DBRS Assigns Provisional Ratings to Grand Canal Securities 2 DAC

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following classes of Notes issued by Grand Canal Securities 2 DAC (the Issuer):

-- Class A at A(sf)
-- Class B at BBB(low)(sf)
-- Class C at BB(low)(sf)
-- Class D at B(low)(sf)

The ratings are based on the following analytical considerations:
-- Transaction capital structure, form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer and master servicer to perform collection and resolution activities. DBRS stressed the expected collections from the mortgage portfolio based on the Business and Resolution strategies. The expected collections are used as an input into the cash flow model. The mortgage portfolio was analysed in accordance with DBRS’s “Rating European Non-Performing Loan Securitisations” and “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” methodologies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Rated Notes according to the terms of the transaction documents. The transaction cash flows were modelled using the expected collection from the mortgage loans. The transaction structure was analysed using Intex DealMaker.
-- The most current sovereign rating of the Republic of Ireland rated A(high)/R-1(middle)/Stable as of the date of this report.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer are consistent with DBRS’s Legal Criteria for European Structured Finance Transactions methodology.

The rating on the Class A Notes addresses timely payment of interest and ultimate payment of principal. The ratings on the Class B, Class C and Class D Notes address the ultimate payment of interest and principal. The Class E, Class P and Class F Notes are unrated. If interest payments on the Class B, Class C or Class D notes are deferred, the transaction will not result in default regardless of whether or not the respective note is the most senior outstanding.

The transaction benefits from four reserve funds: the Class A Reserve Fund, the Class B Reserve Fund, the Class C Reserve Fund and the Class D Reserve Fund. The Class A Reserve Fund will have an initial balance equal to 3.0% of the Class A Notes and can amortise to 3.0% of the outstanding balance of the Class A Notes. The Class B Reserve Fund will be funded to an initial balance of 7.0% of the outstanding balance of the Class B Notes; it does not have a target balance. The Class C Reserve Fund will be funded to an initial balance of 12.0% of the outstanding balance of the Class C Notes; it also does not have a target balance. The Class D Reserve Fund will be funded to an initial balance of 15.0% of the outstanding balance of the Class D Notes; it does not have a target balance. Credits to the Class B, C and D reserves will be made outside of the waterfall based on the proceeds of the interest rate cap allocated proportionately to the respective size of the Class B, C and D Notes relative to the cap notional.

Proceeds from the issuance of the Class A to E Notes will be used to purchase the beneficial title and trust (from trust loans) of first charge (including subsequent charges) performing and non-performing Irish residential mortgage loans. The mortgage loans were originated by Irish Nationwide Building Society (INBS) and Springboard Mortgages Limited (Springboard) and are secured by Irish residential properties. INBS was effectively nationalised in August 2010 following a state bailout. In 2011, INBS, under state-ownership, merged with Anglo Irish Bank to form the Irish Banking Resolution Corporation (IBRC). In February 2013, IBRC was put into special liquidation by the Irish government as part of its strategy to resolve legacy bank assets. The mortgage loans were acquired by Mars Capital through the legal title holders in March and February 2015. Springboard was founded in 2006 as a joint venture between Permanent TSB and Merrill Lynch, with Permanent TSB taking full control of Springboard in 2008. Mortgage loans originated by Springboard loans were acquired by the legal title holder in October 2014.

Approximately 1.1% of the mortgage portfolio consists of mortgage loans that cannot be transferred to the issuer. The legal title holders, Mars Capital Ireland DAC, Mars Capital Ireland DAC 3 and Mars Capital Ireland DAC 4, will provide a declaration of trust over these mortgage loans in favour of the beneficial title seller. The beneficial interest in the trust will be purchased by the Issuer.

The portfolio is granular; the largest borrower accounts for only 0.9% of the analysed portfolio. All mortgages are located in Ireland with the largest concentration (i.e., 19.9% of the pool balance) located in Dublin. Servicing of the portfolio is undertaken by Mars Capital Finance Ireland DAC (MCF). Primary servicing is currently delegated to Acenden (Ireland) DAC (Acenden). Acenden will remain as delegated primary servicer for a transitional period expected to last approximately three months after which servicing will transfer to MCF. MCF will be responsible for all master servicing activities. Intertrust Finance (Ireland) Limited (Intertrust Ireland) will be appointed as the back-up servicer facilitator.

