DBRS Assigns Ratings to Glenbeigh Securities 2018-1 DAC

DBRS Ratings Limited (DBRS) assigned the following ratings to the notes (the Rated Notes) issued by Glenbeigh Securities 2018-1 DAC (Glenbeigh or the Issuer):

-- Class A notes rated AAA (sf)
-- Class B notes rated AA (sf)
-- Class C notes rated A (high) (sf)
-- Class D notes rated A (low) (sf)
-- Class E notes rated BB (high) (sf)

The rating assigned to the Class A notes addresses the timely payment of interest and ultimate payment of principal. The rating assigned to the Class B notes addresses the ultimate payment of interest while the Class B notes are junior, the timely payment of interest when the Class B notes are the most senior and the ultimate payment of principal. The ratings for the Class C, Class D and Class E notes address the ultimate payment of interest and ultimate payment of principal.

The proceeds of the Rated Notes, along with that of the Class Z notes, (together the collateralised notes), have been used as consideration to purchase a residential mortgage portfolio originated by Permanent TSB plc (PTSB or the Seller). The aggregate current balance of the mortgage portfolio as of 9 November 2018 stands at EUR 1.31 billion.

The majority of the mortgage portfolio has been restructured in the last few years to help the borrowers rehabilitate to a healthy payment rate on a sustainable basis. 32.4% of the loans, which were originally paying on a capital-plus-interest basis, now pay, since the date of restructure on a part-capital-and-interest basis (PCI). Of the loans, 67.1% have been restructured such that the outstanding of each such loan was split into two (Split Loan), one portion of which is considered performing (Performing Loan (PL)) and the other portion of which is considered warehoused (Warehoused Loan (WL)). The proportion of the split between the PL and the WL varies, and such variance is determined by a thorough assessment of the borrower’s affordability status at the time of restructuring. While the borrower under a Split Loan, for majority of the cases, makes monthly payments on the PL on a capital-plus-interest basis, on the WL no interest is due or payable during the term of the loan. The borrower is liable to repay the WL outstanding on the maturity date. The WL proportion comprises 34.5% of the Glenbeigh mortgage portfolio, and that for the PL comprises 32.6%.

To assess the credit risk of the Split Loans, DBRS applied its “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.” The PLs, in line with the terms and conditions of this portion of the Split Loans, have been treated as a repayment loan (repaying on a capital-plus-interest basis), where the affordability of the PL has been tested by PTSB at the time of restructuring. The current loan-to-value (indexed; CLTV (ind.)) of the PL, driving probability of default (PD), considered the PL balance divided by the pro rata indexed value of the property or properties securing the Split Loan. The CLTV (ind.) calculated as above would also be the driver of the loss given default (LGD) for each PL.

Based on PTSB’s assessment of the borrower’s income expenditure and subsequent split of the loan, the WL is considered unaffordable to the borrower in terms of making regular monthly repayments. Further, there is no interest burden on the WL for the borrower, with the WL balance repayable as a bullet at the end of loan maturity. DBRS thus treats the WL balance to be in default implying a 100% PD assumption. This is a conservative treatment relative to the possibility that the borrower may refinance the WL balance at the end of the loan term. DBRS calculated the CLTV (ind.) for the WL, which considered the WL balance divided by the indexed value of the property or properties securing the Split Loan.

A small proportion (1.8% as of July 2018) of these Split Loans has been in the greater-than-one-month-of-arrears status and currently none of these loans is in arrears. Of the PCI loans, 3.5% as of July 2018 have been in the greater-than-one-month-of-arrears status, and currently none of these loans is in arrears. This proves that the restructuring of these loans has worked sustainably so far and can be expected to continue doing so going forward.

The other key risk of the mortgage portfolio arises on account of potential loss from loans where borrowers are currently in negative equity status (39.6% of the mortgage portfolio).

The cash flow analysis of the Split Loan applied the PD and LGD for the PL and WL separately given the nature of the restructuring and repayment conditions. While the ten-year front- and back-ended default timing curve was applied to the PL subpool, the WL subpool defaulted only at the end of the loan term (weighted-average remaining term of 22 years). In comparison, given the terms and conditions of the restructuring, if a borrower defaults on the PL, this would imply default for the WL too and trigger the recovery process of both the PL and the WL outstanding. The recovery of the WL in such a case would be much earlier than simulated in the DBRS cash flows analysis, and hence the timing of defaults for a WL is a relatively conservative treatment.

Another conservative element of the DBRS cash flow analysis was the assumption of zero prepayments on the WL subpool in comparison with the terms and conditions of the Split Loan, which allow prepayments to be applied to the WL in preference over the PL portion of the Split Loan. Any prepayments of the WL subpool (a third of the mortgage portfolio by balance) will reduce the negative carry where no interest payments are made by the borrower on the WL, but the Issuer will have to pay interest on the same proportion of notes outstanding. A default of a Split Loan will also have the same positive effect on the transaction structure, though to a smaller degree.

