Press Release

DBRS Morningstar Finalises Provisional Credit Ratings on Dilosk RMBS No. 7 DAC

RMBS

August 03, 2023

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional credit ratings on the residential mortgage-backed notes issued by Dilosk RMBS No. 7 DAC (the Issuer) as follows:

-- Class A notes at AAA (sf)
-- Class B notes at AA (low) (sf)
-- Class C notes at A (sf)
-- Class D notes at BBB (sf)
-- Class E notes at BB (sf)
-- Class F notes at B (low) (sf)
-- Class X1 notes at CCC (sf)

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal. The credit rating on the Class B notes addresses the timely payment of interest once they are the most senior class of notes outstanding and the ultimate repayment of principal on or before the final maturity date. The credit ratings on the Class C, Class D, Class E, Class F, and Class X1 notes address the ultimate payment of interest and principal.

DBRS Morningstar does not rate the Class X2 and Class Z notes also issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the Republic of Ireland. The Issuer will use the proceeds of the notes to fund the purchase of prime and performing Irish buy-to-let (BTL) mortgage loans secured over properties located in Ireland. The majority of the mortgage loans included in the portfolio were originated by Dilosk DAC (Dilosk; the originator, seller, and servicer) in the past six years; however, a small subset corresponds with more seasoned loans from a portfolio that Dilosk acquired from the Governor and Company of the Bank of Ireland in 2014.

This is the seventh securitisation from Dilosk, following Dilosk RMBS No. 6 (STS) DAC, which closed in April 2023. The initial mortgage portfolio consists of EUR 202 million of first-lien mortgage loans collateralised by BTL residential properties in Ireland. The mortgages were mostly granted between 2017 and 2022, except for the portion corresponding with the previously acquired portfolio.

The mortgage loans will be serviced by BCMGlobal ASI Limited (BCMGlobal), trading as BCMGlobal, in its role as delegated servicer. DBRS Morningstar reviewed both the originator and servicer via an email update in February 2023. Underwriting guidelines are in accordance with market practices observed in Ireland and are subject to the Central Bank of Ireland’s macroprudential mortgage regulations, which specify restrictions on certain lending criteria. CSC Capital Markets (Ireland) Limited will act as the backup servicer facilitator.

As of 30 June 2023, a large proportion of the loans in the portfolio (55.6% in terms of outstanding balance) repays on an interest-only basis. Only 0.6% of the loans in the mortgage portfolio were in arrears at cut-off with a portion of 0.1% being more than one month in arrears.

Liquidity in the transaction is provided by the non-amortising general reserve fund, which the Issuer can use to pay senior costs and interest on the rated notes but also to clear principal deficiency ledger balances. Liquidity for the Class A notes will be further supported by a liquidity reserve fund, fully funded at closing and then amortising in line with the referred class of notes, which shall also feature a floor of 75% of its initial balance at closing. The notes’ terms and conditions allow interest payments, other than on the Class A notes and on the Class B notes when they are the most senior class of notes outstanding, to be deferred if the available funds are insufficient.

Credit enhancement for the Class A notes is calculated at 10.86% and is provided by the subordination of the Class B to Class F notes and the general reserve fund. Credit enhancement for the Class B notes is calculated at 7.86% and is provided by the subordination of the Class C to Class F notes and the general reserve fund. Credit enhancement for the Class C notes is calculated at 4.36% and is provided by the subordination of the Class D to Class F notes and the general reserve fund. Credit enhancement for the Class D notes is calculated at 2.36% and is provided by the subordination of the Class E to Class F notes and the general reserve fund. Credit enhancement for the Class E notes is calculated at 1.11% and is provided by the subordination of the Class F notes and the general reserve fund. Credit enhancement for the Class F notes is calculated at 0.36% and is provided by the general reserve fund.

A key structural feature is the provisioning mechanism in the transaction that is linked to the arrears status of a loan besides the usual provisioning based on losses. The degree of provisioning increases with the increase in number-of-months-in-arrears status of a loan. This is positive for the transaction, as provisioning based on the arrears status traps any excess spread much earlier for a loan that may ultimately end up in foreclosure.

Payments are made directly by the borrowers via direct debit, standing order, or cheque, unless otherwise agreed, into a collection account held at the BNP Paribas, Dublin Branch. The amounts in the collections account will be transferred to the Issuer account at least twice every week. DBRS Morningstar’s private rating on BNP Paribas, Dublin Branch in its role as Account Bank is consistent with the threshold for the account bank as outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the credit ratings assigned to the notes.

DBRS Morningstar based its credit ratings on a review of the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio. DBRS Morningstar uses the PD, LGD, and ELs as inputs into the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with DBRS Morningstar’s “European RMBS Insight: Irish Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E, Class F, and Class X1 notes according to the terms of the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker.
-- The sovereign rating of AA (low) with a Stable trend (as of the date of this press release) on the Republic of Ireland.
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

DBRS Morningstar’s credit rating on the Class A, Class B, Class C, Class D, Class E, Class F, and Class X1 notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Interest Payment Amounts and the related Class Balances.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784.

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 credit rating is: “European RMBS Insight Methodology” (27 March 2023), https://www.dbrsmorningstar.com/research/411634.

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.

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.

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.

The sources of data and information used for these credit ratings include those provided by Dilosk and its representatives. DBRS Morningstar was provided with loan-level data for the mortgage loans as of 30 June 2023 and historical performance data (delinquencies and prepayment data) covering the period from April 2017 to March 2023.

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

At the time of the initial credit rating, 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 credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

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

These are the first credit rating actions since the Initial Rating Date.

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

-- In respect of the Class A notes, a PD of 27.5% and an LGD of 26.8% corresponding to the AAA (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B notes, a PD of 20.3% and an LGD of 20.5% corresponding to the AA (low) (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C notes, a PD of 16.0% and an LGD of 15.4% corresponding to the A (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D notes, a PD of 10.1% and an LGD of 10.1% corresponding to the BBB (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E notes, a PD of 4.4% and an LGD of 10.0% corresponding to the BB (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F notes, a PD of 0.7% and an LGD of 10.0% corresponding to the B (low) (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class X1 notes, a PD of 0.3% and an LGD of 10.0% corresponding to the CCC (sf) rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A 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 AA (high) (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 (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class D Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Class E Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD, expected rating of BB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

Class F Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (sf)

Class X1 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD, expected rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (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://registers.esma.europa.eu/cerep-publication/. 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 credit 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
Initial Rating Date: 11 July 2023

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The credit 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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