On the payment date falling 48 months after the closing date, the Rated Notes may be redeemed in full by the holder of the highest number of Class F Notes (Portfolio Option Holder) via the purchase of the beneficial title to all the mortgage loans from the issuer. The purchase price payable will be at least an amount to redeem the Class A to Class E Notes plus senior fees and accrued interest. The purchase by the Portfolio Option Holder of beneficial title to all the mortgage loan is subject to it having obtained the necessary authorisations and consents to enable it to exercise the portfolio option and it has in place a regulated servicer to undertake loan administration, management and monitoring services. As of the payment date falling 48 months from the closing date, the interest on the Rated Notes increases.

The issuer will enter into an Interest Rate Cap Agreement with HSBC Bank plc and will pay the interest rate cap fees in full on the closing date and in return will receive payments to the extent one-month Euribor is above 0.5% for months 0-24 and 1% for months 25-60. The cap agreement will terminate on the payment date falling 60 months from closing, on which date the coupon cap on the notes becomes applicable. The coupon caps on the Class A, Class B, Class C and Class D Notes are equal to 5.00%, 6.00%, 6.00% and 6.00% respectively.

As of the provisional pool cut-off date (30/06/2017), 13.4% of the pool is classed as REO. Amounts exceeding 80% of the expected cumulative proceeds from such REO mortgage loans will form part of REO mortgage loan sale excess amounts which are used to amortise the unrated Class P Notes. The REO mortgage loan sale excess amounts are capped at the lower of the current balance as of the cut-off date and the indexed original valuation collateralising the REO mortgage loan. The Issuer can also unwind or sell part of the Interest Rate Cap at the marked-to-market position provided the notional of the Interest Rate Cap notional does not fall below the outstanding balance of the Class A, Class B, Class C Notes and Class D Notes. As a consequence the Class P Notes may amortise before the Rated Notes. Payments received to the Class P Notes are capped at initial balance of the Class P Notes. Following repayment in full of the Class P Notes, any amount otherwise due to be paid to the Class P Notes will be applied as available funds.

The euro collection account is held with Barclays Bank Ireland Plc which is privately rated by DBRS. Funds deposited into the collection accounts will be deposited weekly into the Issuer Transaction Account held with Bank of New York Mellon, London Branch (BNY), which is privately rated by DBRS. DBRS concludes that BNY meets DBRS’s criteria to act in such capacity. The transaction documents contain downgrade provisions relating to the Transaction Account bank where, if downgraded below BBB(low), the Issuer will replace the account bank. The downgrade provision is consistent with DBRS’s criteria for the initial rating of A(sf) assigned to the Class A Notes. Funds standing to the credit of the transaction account may be invested in authorised investments. The authorised investments are expected to be in accordance with DBRS’s Legal Criteria for European Structured Finance Transactions for eligible investments. DBRS concluded that the rating of the Issuer account bank meets DBRS rating criteria to act in such capacity.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is Rating European Non-Performing Loan Securitisations.

DBRS has applied the principal methodology consistently.

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of data and information used for this rating include Mars Capital Ireland Holdings DAC and its agents.

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

DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS 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 rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

-- The expected principal and interest collection at A(sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collection in a rising interest scenario at BBB(low)(sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collection in a rising interest scenario at BB(low)(sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collection in a rising interest scenario at B(low)(sf) rating level, a 5% and 10% reduction in the expected collections.

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would lead to a downgrade of the rating of Class A Notes to BBB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would lead to a downgrade of the rating of the Class A Notes to BB (sf).

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would lead to a downgrade of the rating of Class B Notes to BB(low) (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would lead to a downgrade of the rating of the Class B Notes to B(low) (sf).

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would lead to a downgrade of the rating of Class C Notes to B(low) (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would lead to a downgrade of the rating of the Class C Notes to below B(low) (sf).

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would lead to a downgrade of the rating of Class D Notes to below B(low) (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would lead to a downgrade of the rating of the Class D Notes to below B(low) (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Asim Zaman, Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 06 November 2017

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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

-- Rating European Non-Performing Loan Securitisations
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Legal Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model Methodology for European Securitisations
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375