DBRS Morningstar Finalises Provisional Ratings on European Residential Loan Securitisation 2019-PL1 DAC

DBRS Ratings GmbH (DBRS Morningstar) finalised the following provisional ratings to the notes issued by European Residential Loan Securitisation 2019-PL1 DAC (ERLS 2019-PL1 DAC or the Issuer):

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

The Class Z and Class X notes are not rated by DBRS Morningstar and will be retained by the seller.

Classes A to F (collectively, the Rated Notes) comprise the collateralised notes. The rating on the Class A notes addresses the timely payment of interest and ultimate repayment of principal on or before the final maturity date. The rating on the Class B notes addresses the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. The ratings on the Class C, D, E and F notes address the ultimate payment of interest and repayment of principal by the final maturity date.

The transaction benefits from a non-amortising reserve fund, which is split into a general reserve and liquidity reserve. The general reserve provides liquidity and credit support to the Rated Notes. The liquidity reserve is amortising and provides liquidity support to the Class A notes. Amortised amounts of the liquidity reserve form part of the general reserve.

The mortgage portfolio comprises owner-occupied and buy-to-let mortgage loans. The outstanding balance of the mortgage portfolio was approximately EUR 676 million as at 31 July 2019.

Proceeds from the issuance of the Rated Notes have been used to purchase first-charge performing and re-performing Irish residential mortgage loans. The mortgage loans were originated by Permanent TSB p.l.c. (PTSB) and are primarily secured by Irish residential properties. Lone Star International Finance DAC (Lone Star) acquired the mortgage loans in 2018. The legal opinion received by DBRS Morningstar addresses the transfer of loans from the seller to the Issuer but does not address the initial sale of loans from PTSB to the seller. DBRS Morningstar has received a report on the due diligence carried out at the time of the initial sale from PTSB to the seller, which amongst other things includes review of standard form documentation, a searches tracker review and a physical review of s small number of loan files from the portfolio. Furthermore, DBRS Morningstar understands that the claw back period in Ireland after a sale of assets is limited to one year under most circumstances and notes that the first portfolio sale was in July 2018.

Start Mortgages DAC (Start) services the mortgage loans and act as the administrator of the assets for the transaction. Hudson Advisors Ireland DAC (Hudson) was appointed as the Issuer administration consultant and, as such, is acting in an oversight and monitoring capacity.

In the mortgage portfolio, approximately 13% of the loans have been restructured as split loans (aggregate current balance of EUR 88 million) with an affordable interest-accruing balance (aggregating to EUR 47.6 million). The remaining warehoused loans will be repaid at maturity and bear no interest (aggregating to EUR 40.2 million). For the split loans, a borrower can default during the life of the loan (e.g., as a result of payment difficulties). Additionally, a borrower who has managed to maintain payment during the life of the loan, and 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. In its analysis, DBRS Morningstar 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 by taking into account both the interest-bearing and non-interest-bearing (i.e., warehoused) loans. Additionally, borrowers who do not default on the loan during its loan term 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 Morningstar 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 Morningstar has taken this into account when estimating the LGD for such defaults. Losses from both scenarios were taken into account for the cash flow analysis.

The weighted-average current loan-to-value indexed (WACLTV(ind)) of the portfolio is 79.7%, with 20.9% of the loans in negative equity. The credit enhancement for the notes is primarily on account of the subordinated collateralised notes and the availability of the general reserve. The Class A notes’ credit enhancement is 49.2%, that for the Class B notes is 39.7%, for the Class C notes is 34.2%, for the Class D notes is 29.5%, for the Class E notes is 24.6% and for the Class F notes is 18.5%.

The senior-most outstanding notes and notes where the respective principal deficiency ledger balance is less than 10% of the outstanding balance can also receive liquidity support from principal receipts. An interest rate cap with a notional of EUR 300 million for seven years may provide further liquidity support to the notes and 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 (24.9% of the mortgage portfolio), loans paying interest linked to the European Central Bank rate (69.9% 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 Morningstar’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 Morningstar calculated the PD, LGD and expected loss (EL) outputs on the mortgage portfolio. The PD, LGD and EL are used as inputs into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’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 and Class F 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) with a Stable trend (as of the date of this press release).
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and, subject to the comments about the first portfolio sale previously mentioned, 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 Morningstar 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 “Global Methodology for Rating Sovereign Governments” at: http://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Start Mortgages DAC and PTSB.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

-DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar 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 Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar 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 Morningstar 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 56.9% and LGD of 68.3%, 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 51.1% and LGD of 57.9%, 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 47.9% and LGD of 54.1%, 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 43.6% and LGD of 48.2%, 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 39.9% and LGD of 41.6%, 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 F notes, a PD of 30.7% and LGD of 32.0%, corresponding to the B (high) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS Morningstar 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 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 Class A 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 A 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 A notes to A (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 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 (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 (high) (sf).
-- A hypothetical increase of the base case LGD 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 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 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 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 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 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 (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 BB (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 B (high) (sf).

Class E Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a 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 a 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 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 (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 (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).

Class F Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class F notes to B (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 a downgrade of the Class F notes to B (sf).
-- A hypothetical increase of the base case LGD 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 PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade 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 Class F notes to below 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 F notes to below 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 F notes to below B (low) (sf).

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 September 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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 Morningstar 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 [email protected].

This press release was amended on 27 November 2019 to correct a disclosure that listed the wrong DBRS Morningstar legal entity.