DBRS Assigns Ratings to Class A Notes Issued by Dunmore Securities No. 1 DAC

DBRS Ratings Limited (DBRS) assigned a AAA (sf) rating to the Class A Notes issued by Dunmore Securities No. 1 DAC (the issuer).

The rating assigned to the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final legal maturity date in June 2066.

Dunmore Securities No. 1 DAC is a public securitisation of residential mortgages originated by Ulster Bank Ireland DAC (Ulster Bank) secured over properties in Ireland. Ulster Bank services the mortgage portfolio during the life of the transaction with CSC Capital Markets (Ireland) Limited acting as the replacement servicer facilitator.

As of 31 October 2018, the closing mortgage portfolio aggregated to EUR 2,191.0 million. Approximately 90.6% of the final mortgage portfolio was originated between 2006 and 2008. The performance history for the securitised pool indicates that approximately 7% of the outstanding pool by loan balance has been more than three months in arrears and that around 17% has undergone some form of forbearance measure. Only 0.7% of the current pool is more than one month in arrears and no loan is more than three months in arrears.

The transaction is structured to initially provide 23.1% of credit enhancement to the Class A Notes. This includes subordination of the Class Z Notes and the non-amortising general reserve fund.

The general reserve fund will be funded from a subordinated loan and can be applied to cover shortfalls in senior fees, pay interest on Classes A Notes and credit principal deficiency ledger (PDL) debits on the Class A sub-ledgers. This has a target balance of EUR 34.6 million, equal to 2% of the initial balance of the Class A Notes.

Principal funds can be diverted to pay shortfalls in senior fees and interest on the Class A Notes. This amount will be subsequently debited to the PDL. The PDL also tracks realised loss and provisions for arrears, gradually increasing the percentage of the outstanding balance that has been debited to the PDL as the severity of arrears increases. This allows excess spread to be captured earlier to recover any future potential losses, which would otherwise have been released to the seller as deferred consideration.

Monthly mortgage receipts are deposited into the collections account at Ulster Bank and held in accordance with the collection account declaration of trust. The funds credited to the collection account are swept into the account bank on the next business day. The collection account declaration of trust provides that the interest in the collection account is in favour of the issuer over the seller. Commingling risk is considered mitigated by the collection account declaration of trust and the regular sweep of funds. Bank of New York Mellon SA/NV Dublin branch (BNY Mellon-Dublin) is the account bank for the transaction. DBRS’s private rating of BNY Mellon-Dublin is consistent with the minimum institution rating, given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS based its rating primarily on the following analytical considerations:

-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the parties to perform servicing and collection activities.
-- DBRS calculated the portfolio default rates (PD), loss-given default (LGD) and expected loss (EL) assumptions on the mortgage loan portfolio.
-- The transaction’s ability to withstand stressed cash flows assumptions and repay investors according to the terms of the transaction documents. The transaction cash flows were analysed using Intex DealMaker.
-- The consistency of the transaction’s legal structure with the DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.
-- The ratings of the relevant counterparties are in line with DBRS legal criteria to mitigate the risk of counterparty default or insolvency.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “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 the rating includes Ulster Bank and NatWest Markets PLC (the arrangers).

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 the 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”).

DBRS expected a base case PD and LGD for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

The base case PD and LGD of the current pool of receivables at the AAA (sf) rating stress are 32.8% and 62.5%, respectively.

For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to BBB (high) (sf), ceteris paribus.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (high) (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 AA (low) (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 (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: Matt Albin, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 November 2018

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

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- 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

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.