgage portfolio. A liquidity reserve fund (LRF), which provides liquidity support to the rated notes, was fully funded at closing through a subordinated loan provided by the two sellers.

The two sellers act as servicers of the transaction and will retain a pool of randomly selected mortgages accounting for at least 5% of the nominal value of the securitised portfolio, where such non-securitised loans would otherwise have been securitised in the transaction. The transaction is compliant with Simple, Transparent, and Standardised securitisation requirements.

As of 31 March 2023, the initial portfolio consisted of 34,440 loans with an aggregate principal balance of EUR 5.08 billion. EBS originated the majority of the loans by balance (77.7%) and Haven originated the rest (22.3%). The transaction portfolio comprises both recent originations and loans originated before the sovereign debt crisis of 2010 (45.5%), with a weighted-average (WA) seasoning of 8.4 years and a WA remaining term of 21.1 years. However, the loans included in the pool survived the economic downturn without ever being restructured and therefore are a positive selection of these seasoned vintages. Original loan-to-values (OLTVs) were not materially higher for pre-2010 vintages compared with more recently originated loans.

The origination quality of the pool is strong across vintages because of the borrowers’ prime feature (95% full-time employees, 100% purchase purpose) and the prudent lending decisions underpinned by full valuation reports and a DBRS-computed WA original loan-to-value of 76.9%.

The transaction features a 24-month revolving period during which time the Issuer may acquire additional loans from the sellers subject to the availability of principal collections and eligibility criteria and as long as no revolving period termination event has occurred. The purchase of additional loans will be subject to the eligibility criteria of the loan agreements on each purchase date, the additional loan conditions, as well as revolving period termination events.

The transaction benefits from an initial portfolio all-in rate of 2.99%. However, the transaction does not include any covenant on the minimum standard variable rate (SVR) to be paid by the portfolio, and there is no swap agreement in place to hedge against the SVR compression over the life of the transaction. Therefore, portfolio margins may be compressed in an increasing rate scenario. The transaction does not include limits to the product switches that the servicer can grant, meaning the borrowers can opt to switch to a fixed rate at any time. The transaction does not include a limit of the fixed rate exposure in the portfolio. Since the initial notes balance paying a fixed-rate coupon is 67.0%, the transaction may lack an effective hedge in some scenarios.

The notes are paid down sequentially on a quarterly basis, which allows credit enhancement for the more senior notes to build up over time as the notes amortise. The Class A1 and Class A2 Notes pay interest pari passu and pro rata but the Class A2 Notes are time-subordinated to the Class A1 Notes since the Class A1 Notes amortise principal in priority to the Class A2 Notes until the full redemption of the Class A1 Notes.

The transaction benefits from a funded liquidity reserve to cover interest shortfalls on the rated notes. Moreover, principal can be drawn to cover interest on the rated notes, thus further decreasing the risk of a default on the timely interest payment of the rated notes.

RATING RATIONALE
DBRS Morningstar based its ratings on the following analytical considerations:
--The transaction capital structure, and form and sufficiency of available credit enhancement to support DBRS Morningstar-projected expected cumulative losses under various stressed scenarios.
--The credit quality of the portfolio and DBRS Morningstar’s qualitative assessment of the originators’ capabilities with regard to originations, underwriting, and servicing.
--The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes. The ratings on the Class A1 and Class A2 Notes address the timely payment of interest and the ultimate repayment of principal on or before the final maturity date.
--The transaction parties’ financial strength in order to fulfil their respective roles.
--The transaction’s legal structure and its consistency with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, as well as the presence of the appropriate legal opinions that address the assignment of the assets to the Issuer.
--The sovereign rating on the Republic of Ireland at AA (low) with a Stable trend as of the date of this press release.

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, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (28 November 2022);
https://www.dbrsmorningstar.com/research/405779/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.

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 principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 loan-by-loan data as of 31 March 2023 provided by the originators.

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 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 the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

The probability of default (PD) and loss given default (LGD) assumptions at the AAA (sf) stress scenario of 19.2% and 57.9%, respectively.

Class A1 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class A2 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (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: Ronja Dahmen, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director, Head of European RMBS and Covered Bonds
Initial Rating Date: 17 April 2023

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.

-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions
-- 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
-- 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
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (28 November 2022) and European RMBS Credit Model v 1.0.0.0, https://www.dbrsmorningstar.com/research/405779/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda

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.