The representations and warranties given by PTSB, the Seller, are comparable to those given for the Fastnet series of transactions. However, the liability of the Seller in the event of a breach of any representation and warranty has time and amount limitations. Any concerns around loss to the Issuer on account of a breach of any representation and warranty, given these limitations, are largely mitigated because of the seasoning of the portfolio, the restructured nature of the loans and the transfer of the legal title of the loans to Pepper Finance Corporation (Ireland) DAC (Pepper) from PTSB within three months of closing.

The issuance structure under Glenbeigh offers subordination and liquidity support for regular payments on the notes met through separate revenue and principal priority of payments. The Class A notes have credit enhancement (CE) of 65%, the Class B notes have CE of 52%, the Class C notes have CE of 41.5%, the Class D notes have CE of 34% and the Class E notes have CE of 29%. A liquidity reserve fund (LRF) of EUR 38.94 million, funded at the closing of the transaction, will provide liquidity support to the Class A, Class B, Class C and Class D notes. The LRF will amortise and be maintained at 4.75% of the aggregate outstanding balance of the Class A, Class B, Class D and Class E notes. The use of the LRF will only be allowed before the principal receipts have been used (subject to conditions) to support the liquidity of the Rated Notes.

Approximately 30% of the loans pay interest linked to a standard variable rate (SVR; currently at 4.3%) set by PTSB. Of the loans in the mortgage portfolio, 36.5% pay interest linked to the European Central Bank (ECB) rate. The remaining 33.7% of the loans do not pay any interest during the life of the loans (WLs). In comparison, the interest paid on the notes is linked to three months’ Euribor. This difference in basis gives rise to a risk that is not hedged in the transaction. The basis risk between the SVR paying loans and three months’ Euribor on the notes is mitigated by a SVR floor rate of three months’ Euribor plus 3.25% effective six months after the closing of the transaction. DBRS has stressed for the unhedged basis risk between the ECB and three months’ Euribor.

The interest margin on the notes will step up in November 2024. On or after such date, the entire mortgage portfolio can be sold or the sale can be only for part of the mortgage portfolio. In the case of a partial sale, the notice of such intention will be provided to DBRS giving the details of the residual mortgage portfolio (after sale) and the resultant outstanding notes and structure.

The master servicer for the mortgage portfolio will be Pepper, with the servicing in the first six months from closing delegated to PTSB, after which Pepper would service the mortgage portfolio. The legal title of the loans currently with PTSB is expected to be transferred to Pepper within three months of closing.

DBRS based the ratings primarily on the following analytical considerations:

--The transaction capital structure, form and sufficiency of available CE and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated PD, LGD and expected loss outputs for 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 analysed using PD and LGD outputs provided by DBRS’s “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” methodology. Transaction cash flows were analysed 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 legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and its 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 this rating include PTSB and investor reports on Irish residential mortgage-backed securities transactions. The percentage numbers on the mortgage portfolio (as of November 2018) are approximate and based on DBRS calculations.

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”). The additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes:

The following scenarios constitute the parameters used to determining the Base Case:

-- In respect of the Class A notes, the PD and LGD at the AAA (sf) stress scenario of 57.0% and 61.9%, respectively.

DBRS concludes the following impact on the Class A notes:

-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to AA(high)(sf).
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA(sf).
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA(high)(sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA(sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA(sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA(low)(sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA(low) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A(high)(sf).

-- In respect of the Class B notes, the PD and LGD at the AA (sf) stress scenario of 53.1% and 50.4%, respectively.

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(high)(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 to A(high)(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 A(high)(sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A(low)(sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A(sf).

-- In respect of the Class C notes, the PD and LGD at the A(high) (sf) stress scenario of 51.0% and 46.6%, respectively.

DBRS concludes the following impact on the Class C notes:

-- 25% increase of the PD, ceteris paribus, would not lead to a downgrade.
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to A(sf).
-- 25% increase of the LGD, ceteris paribus, would not lead to a downgrade.
-- 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 A(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 BBB(high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB(sf).

-- In respect of the Class D notes, the PD and LGD at the A(low) (sf) stress scenario of 49.5% and 43.3%, respectively.

DBRS concludes the following impact on the Class D notes:

-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to BBB(high)(sf).
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BBB(sf).
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB(high)(sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB(low)(sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB(sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB(low)(sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(high)(sf).

-- In respect of the Class E notes, the PD and LGD at the BB(high) (sf) stress scenario of 44.4% and 32.8%, respectively.

DBRS concludes the following impact on the Class E notes:

-- 25% increase of the PD, ceteris paribus, would not lead to a downgrade.
-- 50% increase of the PD, ceteris paribus, would not lead to a downgrade.
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(sf).
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(low)(sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(low)(sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB(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: Kali Sirugudi, Vice President, EU RMBS
Rating Committee Chair: Vito Natale, Head of EU RMBS and CBs
Initial Rating Date: 4 December 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

-- 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.