DBRS Assigns Provisional Ratings to Ardmore Securities No. 1 DAC

DBRS Ratings Limited (DBRS) assigned provisional ratings on the notes to be issued by Ardmore Securities No. 1 DAC (Ardmore Securities No.1; Issuer) as follows:

-- Class A notes rated AAA (sf)
-- Class B notes rated AA (sf)
-- Class C notes rated A (high) (sf)

The Class Z and X notes are not rated.

The provisional ratings assigned to the Class A notes address timely payment of interest and ultimate payment of principal. The provisional ratings assigned to the Class B and Class C notes address ultimate payment of interest and ultimate payment of principal.

The Issuer is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in Ireland. The issued notes will be used to fund the purchase of Irish residential mortgage loans originated by Ulster Bank Ireland DAC (Ulster Bank or the Bank), and secured over properties located in Ireland.

The provisional mortgage portfolio aggregates to EUR 1,346.62 million (as of 28 February 2018). 92.3% of the provisional mortgage portfolio was originated between 2013 and 2018. DBRS was provided with performance history (spanning from January 2007 onwards) for the portfolio to be securitised, showing 99.6% of the loans have never been in arrears (including loans considered to be in technical arrears). 0.12% of the loans were in arrears for greater than or equal to three months in the history of the loans but all are currently in the performing status.
There are no loans in the mortgage portfolio that repay on an interest-only basis and there are no loans for investment properties (Buy-to-Let).

The transaction’s capital structure provides 18.0% credit enhancement to the Class A notes, through subordination of the Class B notes (8.0% in size of the total issuance), the Class C notes (7.0% in size of the total issuance) and the Class Z notes (3.0% in size of the total issuance). The general reserve fund will not be funded at closing of the transaction but will build up from excess revenue receipts to reach 2.5% of the combined Class A, Class B and Class C notes initial balance. The general reserve fund will not amortise.

The Class B notes are proposed to have 10.0% of credit enhancement and the Class C notes 3.0%.
DBRS does not rate the Class Z notes or the Class X notes.

Liquidity in the transaction is provided by the general reserve fund, which can be used to pay senior costs and interest on the rated notes. Liquidity for the Class A notes will be further supported by the use of available principal receipts from the mortgage loans and a liquidity reserve fund (equal to 4.5% of the outstanding balance of the Class A notes at issuance but amortising down to 2.5% of the Class A notes outstanding balance at issuance). Terms and conditions on the notes allow interest payments on the subordinated notes of Class B and Class C to be deferred if the funds available are insufficient.

A key structural feature is the provisioning mechanism in the transaction, which 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 arrears status will trap any excess spread much earlier for a loan which may ultimately end up in foreclosure.

The notes are floating rate, indexed to Euribor 3 months. 53.2% of the provisional mortgage portfolio comprises short- term fixed- rate loans which revert to the Standard Variable Rate (SVR), currently set at 4.3%, at specified date in the future. The remaining portfolio is indexed to the SVR (37.8% of which enjoying a discount). This gives rise to an asset-liability mismatch which has been accounted for in DBRS’s cash flow modelling.

The account bank in the transaction is Bank of New York Mellon SA/NV, Dublin Branch (privately rated). This counterparty is appropriately rated to mitigate the counterparty risk to the issuer in line with DBRS’s legal criteria.

DBRS based the ratings primarily on the following analytical considerations:

-- The transaction capital structure, form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated the probability of default (PD), loss given default (LGD) and expected loss (EL) outputs on the mortgage loan portfolio.
-- 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 PD and LGD outputs provided by the Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”. Transaction cash flows were modelled using INTEX DealMaker.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the Terms and Conditions of the notes.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf

The sources of data and information used for these ratings include Ulster Bank Ireland DAC, NatWest Markets and investor reports for Irish RMBS transactions.

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

-- At the time of the initial rating 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”):

In respect of the Class A notes, the PD and LGD at the AAA (sf) stress scenario of 24.05% and 59.25%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus would not lead to a downgrade from AAA (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- 25% increase of the LGD, ceteris paribus would not lead to a downgrade from AAA (sf).
-- 50% increase of the LGD, ceteris paribus would not lead to a downgrade from AAA (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA(high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA (sf).

In respect of the Class B notes, the PD and LGD at the AA (sf) stress scenario of 16.00% and 49.61%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class B notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade AA (low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).

In respect of the Class C notes, the PD and LGD at the AAA (sf) stress scenario of 12.39% and 42.25%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class C notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (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: Rehanna Sameja, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President, CFA, FRM
Initial Rating Date: 6 April 2018
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

-- Derivative Criteria for European Structured Finance Transactions
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.