DBRS Assigns Provisional Ratings to Shamrock Residential 2019-1 DAC

DBRS Ratings Limited (DBRS) assigned the following provisional ratings to the notes to be issued by Shamrock Residential 2019-1 DAC (the Issuer):

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

Classes A through Z2 comprise the collateralised notes. The rating on the Class A notes addresses timely payment of interest and ultimate payment of principal. The ratings on the Class B, Class C, Class D, Class E Class F and Class G notes address the ultimate payment of interest and principal. The Class B rating also addresses timely payment of interest when these notes are the most senior outstanding class.

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 provide liquidity and credit support to the rated notes. The LRF is amortising and will provide liquidity support to the Class A notes. Amortised amounts of the LRF will form part of the NLRF.

Proceeds from the issuance of the Class A to Class Z2 notes will be used to purchase the first-charge performing and re-performing Irish residential mortgage loans that are currently in the mortgage book of Lone Star Funds, which were purchased in 2015. The provisional mortgage portfolio comprises owner-occupied and buy-to-let mortgage loans. The outstanding balance of the provisional mortgage portfolio was approximately EUR 336 million as at 31 January 2019.

The provisional mortgage loans were originated by Irish Nationwide Building Society (INBS; 47.4%), Bank of Scotland plc and Bank of Scotland (Ireland) Limited (33.4%), Start Mortgages DAC (16.5%)(Start) and NUA Mortgages Limited (2.6%), and are secured by Irish residential properties.

Servicing of the mortgage loans is conducted by Start (52.6% of the mortgage portfolio) and Pepper (47.4% of the mortgage portfolio), which are also expected to be appointed as administrators of the respective assets for the transaction. Hudson Advisors Ireland DAC (Hudson) will be appointed as the Issuer administration consultant and, as such, will act in an oversight and monitoring capacity.

5.3% of the loans in the mortgage portfolio have been restructured as split loans (aggregate current balance of EUR17.9 million) with an affordable-interest-accruing-balance (aggregating EUR 10.9 million) and the remaining warehoused to be repaid only at maturity and bearing no interest (aggregating EUR 6.9 million). Additionally, 4.4% of the loans in the mortgage portfolio (aggregate current balance of EUR14.8 million) have been restructured where EUR 5.9 million (1.8% of the mortgage portfolio balance) of the outstanding balance can be written off if the loan is not in arrears for longer than three months on or before a specified date. Until the specific date of such reckoning, no interest is payable on the amount of EUR 5.9 million which can be written off. DBRS has estimated the probability default and loss severity of such loans assuming none of the loan balance is written off which is conservative treatment resulting in a higher default probability and loss severity for the combined loans.

For the split loans, a borrower can default during the life of the loan (e.g. due to payment difficulties). Additionally, a borrower who has managed to maintain payment during the life of the loan and has hence repays the interest bearing portion of the split mortgage in full, may be unable to make a bullet repayment of the non-interest bearing warehoused loan at the point of loan maturity. DBRS in its analysis, accounts for defaults and losses arising from both scenarios.

The probability of default (PD) and loss given default (LGD) on the interest bearing loans was estimated taking into account both the interest bearing and non-interest bearing (i.e. warehoused) loan. Additionally borrowers who do not default on the loan during their life, may not have the funds available to make a bullet repayment on the warehoused portion of the loan at maturity. Moreover, such warehoused loan is deemed unaffordable by the borrower at the time of the restructure of the loan. Hence DBRS assumed a 100% default probability for the non-interest bearing warehoused loan. Since the borrower would have fully repaid the interest bearing portion of the loan in such a scenario, the exposure at default for such loans will only be equal to the warehoused loan portion. DBRS has taken this into account when estimating the LGD for such defaults. Losses from both scenarios, described here were taken into account for the cash flow analysis.

The weighted-average current loan to value indexed (WACLTV(ind)) of the portfolio is 80.5% with 23.3% of the loans in negative equity. The credit enhancement for the notes is primarily on account of the subordinated collateralised notes and the non-liquidity reserve fund. The Class A notes’ credit enhancement is expected to be 41.9%, that for the Class B notes is 31.2%, for the Class C notes is 25.1%, for the Class D notes is 18.0%, for the Class E notes is 11.6%, for the Class F notes is 7.6% and for the Class G notes credit enhancement is 5.2%. DBRS has excluded an amount of EUR 5.9 million from the collateral balance which can potentially be written off. Additionally the maximum potential write-off of the EUR5.9 million has been reflected in the cash flow analysis by assuming a PDL to the extent of this maximum write-off amount at closing of the transaction. The transaction will trap any excess spread to clear this PDL from beginning.

The interest payable on the junior notes i.e. the notes other than the Class A notes, will be subject to Net weighted-average coupon rate (Net WAC). Net WAC is defined as the interest due on the mortgage portfolio net of the senior expenses of the Issuer as a percentage of the aggregate current balance of the mortgage portfolio. The interest payable on the junior notes will be the lower of the coupon on the notes and the Net WAC. If the interest paid on an IPD is lower than the coupon on the notes, such deficit is expected to be paid junior in the revenue waterfall of the transaction, subordinated to payments of interest on the rated notes. DBRS’s ratings do not address the payment of these amounts.

The rated notes have liquidity support from a reserve fund which is split into a liquidity reserve fund (LRF) (supporting the Class A notes exclusively) and a non-liquidity reserve fund (NLRF) which is expected to be funded at the closing of the transaction. The senior-most outstanding notes can also receive liquidity support from principal receipts. An interest rate cap with a notional of EUR 150 million for seven years may provide further liquidity support to the notes and also partially mitigate basis risk exposure of the Issuer. The basis risk exposure of the Issuer is on account of loans where the interest rate is linked to the Standard Variable Rate (66.5% of the mortgage portfolio), loans paying interest linked to the European Central Bank rate (33.5% of the mortgage portfolio) and in comparison the interest rate on the notes is linked to one-month Euribor.

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 (PD), loss given default (LGD) and expected loss (EL) outputs on the mortgage portfolio. The PD, LGD and 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 Notes 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 Daire Residential DAC, Start Mortgages DAC and Pepper Finance Corporation (Ireland) DAC.
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 to be issued financial instruments. These are the first DBRS ratings on this financial instrument.

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 60.7% and LGD of 68.1%, 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 54.2% and LGD of 58.2%, 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 49.5% and LGD of 53.2%, 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 41.5% and LGD of 43.1%, 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 36.7%, 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 25.7% and LGD of 33.3%, 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 21.4% and LGD of 27.6%, 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 (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 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 (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 BB (high) (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 (sf).
-- A hypothetical increase of the base case PD 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 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 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 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 (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 (high) (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 (low) (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 (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 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 (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 (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 BB (low) (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 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 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 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 (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to 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 (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 F Notes to 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 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 (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 (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 (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: 19 June 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.