Press Release

DBRS Morningstar Assigns Provisional Credit Ratings to Finance Ireland RMBS No. 6 DAC

RMBS

September 08, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional credit ratings to the residential mortgage-backed notes to be issued by Finance Ireland RMBS No. 6 DAC (the Issuer) as follows:

-- Class A: AAA (sf)
-- Class B: AA (high) (sf)
-- Class C: AA (low) (sf)
-- Class D: BBB (high) (sf)
-- Class E: BB (sf)

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

DBRS Morningstar does not rate the Class X, Class Y, and Class Z notes also expected to be 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 owner-occupied (OO) mortgage loans secured over properties located in Ireland. The majority of the mortgage loans included in the portfolio were originated by Finance Ireland Credit Solutions DAC (Finance Ireland; the originator), however, a subset of these have been originated by Pepper Finance Corporation (Ireland) DAC (Pepper; the servicer) and have been subsequently sold to Finance Ireland on December 2018 together with the corresponding legal titles.

This is the sixth securitisation from Finance Ireland, following Finance Ireland RMBS No. 5 (Finance Ireland 5), which closed in October 2022. The initial mortgage portfolio consists of EUR 241 million of first-lien mortgage loans collateralised by OO residential properties in Ireland. The mortgages were mostly granted between 2019 and 2023, with a few cases dating back to 2016.

The mortgage loans will be serviced by Pepper. DBRS Morningstar reviewed both the originator and the servicer via an online meeting in July 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. Intertrust Management Ireland Limited will act as the back-up servicer facilitator.

As of 31 August 2023, all of the loans in the portfolio repay on an annuity basis. Only 1.9% of the loans in the mortgage portfolio were in arrears at closing with a portion of 0.3% being more than one month in arrears.

Liquidity in the transaction is provided by the general reserve fund (GRF), which the Issuer can use to cover any shortfalls in interest payments for the rated notes (as long as no debit balance remains on principal deficiency ledgers). Liquidity for the Class A notes will be further supported by a liquidity reserve fund (LRF), to be fully funded at closing and then amortising in line with the referred class of notes, which shall also feature a floor of EUR 1.4 million. The notes' terms and conditions allow interest payments, other than on the Class A, Class B, and Class C notes when they are the most senior notes outstanding, to be deferred if the available funds are insufficient.

Credit enhancement for the Class A notes is calculated at 8.74% and is provided by the subordination of the Class B to Class E notes, the Class Z notes, and the reserve funds. Credit enhancement for the Class B notes is calculated at 5.49% and is provided by the subordination of the Class C to Class E notes, the Class Z notes, and the reserve funds. Credit enhancement for the Class C notes is calculated at 3.74% and is provided by the subordination of the Class D to Class E notes, the Class Z notes, and the reserve funds. Credit enhancement for the Class D notes is calculated at 2.49% and is provided by the subordination of the Class E notes, the Class Z notes, and the reserve funds. Credit enhancement for the Class E notes is calculated at 1.49% and is provided by the subordination of the Class Z notes, and the reserve funds.

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 in line with increases in the number of months in a loan’s arrears status. 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.

In order to hedge against the possible variance between the fixed rates of interest payable on the fixed-rate loans in the portfolio and the interest rate under the notes calculated by reference to the three-month Euribor, the Issuer will enter into a fixed-to-floating interest rate swap transaction with BofA Securities Europe SA (privately rated by DBRS Morningstar). The Issuer can restructure the hedging agreement to increase the notional of the original swap agreement in order to hedge the exposure to additional fixed-rate loans resulting from product switches and further advances before the step-up date. For the increased portion of the notional, the Issuer will pay the prevailing mid-market swap rate on the swap determination date following the collection period during which the switch to the fixed rate occurred. The fixed-rate loans are subject to a floor of 1.5% margin over the prevailing mid-market swap rate at the time of switch/reset, less any applicable swap adjustment charges. DBRS Morningstar modelled a locked-in post-swap margin of 1.5% minus a swap adjustment charge for all loans that reset to a new fixed rate or switch to a fixed rate before the step-up date. To hedge the floating-rate portion of the portfolio, the loans that are currently paying a standard variable rate (SVR) rate, revert to SVR, or switch to SVR are subject to a minimum rate of one-month Euribor (floored at zero) plus 2.4%.

Borrower collections are held with the Governor and Company of the Bank of Ireland and The Allied Irish Banks, p.l.c. (both rated by DBRS Morningstar with a long-term Critical Obligations Rating of A (high), Stable trend) and are deposited on the next business day into the Issuer transaction account held with Elavon Financial Services DAC, UK Branch (Elavon). DBRS Morningstar’s private rating on Elavon in its role as the Issuer Account Bank is consistent with the threshold for the account bank outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the 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 Methodology: Irish Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, and Class E 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 rated 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 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-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 credit rating is: “European RMBS Insight Methodology”, https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology (27 March 2023).

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 Finance Ireland and its representatives. DBRS Morningstar was provided with loan-level data for the mortgage loans as of 31 August 2023 and historical performance data which included data on borrower paid amounts, principal amounts, arrears, scheduled monthly payments, days past due, and additional information such as origination date and loan amount, loan status, pool, occupancy type, rate type and reversion date. The data covered the period April 2016 to April 2023, and was reported on a monthly basis.

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 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 expected-to-be-issued new financial instruments. These are the first DBRS Morningstar credit ratings on these financial instruments.

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

-- In respect of the Class A notes, a PD of 16.1% and an LGD of 29.1% 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 14.2% and an LGD of 24.4% corresponding to the AA (high) (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 11.7% and an LGD of 22.3% 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 D notes, a PD of 6.4% and an LGD of 11.9% corresponding to the BBB (high) (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 2.8% and an LGD of 10.5% corresponding to the BB (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 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 AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

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

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

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: André Soutinho, Senior Analyst
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 8 September 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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