DBRS Morningstar Assigns Ratings to Burlington Mortgages No.1 DAC

DBRS Ratings Limited (DBRS Morningstar) assigned the following ratings to the notes issued by Burlington Mortgages No.1 DAC (the Issuer):

-- Class A1 Notes rated AAA (sf)
-- Class A2 Notes rated AAA (sf)
-- Class B Notes rated AA (low) (sf)
-- Class C Notes rated A (low) (sf)
-- Class D Notes rated BBB (low) (sf)
-- Class E Notes rated BB (sf)
-- Class Z Notes not rated

The ratings on the Class A1 and A2 notes address the timely payment of interest and ultimate repayment of principal on or before the final maturity date in 2058. The ratings on the Classes B, C, D, and E notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date.

Burlington Mortgages No.1 DAC (the Issuer or Burlington) is a securitisation collateralised by a portfolio of owner-occupied (OO) residential mortgage loans granted by EBS DAC (EBS) and its fully-owned subsidiary, Haven Mortgages Limited (Haven) in Ireland. Both originators – which are also the sellers in the transaction – are part of the Allied Irish Bank (AIB) banking group.

The Issuer issued seven tranches of collateralised mortgage-backed securities to finance the purchase of the mortgage portfolio. The general reserve fund and Class A liquidity reserve fund, which provide liquidity support and credit enhancement to the transaction, was fully funded at closing through subordinated loans provided by the two sellers.

The two sellers act as servicers of the transaction and will retain at least 5% of each class of the notes, in accordance with European Union securitisation regulations.

As of 29 February 2020, the initial portfolio consisted of 24,950 loans extended to 23,189 borrowers with an aggregate principal balance of EUR 4,026 million. EBS originated the majority of the loans (65.1%) with Haven originating the rest (34.9%). The portfolio excludes all loans that have either been restructured or been in arrears during at any point during the life of the mortgages so far. The weighted-average (WA) seasoning of the portfolio is 5.5 years as about one quarter of the pool was originated before 2010.

The transaction portfolio comprises both recent originations (59.9% comprise loans originated after 2015) and loans originated before 2010 and the sovereign debt crisis (25.8%), which drives up the indexed current loan-to-value as the properties backing pre-2010 loans were bought at the peak of the market. The WA seasoning of the pool is 5.5 years and the WA remaining term is 22.8 years. There is no concentration in the maturity profile of the portfolio. There are no mortgages that are in arrears or have been in arrears over the course of their life.

The origination quality of the pool is strong across vintages because of the borrowers’ prime features (95% full-time employees, and virtually 100% purchase purpose) and the prudent lending decisions underpinned by full valuation reports and a WA original loan-to-value of 79.4%.

The transaction benefits from an initial portfolio all-in rate of 3.0% whereas the WA cost of funding is only 0.25% initially but is expected to increase due to sequential amortisation and margin step-ups on several notes, including the Class A1 Notes. However, the transaction does not include any covenant on the minimum standard variable rate (SVR) to be paid by the portfolio, and there is no swap in place to hedge against the SVR compression over the life of the transaction. Therefore, portfolio margins may be compressed in an increasing rate scenario as, historically, lenders’ margins go down as monetary rates climb but also do so in a stable rating scenario due to the changes in the lenders’ competitive landscape.

The notes are paid down sequentially on a monthly basis, which allows credit enhancement for the more senior notes to build up over time as the notes amortise. The Class A1 and A2 notes pay interest pari passu and pro rata but the Class A2 Notes are time-subordinated to the Class A1 Notes since the Class A1 Notes amortise principal in priority to the Class A2 Notes until full redemption of the Class A1 Notes.

The transaction benefits from both a funded liquidity reserve to cover Class A1 and A2 interest shortfalls and a funded general reserve to cover interest and principal shortfalls on the rated notes. Moreover, principal can be drawn to cover interest on the most senior notes outstanding, thus further decreasing the risk of a default on the timely interest payment of the rated notes.

DBRS Morningstar based its ratings on the following analytical considerations:
--The transaction capital structure, and form and sufficiency of available credit enhancement to support DBRS Morningstar-projected expected cumulative losses under various stressed scenarios.
--The credit quality of the portfolio and DBRS Morningstar’s qualitative assessment of the originators’ capabilities with regard to originations, underwriting, and servicing.
--The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions of the notes. The ratings on the Class A1 and A2 notes address the timely payment of interest and ultimate repayment of principal on or before the final maturity date. The ratings on the Class B, C, D, and E notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date.
--The transaction parties’ financial strength in order to fulfil their respective roles.
--The transaction’s legal structure and its consistency with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, as well as the presence of the appropriate legal opinions that address the assignment of the assets to the Issuer.
--The sovereign rating of the Republic of Ireland at A (high) with a Positive trend as of the date of this press release.

DBRS Morningstar analysed its transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

For additional disclosure related to the impact of the Coronavirus Disease (COVID-19) on DBRS Morningstar rating methodologies, please see the following link: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies 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: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for the ratings include loan-by-loan data as of 29 February 2020 provided by the originators.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, 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 a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

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):

The following scenarios constitute the parameters used to determining the ratings (the Base Case):
-- In respect of the Class A1 and A2 Notes, the probability of default (PD) and loss given default (LGD) at the AAA (sf) stress scenario of 23.9% and 59.8%, respectively.
-- In respect of the Class B Notes, the PD and LGD at the AA (low) (sf) stress scenario of 14.1% and 45.7%, respectively.
-- In respect of the Class C Notes, the PD and LGD at the A (low) (sf) stress scenario of 10.0% and 39.6%, respectively.
-- In respect of the Class D Notes, the PD and LGD at the BBB (low) (sf) stress scenario of 5.9% and 29.0%, respectively.
-- In respect of the Class X Notes, the PD and LGD at the BB (sf) stress scenario of 3.1% and 23.9%, respectively.

Class A1 and A2 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 AAA (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 (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 A (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 A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (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 (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Class D Notes 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 (high) (sf)
-- 25% increase in PD, expected rating of BB (low) (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 BB (low) (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 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 Limited are subject to EU and US regulations only.

Lead Analyst: Lorenzo Coccioli, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 16 March 2020

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.

-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda

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].