DBRS Finalises Provisional Ratings of Jepson Residential 2019-1 DAC

DBRS Ratings Limited (DBRS) finalised the following ratings of the notes issued by Jepson Residential 2019-1 DAC (the Issuer):

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

The Class RFN, Class Z1 Notes and the Class Z2 Notes are not rated by DBRS and will be retained by the seller.

The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal. The Class B Notes’ rating addresses the timely payment of interest, at the time they are the most senior notes after redemption of the Class A notes only and the ultimate payment of principal. The ratings of the Class C Notes, Class D Notes, Class E Notes, Class F Notes and Class G Notes address the ultimate payment of interest and principal. An increased margin on the rated notes is payable from the step-up date falling in March 2021. Additional amounts are also due to the Class C, Class D, Class E, Class F and Class G Notes on and from the first interest payment date following the step-up date. DBRS does not rate such additional amounts.

Proceeds from the issuance of the Class A to Class Z2 Notes have been used to purchase the first charge performing and re-performing Irish residential mortgage loans which were securitised in the European Residential Loan Securitisation 2017-PL1 DAC transaction. The outstanding balance of the closing mortgage portfolio is approximately EUR 616 million (28 February 2019). The mortgage loans were originated by Bank of Scotland (Ireland) Limited (BoSI; 67.1%), Start Mortgages DAC (Start; 29.2%) and NUA Mortgages Limited (NUA; 3.8%). The mortgage loans are secured by Irish residential properties. Lone Star Funds, through the respective seller, acquired the mortgage loans originated by Start and NUA in December 2014. The mortgage loans originated by BoSI were acquired by the respective seller in February 2015. Servicing of the mortgage loans is conducted by Start, which is also appointed as administrator of the assets for the transaction. Primary servicing activities have been delegated to Homeloan Management Limited (HML) under a subservicing agreement. There is no obligation for Start to continue to delegate to HML and HML is not a party to the securitisation documents. Hudson Advisors Ireland DAC (Hudson) is appointed as the Issuer administration consultant and, as such, will act in an oversight and monitoring capacity.

In this transaction, a very small amount of the Class A Notes would remain outstanding until the accumulated deferred interest (if any) of the Class B Notes is paid. Upon full payment of the accumulated deferred interest of the Class B Notes, such small Class A Notes balance would be paid down upon which the Class B Notes become the most senior class outstanding.

The Issuer has entered into an interest rate cap agreement with BNP Paribas S.A. (BNP). The cap agreement will terminate on 24 March 2026 or, if earlier, the date as of which all amounts due under the Class A, Class B, Class C, Class D, Class E, Class F and Class G Notes have been repaid and/or redeemed in full. The Issuer will receive payments to the extent that one-month Euribor is above 2% for the relevant interest period. The cap notional balance will be in accordance with a notional amount payment schedule.

The transaction benefits from a non-amortising reserve fund, which is split into a non-liquidity reserve fund (NLRF) and a liquidity reserve fund (LRF). The NLRF will have a target amount equal to 2% of the Class A to Class Z Notes’ initial balance minus the target amount of the LRF. The NLRF will provide liquidity and credit support to the rated notes. The LRF is amortising with a target amount equal to 2% of the Class A Notes outstanding but floored at 1% of the initial Class A Notes’ balance and will provide liquidity support to the Class A Notes. Amortised amounts of the LRF will form part of the NLRF.

On each interest payment date, an additional note payment reserve will be credited using 50% of the excess spread. Amounts standing to the credit of the additional note payment reserve will be available to cover additional note payment shortfalls. On the final rated notes’ redemption date, amounts standing to the credit of the additional note payment reserve will be applied as available principal funds.

