Press Release

DBRS Morningstar Confirms Ratings on European Residential Loan Securitisation 2019-NPL2 DAC, Trend Remains Negative

Nonperforming Loans

December 21, 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the following classes of notes issued by European Residential Loan Securitisation 2019-NPL2 DAC (the Issuer):

-- Class A at A (sf)
-- Class B at BBB (high) (sf)
-- Class C at BBB (low) (sf)

The trend on all ratings remains Negative.

The transaction represents the issuance of Class A, Class B, Class C, Class P, and Class D notes. The rating of the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date. The ratings of the Class B and Class C notes address the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class D or Class P notes.

Proceeds from the issuance of the Class A to Class C notes were used to purchase a portfolio of first-charge performing and nonperforming Irish residential mortgage loans originated by Permanent TSB p.l.c. As of 30 September 2019, the portfolio had a total outstanding balance (OB) of EUR 1.3 billion and mostly comprised nonperforming loans (91.3% of the total OB). Lone Star International Finance DAC (Lone Star) acquired the mortgage loans in 2018.

Start Mortgages DAC services the portfolio. Hudson Advisors Ireland DAC was appointed as the issuer administration consultant and as such acts in an oversight and monitoring capacity and provides input on asset resolution strategies.

RATING RATIONALE
The rating confirmations follow the first annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of the portfolio recoveries as of 31 October 2020, with a focus on:
(1) Comparison between actual recoveries and servicer’s business plan forecast;
(2) Recovery performance observed since issuance and in the period following the outbreak of the Coronavirus Disease (COVID-19);
(3) Historical collections trend and average pay rate recorded in the last six months; and
(4) Comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: loan pool composition as of 31 October 2020 and evolution of its core features, including the portfolio breakdown by arrears status and the observed increase in the share of reperforming loans since issuance.
-- Liquidating structure: the order of priority entails a fully sequential amortisation of the notes – i.e., the Class B notes will begin to amortise following the full repayment of the Class A notes; the Class C notes will amortise following the repayment of the Class B notes; the Class D and the Class P notes will begin to amortise following the full repayment of all the rated notes. Additionally, the repayment of interest on the Class B notes is fully subordinated to the repayment of both interest and principal on the Class A notes, and the repayment of interest on the Class C notes has a lower ranking to the payments due on the Class B notes.
-- Liquidity support: the transaction benefits from three reserve funds available to mitigate temporary collection shortfalls on the payment of (1) senior costs and interest on the Class A notes, (2) interest on the Class B notes, and (3) interest on Class C notes, respectively.

According to the latest investor report dated 24 November 2020, the principal amount outstanding of the Class A, Class B, Class C, Class P, and Class D notes was equal to EUR 549.4 million, EUR 59.6 million, EUR 59.6 million, EUR 119.8 million, and EUR 470.3 million, respectively. The balance of the Class A notes amortised by approximately 11.6% since issuance. The current aggregated transaction balance is EUR 1,258.7 million.

As of 31 October 2020, the transaction was performing significantly below the servicer’s initial expectations. The actual cumulative gross collections were EUR 91.1 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 240.3 million for the same period. Despite the above, the transaction is performing above DBRS Morningstar’s stressed expectations for the same period.

The negative trend assigned to the ratings is retained with a view to closely monitoring the underperformance compared with the servicer’s business plan observed thus far, also considering the future development of the real estate market and macroeconomic environment.

The transaction benefits from three reserve funds to support liquidity shortfalls on senior costs, interest due in relation to the rated notes and, ultimately, the repayment of principal on the same, if available:
-- The Class A reserve fund, which was fully funded at closing to an initial amount equal to 4.0% of the Class A notes balance and amortises based on the same;
-- The Class B reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 7.5% of the Class B notes balance; and
-- The Class C reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 10.0% of the Class C notes balance;
Credits to the Class B and Class C reserves are made outside of the waterfall based on the proceeds of the interest rate cap allocated proportionately to the respective size of the Class B and Class C notes relative to the cap notional.
According to the investor report dated 24 November 2020, the Class A reserve fund amounted to EUR 22.3 million, which is in line with the target balance, and the Class B and Class C notes reserve fund balance amounted to EUR 3.4 million and EUR 4.1 million, respectively.

The final maturity date of the transaction is 24 February 2058.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp economic contraction, increases in unemployment rates and reduced investment activities. DBRS Morningstar anticipates that collections in European nonperforming loan securitisations will continue to be disrupted in coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from nonperforming loans and the related real estate collateral. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar assumed reduced collections for the next two quarters and incorporated its revised expectation of a moderate medium-term decline in residential property prices, albeit partial credit to house price increases from 2023 onwards is given on non-investment grade scenarios.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 2 December 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include the Issuer and/or its agents, which comprise a data tape as of 31 October 2020, detailed performance data as of 31 October 2020, and monthly investor report dated 24 November 2020.

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

At the time of the initial ratings, 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.

The last rating action on this transaction took place on 8 May 2020, when DBRS Morningstar assigned a Negative trend to the ratings of the Class A, Class B, and Class C notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the ratings (the Base Case):

-- The expected principal and interest collections in a declining interest rate scenario at the A (sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collections in a declining interest rate scenario at the BBB (high) (sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collections in a declining interest rate scenario at the BB (sf) rating level, a 5% and 10% reduction in the expected collections.

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class A notes at A (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class B notes at BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class B notes to BBB (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class C notes to BB (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Sebastiano Romano, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 12 November 2019

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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