DBRS Finalises Provisional Ratings of Dilosk RMBS No. 3 DAC

DBRS Ratings Limited (DBRS) finalised the provisional ratings of the notes issued by Dilosk RMBS No. 3 DAC (Dilosk or the Issuer):

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

DBRS does not rate the Class Z1, X1, X2, R and Z2 Notes.

The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date. The ratings assigned to the Class B to Class D Notes address the ultimate payment of interest and principal while junior but timely payment of interest when the senior-most tranche. An increased margin on all the rated notes is payable from the step-up date in April 2022.

The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the Republic of Ireland (Ireland; rated A (high) with a Stable trend by DBRS). The proceeds of the notes have been used to fund the purchase of Irish buy-to-let (BTL) residential mortgage loans originated by Dilosk DAC and secured via residential properties located in Ireland. The Issuer is the first securitisation of residential mortgages originated by Dilosk DAC.

Dilosk DAC is the named mortgage portfolio servicer but will delegate day-to-day servicing to Link Asset Services. There is no backup servicer in place. However, to maintain servicing continuity, Wilmington Trust SP Services (Dublin) Limited will be appointed as the backup servicer facilitator.

As at 31 March 2019, the closing mortgage portfolio consisted of 909 loans with a total portfolio balance of approximately EUR 174.5 million. The weighted-average (WA) loan-to-value (WALTV) is 56.4% with a WA seasoning of 11.3 months. The entire mortgage portfolio consists of BTL mortgages. As is common for BTL loans, the loans are largely scheduled to pay interest only on a monthly basis, with principal repayment concentrated in the form of a bullet payment at the maturity date of the mortgage (75.6% of the portfolio’s current balance is interest only). A significant concentration of the BTL loans is granted to individual landlords (71.4% of the portfolio’s current balance). Of the portfolio’s current balance, 17.7% is granted to corporates and the remaining 10.9% is granted to pension trusts. The loans granted to corporates are not backed by personal guarantees, while the loans granted to pension trusts are non-recourse loans (there is recourse to the property only but not to the borrower).

All the loans included in the portfolio are floating-rate loans linked to the Standard Variable Rate set by Dilosk DAC. The mortgages are high yielding, with a WA coupon of 5.27%. 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. None of the loans in the closing portfolio are in arrears.

During the first interest period, the Issuer may purchase additional loans that are funded by the over-issued notes at closing. The pre-funded loans will be subject to criteria tests to prevent a material deterioration in credit quality. Any funds that are not applied to purchase additional loans will be used to redeem the Class A to D Notes and the Z1 Notes on a pro rata basis. The prefunded amount is EUR 34.9 million at closing. Credit enhancement for the Class A Notes is calculated at 22.5% and is provided by the subordination of the Class B Notes to the Class Z1 Notes and a non-amortising general reserve fund. Credit enhancement for the Class B Notes is calculated at 16.0% and is provided by the subordination of the Class C Notes to the Class Z1 Notes and the general reserve fund. Credit enhancement for the Class C Notes is calculated at 10.25% and is provided by the subordination of the Class D Notes to the Class Z1 Notes and the general reserve fund. Credit enhancement for the Class D Notes is calculated at 5.0% and is provided by the subordination of the Class Z1 Notes and the general reserve fund. The general reserve fund is fully funded at closing by the proceeds from the issuance of the Class Z2 Notes and is equal to 2.5% of the Class A to Z1 Notes’ balance at closing. The general reserve fund can be applied to cover shortfalls in senior fees and interest on the Class A to D Notes and to clear principal deficiency ledger (PDL) balances on the Class A to D Notes’ sub-ledgers.

The transaction benefits from a liquidity reserve fund that will not be initially funded but will be funded from closing at a senior position in the pre-enforcement principal priority of payments to 1.5% of the Class A Notes’ outstanding balance. The liquidity reserve fund can be applied to cover further shortfalls in senior fees as well as Class A Notes interest, if a shortfall still exists after applying revenue collections and the general reserve fund. If drawn from the liquidity reserve, the fund is replenished from the pre-enforcement revenue priority of payments. The liquidity reserve fund is replenished to 1.5% of the outstanding Class A Notes with a floor at 0.75% of the original Class A Notes’ balance, with released amounts forming available principal funds.

The notes will additionally be provided with liquidity support from principal receipts, which can be used to cover shortfalls in senior fees and interest shortfalls on the most senior class of notes, provided a debit is applied to the PDLs in reverse-sequential order. The principal funds will be applied in this case after applying revenue collections and exhausting both reserve funds.

A key structural feature is the provisioning mechanism in the transaction, which 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 the number of months in arrears status of a loan. This is positive for the transaction as provisioning based on the arrears status will trap any excess spread much earlier for a loan, which may ultimately end up in foreclosure.

The Issuer Account Bank, Paying Agent and Cash Manager is The Bank of New York Mellon, London Branch. 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.

DBRS based its ratings primarily on the following:

-- 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 (PD), loss given default (LGD) and expected loss outputs on the mortgage portfolio. The PD, LGD and expected losses are used as an input in 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 and Class D Notes according to the terms of the transaction documents. The transaction structure was analysed using Intex DealMaker.
-- The sovereign ratings of A (high) and R-1 (middle) with Stable trends (as of the date of this press release) 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 Dilosk DAC 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.

This is the first rating action since the Initial Rating Date. The last rating action on this transaction took place on 3 April 2019 when provisional ratings were assigned to notes to be issued by the Issuer.

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 44.5% and LGD of 47.2%, 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 37.3% and LGD of 32.2%, 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 28.3% and LGD of 25.0%, corresponding to the “A” 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 18.2% and LGD of 12.2%, 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 (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 (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 (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 AA (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 A Notes to AA (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 AA (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 (high) (sf).

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

Class D Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would not lead to a downgrade of the Class D Notes.
-- A hypothetical increase of the base case PD by 50%, 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 25%, ceteris paribus, would not lead to a downgrade of the Class D Notes.
-- 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 BBB (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 BBB (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 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 D 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 D Notes to BB (high) (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: Belén Bulnes Meneses, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 3 April 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
-- 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.