DBRS Finalises Provisional Ratings of Proteus RMBS DAC

DBRS Ratings Limited (DBRS) finalised its provisional ratings of the notes issued by Proteus RMBS DAC (the Issuer) as follows:

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

The Class F, the Class X certificate and the Class Y notes are not rated.

As at 30 September 2018, the mortgage portfolio consisted of 11,958 loans with a total portfolio balance of approximately EUR 1,578 million. The weighted-average (WA) loan-to-indexed value is 63.9% with a WA seasoning of 10.9 years. Almost all the loans included in the portfolio (98.8%) are floating-rate loans linked either to the European Central Bank (ECB) rate or a standard variable rate (SVR) set by Pepper Finance Corporation (Ireland) DAC (Pepper). The notes pay a floating rate of interest linked to three-month Euribor. DBRS has accounted for this interest rate mismatch in its cash flow analysis. Approximately 2.0% of the loans have been restructured at least once. 1.18% of the portfolio is three or more months in arrears.

Credit enhancement for the Class A notes is calculated at 24.0% and is provided by the subordination of the Class B notes to the Class Y notes. Credit enhancement for the Class B notes is 18.5% and is provided by the subordination of the Class C notes to the Class Y notes. Credit enhancement for the Class C notes is 14.5% and is provided by the subordination of the Class D notes to the Class Y notes. Credit enhancement for the Class D notes is 11.50% and is provided by the subordination of the Class E notes to the Class Y notes. Credit enhancement for the Class E notes is 9.0% and is provided by the subordination of the Class F notes to the Class Y notes.

The transaction benefits from a general reserve fund (GRF) that is available to support the Class A to Class E notes. The GRF will be funded from available revenue funds. At the issue date, the GRF balance will be zero but from the first interest payment date (IPD) (inclusive) it will be equal to 0.25% of the initial balance of the mortgage loans as at 30 September 2018. The GRF will be non-amortising until October 2020 and thereafter it will amortise to the higher of (1) 0.25% of the outstanding balance of the mortgage loan and (2) 0.10% of the initial balance of the mortgage loans as at 30 September 2018; the amortisation is not subject to performance conditions. The transaction also benefits from a liquidity reserve fund (LRF) that provides liquidity support to cure revenue shortfalls on senior fees, the Class X certificate and interest on the Class A notes. The LRF will be funded from principal receipts to its target and can be used prior to any principal receipts received during the period. At the issue date, the LRF will be funded to EUR 3,946,055 which corresponds to 0.25% of the outstanding balance of the mortgage loans as at 30 September 2018. From the first IPD (inclusive), the LRF target amount will be set by the shortfall between the GRF balance and the GRF target amount up to the LRF start date (when its target amount will change). In addition, any use of principal to cure revenue shortfalls or to fund the liquidity reserve fund will be debited to the principal deficiency ledgers in reverse sequential order.

A key structural feature is the provisioning mechanism in the transaction, which is only linked to losses and not linked to the arrears status of a loan. DBRS considers that provisioning based on losses is not as positive for the transaction as provisioning based on arrears because the latter will trap any excess spread earlier for loans that may ultimately end up in litigation for recovery.

The Issuer Account Bank is Citibank Europe Public Limited Company. Based on the DBRS rating of the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

The final ratings assigned to the Class A notes address the timely payment of interest and ultimate payment
of principal on or before the final maturity date. The final ratings assigned to the Class B to Class E notes
address the ultimate payment of interest and principal while junior but timely payment of interest when the senior-most tranche. DBRS based its ratings primarily on the following:

-- 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 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 analysed using PD and LGD outputs
provided by DBRS’s “Master European Residential Mortgage-Backed Securities Rating Methodology and
Jurisdictional Addenda”. 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
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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include Goldman Sachs International.

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 these ratings to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

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 55.00% and 65.18%, 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 lead to a downgrade to AA (high) (sf)
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (low) (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 (low) (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (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 BBB (sf)

In respect of the Class B notes, the PD and LGD at the AA (high) (sf) stress scenario of 51.91% and 56.48%, 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 AA (sf)
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to A (sf)
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (sf)
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (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 (low) (sf)

In respect of the Class C notes, the PD and LGD at the AA (sf) stress scenario of 48.44% and 54.68%, 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 (high) (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 (high) (sf)
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (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 (low) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (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 D notes, the PD and LGD at the A (sf) stress scenario of 43.73% and 49.50%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

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

In respect of the Class E notes, the PD and LGD at the BB (high) (sf) stress scenario of 31.69% and 37.53%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

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

In respect of the Class F notes, the PD and LGD at the BB (sf) stress scenario of 29.62% and 34.88%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class F notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to B (high) (sf)
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to B (sf)
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (high) (sf)
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to B (low) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to 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: Belen Bulnes, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 13 December 2018

DBRS Ratings Limited
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31st Floor, London EC3M 3BY
United Kingdom
Registered and incorporated under the laws of England and Wales: Company 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.