The mortgage portfolio related figures are as of 31 December 2018, unless otherwise stated. The origination vintages of the portfolio are concentrated between 2006 and 2008 (70.6%). The weighted-average (WA) indexed current loan-to-value (CLTV(ind)) of the portfolio is equal to 73.8%, 41.1% of the loans have an indexed CLTV greater than 80% and 13% of the borrowers are in negative equity. The pool is primarily concentrated in Non-Dublin at 59.7% with the remaining 40.3% located in Dublin. Irish house prices in Dublin and Non-Dublin have rebounded 102% and 79%, respectively, following the peak-to-trough drop of 59.7% and 55.7%, respectively. Restructured loans comprise 75.8% of the mortgage portfolio. DBRS has assessed the performance of restructured loans in its default analysis. The proportion of loans paying 100% or more of the scheduled payment has slightly improved to 86.7% from 85.5% in March 2017, which indicates stable performance to date and sustainable terms for the majority of the restructured loans. However, as of 31 December 2018, 7.8% of the mortgage loans are three months plus in arrears.

The interest rate payable on the mortgage loans is either linked to variable rates set by the servicer (Standard Variable Rate or SVR; 32.9% of the pool by outstanding), a fixed rate (Fixed-Rate Loans 0.2% of the pool) or linked to the European Central Bank (ECB) base rate (66.9% of the pool). The coupon payable on the notes is linked to one-month Euribor. An SVR floor of one-month Euribor plus 2.50% will also be implemented, subject to compliance with applicable law, regulations and mortgage conditions. The WA coupon generated by the mortgage loans is equal to 2.1%.

The credit enhancement available to the rated notes consist of subordination and the NLRF. The credit enhancement available to the Class A Notes is equal to 45.75%, credit enhancement available to the Class B Notes is equal to 35.95%, credit enhancement available to the Class C Notes is equal to 28.75%, credit enhancement available to the Class D Notes is equal to 22.75%, credit enhancement available to the Class E Notes is equal to 16.75%, credit enhancement available to the Class F Notes is equal to 14.1% and that for Class G Notes equals 10.5%.

The collection accounts are held with the Allied Irish Banks Plc (AIB). Funds deposited into the AIB collection accounts will be deposited on the next business day into the Issuer transaction account held with Elavon Financial Services DAC, UK Branch, which is privately rated by DBRS. DBRS has concluded that Elavon 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 “A,” the Issuer will have to replace the account bank. The downgrade provision is consistent with DBRS’s criteria for the initial rating of AAA (sf) assigned to the Class A Notes. The interest rate received on cash held in the account bank is not subject to a floor of 0%, which can create a potential liability for the Issuer.

The ratings are based on DBRS’s review of the following analytical considerations:
-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS calculated probability of default, loss given default and expected loss outputs on the mortgage portfolio. The probability of default (PD), loss given default (LGD) and expected losses (EL) are used as an input into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS’s “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E, Class F and Class G Notes according to the terms of the transaction documents. The transaction structure was analysed using Intex Dealmaker.
-- The sovereign rating of the Republic of Ireland rated A (high)/R-1(middle)/Stable (as of the date of this press release).
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and the 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 ratings 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 Ellington Residential Holdings Ireland DAC, Start Mortgages DAC and Morgan Stanley & Co. International plc.

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 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.

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, a PD of 61.2% and LGD of 67.9%, corresponding to the AAA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 54.7% and LGD of 55.9%, corresponding to the AA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 48.2% and LGD of 48.4%, corresponding to the A(low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 41.8% and LGD of 38.3%, corresponding to the BBB(low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E Notes, a PD of 33.2% and LGD of 30.9%, corresponding to the BB(low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F Notes, a PD of 30.8% and LGD of 28.4%, corresponding to the B(high) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class G Notes, a PD of 20.8% and LGD of 25.7%, corresponding to the B(low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS concludes the following impact on the rated notes:

Class A Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes at AA (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (sf).

Class B Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class B Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).

Class C Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to B (high) (sf).

Class D Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class D Notes to BB (low)(sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (sf).

Class E Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead downgrade of the Class E Notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class E Notes to B (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class E Notes to B (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (low) (sf).

Class F Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to maintaining the rating on the Class F Notes at B (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to below B (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to maintaining the rating of the Class F Notes at B (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (low) (sf).

Class G Notes:

In all stress scenarios with a higher PD and/or LGD, the Class G Notes would be downgraded to a rating 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: Kali Sirugudi, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 February 2019

DBRS Ratings Limited
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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

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- 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.

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