DBRS Confirms Ratings on European Residential Loan Securitisation 2017-NPL1

DBRS Ratings Limited (DBRS) confirmed its ratings on the Irish non-performing loans transaction European Residential Loan Securitisation 2017-NPL1 (the Issuer) as follows:

-- Class A at A (sf)
-- Class B at BBB (sf)
-- Class C at BB (high) (sf)

The rating confirmation follows an annual review of the transaction and reflects the stable performance of the transaction since its issuance on 28 April 2017 (the Issue Date).

At issuance, the EUR 419.8 million capital structure was tranched as follows: EUR 182.7 million Class A (approximately 43.5% of the total asset portfolio), EUR 16.8 million Class B (approximately 4.0% of the total asset portfolio), EUR 14.7 million Class C (approximately 3.5% of the total asset portfolio), EUR 44 million Class P (approximately 10.5% of the total asset portfolio) and EUR 161.8 million Class D (approximately 38.5% of the total asset portfolio). The Class P and Class D notes are unrated and are retained by LSF IX Paris Investments DAC (the Seller). The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal. The ratings on the Class B and Class C notes address the ultimate payment of interest and principal.

The notes were originally backed by 1,228 Irish non-performing mortgage loans secured by residential properties and originated by Bank of Scotland (Ireland) Limited. There was a small percentage (2.35%) of performing residential mortgages. Lone Star Funds (Lone Star), through the Seller, acquired the portfolio in February 2015. Servicing of the mortgage loans is conducted by Start Mortgages DAC (Start or the Servicer); Start also acts as Administrators of the assets for the transaction. As of the closing date, 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. HML is not a party to the transaction documents. Hudson Advisors Ireland DAC (Hudson) was also appointed as the Issuer Administration Consultant and, as such, acts in an oversight and monitoring capacity.

As of the date of the last Investor Report, March 2019, the transaction outstanding principal balance of the rated Class A, Class B and Class C was equal to EUR 128.3 million, EUR 16.8 million and EUR 14.7 million, respectively. The transaction structure is fully sequential and, as a consequence, the balance of Class A is currently the only one to amortise (-29.78% since issuance). The current aggregated transaction balance, included the unrated notes, is EUR 365 million.

Each rated class benefits from a Cash Reserve of EUR 5.8 million for Class A, EUR 1.2 million for Class B and EUR 1.3 million for Class C, respectively. The Class A Reserve Fund had an initial balance equal to 4.5% of the Class A Notes initial balance and can amortise to 4.5% of the outstanding balance of the Class A notes. The Class B Reserve Fund was funded to an initial balance of 10.0% of the Class B notes and does not have a target balance. Credits to the Class B reserve are made outside of the waterfall based on the proceeds of the interest rate cap allocated proportionately to the size of the Class B notes relative to the cap notional. Liquidity support to the Class C notes is provided by the cap proceeds allocated proportionately to the size of the Class C notes relative to the cap notional. The Class C Reserve Fund was funded to an initial balance of 15.0% of the Class C Notes and does not have a target balance. Credits to the Class C reserve are made outside of the waterfall based on the proceeds of the Interest Rate Cap allocated proportionately to the size of the Class C Notes relative to the cap notional and as long as the Class C Notes are outstanding. Any unpaid accrued interest amount in the Class C notes is reduced by the Class C interest payments funded via the cap proceeds.

Elavon Financial Services DAC, U.K. Branch (Elavon) acts as the Issuer Transaction Account Bank. DBRS’s private rating of Elavon 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.

The ratings are based on DBRS’s analysis of the projected recoveries of the underlying collateral, the historical performance and expertise of the Servicer, the availability of liquidity to fund interest shortfalls and special-purpose vehicle expenses, the Interest Rate Cap agreement entered between the Issuer and Barclays Bank plc, and the transaction’s legal and structural features.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology.”

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 investor reports provided by U.S. Bank Trustees Limited.

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.

The last rating action on this transaction took place on 28 April 2017, when DBRS finalised its provisional ratings on the Class A notes at A (sf), Class B notes at BBB (sf) and Class C notes at BB (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Mattia Pauciullo.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available at: 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 expected principal and interest collection in a rising interest scenario at A (sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collection in a rising interest scenario at BBB (sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collection in a rising interest scenario at BB (high) (sf) rating level, a 5% and 10% reduction in the expected collections.

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of Class A notes at A (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would decrease the rating of the Class A notes to BBB (sf).

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of the Class B notes at BBB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would decrease the rating of the Class B notes to BB (sf).

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would decrease the rating of the Class C notes at BB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would decrease the rating Class C notes at BB (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: Mattia Pauciullo, Senior Financial Analyst
Rating Committee Chair: Erin Stafford, Managing Director
Initial Rating Date: 6 April 2017

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

-- Rating European Non-Performing Loan Securitisations
-- 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

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.