DBRS Finalises Ratings of Mulcair Securities DAC

DBRS Ratings Limited (DBRS) finalised the following ratings of the notes issued by Mulcair Securities DAC (Mulcair or the Issuer):

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

The Class Z notes are not rated by DBRS.

The rating of the Class A notes addresses the timely payment of interest and ultimate payment of principal. The rating of the Class B notes addresses the timely payment of interest when the notes are the most senior after the redemption of the Class A notes only and the ultimate payment of principal. The ratings of the Class C notes, Class D notes and Class E notes address the ultimate payment of interest and ultimate payment of principal. An increased margin on all the rated notes is payable from the step-up date in April 2022. Additional amounts are also due to the Class C notes, Class D notes and Class E notes on and from the first interest payment date following the step-up date. Such additional amounts are not rated by DBRS.

Mulcair is a bankruptcy-remote special-purpose vehicle incorporated in Ireland. The issued notes were used to fund the purchase of re-performing Irish residential mortgage loans sold by The Governor and Company of the Bank of Ireland (rated A (low) with a Stable trend by DBRS) and secured over properties located in Ireland.

As at 31 January 2019, the mortgage portfolio consists of 1,727 loans to 788 borrowers with a total portfolio balance of approximately EUR 377.3 million. The weighted-average (WA) loan-to-indexed value is 81.7% with a WA seasoning of 12.4 years. Almost all the loans included in the portfolio (99.2%) are floating-rate loans linked either to a variable rate (86.7%) or to the European Central Bank rate (12.5%). The notes pay a floating rate of interest linked to three-month Euribor.

To partially mitigate the interest rate mismatch, the transaction is structured with an interest rate cap agreement with HSBC Bank plc, which is privately rated by DBRS. The interest rate cap agreement terminates 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 and Class E Notes have been repaid and/or redeemed in full. The Issuer receives payments to the extent that one-month Euribor is above 1.5% for the relevant interest period. The interest rate cap notional balance is equal to 20.0% of the portfolio balance.

Most of the loans in the portfolio (87.9%) have been originated to buy-to-let borrowers. The remaining 10.3% were initially originated to owner-occupied borrowers but have subsequently been reclassified as buy-to-let since the property is no longer the borrower’s primary residency. Approximately 97% of the portfolio has previously been restructured and currently 1.4% of portfolio is in arrears of greater than one-month.

In this transaction, a nominal amount of the Class A notes is intended to 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 nominal balance of the Class A notes would be paid down, upon which the Class B notes would become the most senior class outstanding.

The Class A notes benefit from liquidity support provided by a Senior Reserve Fund. The senior reserve fund is sized at 2.0% of the Class A notes balance and amortises with the Class A notes with a floor of 1.0% of the initial Class A notes balance.

The Class B, Class C, Class D and Class E notes benefit from credit and liquidity support provided by the amortising general reserve. The general reserve is sized at 2.0% of the initial Class B to Class E notes and amortises with no floor, in line with these notes. The general reserve does not provide support to the Class A notes.

Credit enhancement for the Class A notes is calculated at 37.0% and is provided by the subordination of the Class B notes to the Class Z notes. Credit enhancement for the Class B notes is calculated at 28.0% and is provided by the subordination of the Class C notes to the Class Z notes and the general reserve fund. Credit enhancement for the Class C notes is calculated at 20.5% and is provided by the subordination of the Class D notes to the Class Z notes and the general reserve fund. Credit enhancement for the Class D notes is calculated at 15.5% and is provided by the subordination of the Class E notes, Class Z notes and the general reserve fund. Credit enhancement for the Class E notes is calculated at 11.5% and is provided by the subordination of the Class Z notes and the general reserve fund.

A key structural feature is the provisioning mechanism in the transaction that is linked to the arrears status of a loan besides the usual provisioning based on losses. The degree of provisioning increases with the increase in number of months in arrears status of a loan. This is positive for the transaction as provisioning based on the arrears status traps any excess spread much earlier for a loan, which may ultimately end up in foreclosure.

Borrower collections are held with The Governor and Company of the Bank of Ireland and are deposited on the next business day into the Issuer’s deposit account held with The Bank of New York Mellon - London Branch (rated R-1 (high) with a Stable trend by DBRS). DBRS’s rating of the deposit account bank, along with the replacement provisions upon downgrade below “A”, is consistent with the threshold for the Account Bank outlined in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

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 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 and Class E notes according to the terms of the transaction documents. The transaction structure was analysed using Intex DealMaker.
-- The sovereign rating of A (high)/R-1 (middle) with Stable trends (as of the date of this press release) of the Republic of Ireland.
-- The consistency of the legal structure with 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.

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 The Governor and Company of the Bank of Ireland and its agents.

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.

These ratings concern newly issued financial instruments.

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 46.2% and LGD of 67.0%, 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 39.7% and LGD of 55.5%, 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 36.1% and LGD of 51.5%, corresponding to the A (high) 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 31.7% and LGD of 45.2%, corresponding to the BBB (high) 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 27.8% and LGD of 38.0%, corresponding to the BBB (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 (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (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 (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 A Notes to AA (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 AA (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 A (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 A (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 A (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 (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 (high) (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 (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 (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 B Notes to BBB (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 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 BBB (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 B Notes to BB (high) (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 (high) (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 (low) (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 (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 C 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 C 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 C Notes to BB (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 C 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 C Notes to BB (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 BBB (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (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 BBB (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 D 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 D 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 D 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 D Notes to BB (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 (high) (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 BB (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to BB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class E 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 E 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 E 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 E 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 E Notes to below 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 E Notes to B (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: Rehanna Sameja, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 28 March 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.