DBRS Finalises Provisional Ratings on Finance Ireland RMBS No. 1 DAC

DBRS Ratings Limited (DBRS) finalised the provisional ratings on the following notes issued by Finance Ireland RMBS No. 1 DAC (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)
-- Class E notes rated BB (sf)

The Class X, Class Y and Class Z notes are not rated by DBRS.

The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal. The ratings on the Class B to Class E notes address the timely payment of interest when they are the most-senior notes and the ultimate payment of principal. An increased margin on all the rated notes is payable from the step-up date in June 2022.

The issuer is a bankruptcy-remote, special-purpose vehicle incorporated Ireland. The issued notes were used to fund the purchase of Irish residential mortgage loans originated by Finance Ireland Credit Solutions DAC and Pepper Finance Corporation DAC.

As at 31 May 2019, the mortgage portfolio consisted of 1,364 loans with a total portfolio balance of approximately EUR 290.2 million. The weighted-average (WA) current loan-to-indexed value is 67.6% with a WA seasoning of 12.4 months. Fixed-rate loans represent approximately a third of the portfolio, while the notes pay a floating rate of interest linked to three-month Euribor.

To address this interest rate mismatch, the transaction is structured with an interest rate swap that swaps 0.08% for three-month LIBOR. The swap notional will amortise in line with a pre-defined schedule that aims to match the fixed-rate loans in the portfolio at such time.

A portion of the loans in the portfolio (11.4%) have been originated to buy-to-let (BTL) borrowers; the remaining 88.6% were originated to owner-occupied borrowers. BTL loans are viewed as more risky given borrowers who find themselves in difficultly are likely to default on their BTL properties prior to their primary dwelling. The recovery process associated with BTL loans is, however, generally less intensive in Ireland compared with owner-occupied loans; in addition, a BTL property can be placed into receivership by the administrator.

The Class A notes will benefit from an amortising liquidity reserve fund providing liquidity support for items senior in the waterfall to payments of interest on the Class A notes. The liquidity reserve will have a target amount equal to 1.5% of the outstanding Class A notes balance, and any amortised amounts will form part of available revenue funds.

Liquidity support for the rated notes is provided by the general reserve fund. The general reserve will have a target amount equal to 1.5% of the outstanding balance of the Class A to Class E notes less the liquidity reserve amount. The general reserve will amortise with no floor, in line with these notes.

Credit enhancement for the Class A notes is 15.5% and is provided by the subordination of the Class B notes to the Class Z notes. Credit enhancement for the Class B notes is 10.0% and is provided by the subordination of the Class C notes to the Class Z notes. Credit enhancement for the Class C notes is 7.0% and is provided by the subordination of the Class D notes to the Class Z notes. Credit enhancement for the Class D notes is 4.3% and is provided by the subordination of the Class E notes and the Class Z notes. Credit enhancement for the Class E notes is 2.3% and is provided by the subordination of the Class Z notes.

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 that may ultimately end up in foreclosure.

Borrower collections are held with The Governor and Company of the Bank of Ireland (rated A (low) with a Stable trend by DBRS) and are deposited on the next business day into the issuer transaction account held with Elavon Financial Services DAC, U.K. Branch. DBRS’s private rating of the issuer account bank 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:

-- The 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 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 the ratings include Bank of America Merrill Lynch on behalf of Finance Ireland Credit Solutions 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 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 25.9% and LGD of 57.0%, corresponding to the AAA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class B notes, a PD of 22.1% and LGD of 46.7%, corresponding to the AA (high) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class C notes, a PD of 14.6% and LGD of 40.3%, corresponding to the A (high) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class D notes, a PD of 9.2% and LGD of 30.3%, corresponding to the BBB rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class E notes, a PD of 4.5% and LGD of 21.4%, corresponding to the BB rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.

Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Class B notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Class C notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Class D risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Class E notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of B (sf)
-- 25% increase in PD, expected rating of B (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (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: Rehanna Sameja, Senior Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 5 July 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.