DBRS Morningstar Finalises Provisional Ratings on Dilosk RMBS No. 4 DAC

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the residential mortgage-backed floating-rate notes issued by Dilosk RMBS No. 4 DAC (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)

DBRS Morningstar does not rate the Class X and Class Z notes.

The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal. The ratings on the Class B, Class C, Class D, and Class 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 margins on the final structure’s notes are lower than the ones envisaged in the provisional structure. This had a positive impact on the final ratings assigned to the Class B, Class C, Class D, and Class E notes, which are higher than DBRS Morningstar's respective provisional ratings of AA (sf), A (sf), BBB (low) (sf), and BB (high) (sf).

RATING RATIONALE
Dilosk RMBS No. 4 DAC (the Issuer) is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in the Republic of Ireland. The proceeds of the notes will be used to fund the purchase of prime and performing Irish buy-to-let (BTL) and owner-occupied (OO) mortgage loans secured over properties located in Ireland. The mortgage loans were originated by Dilosk DAC (Dilosk, the originator and the seller) between 2019 and 2021.

This is the fourth securitisation from Dilosk, following Dilosk RMBS No. 3, which closed in April 2019. The initial mortgage portfolio consisted (as of 30 November 2020) of EUR 260 million of first-lien mortgage loans collateralised by owner-occupied and BTL residential properties in the Republic of Ireland. The mortgages – all originated by Dilosk DAC – have mostly been granted in the past 1.5 years (i.e., after the last transaction closed). The transaction will also include a prefunding period of three months, from closing in February 2021 to the first payment date in May 2021. In order to mitigate possible adverse credit mitigations in the overall portfolio, after the prefunding period, the portfolio will need to adhere to specific portfolio covenants.

The mortgage loans will be serviced by Link Asset Services in its role of delegated servicer. DBRS Morningstar reviewed both the originator and the servicer through a phone update in October 2020 with two separate calls: one on origination with Dilosk and one with the Link team that manages the Dilosk portfolio. Underwriting guidelines are in accordance with market practices observed in Ireland and are subject to the Central Bank of Ireland’s macroprudential mortgage regulations, which specify restrictions on certain lending criteria.

Liquidity in the transaction is provided by the general reserve fund, which can be used to pay senior costs and interest on the rated notes (but also to clear principal deficiency ledger (PDL) balances). Liquidity for the Class A notes will be further supported by a liquidity reserve fund, fully funded at closing and then amortising in line with the Class A notes. Principal receipts from loans can be used to support liquidity for the Class A notes and after the Class A notes have been redeemed in full, to support the liquidity for the most senior class of notes outstanding (but only after shortfalls are first met from the general reserve fund and the liquidity reserve for Class A interest).

Credit enhancement for the Class A notes is calculated at 19.5% and is provided by the subordination of the Class B notes to the Class Z notes and the reserve funds. Credit enhancement for the Class B notes is calculated at 11.8% and is provided by the subordination of the Class C notes to the Class Z notes and the reserve funds. Credit enhancement for the Class C notes is calculated at 7.3% and is provided by the subordination of the Class D notes to the Class Z notes and the reserve funds. Credit enhancement for the Class D notes is calculated at 5.0% and is provided by the subordination of the Class E notes to the Class Z notes, and the reserve funds. Credit enhancement for the Class E notes is calculated at 3.5% and is provided by the subordination of the Class Z notes and the reserve funds.

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.

The Issuer entered into a fixed-to-floating swap agreement with Natixis that hedges the interest mismatch between the floating rate paid by the notes and the fixed rate paid by part of the portfolio. Moreover, to mitigate basis risk on the variable interest portion of the portfolio, the servicer is contractually obliged to maintain the SVR rate on the loans at a minimum of the three-month Euribor plus 3.25% for BTL loans and a minimum of three-month Euribor plus 2.40% for OO loans, subject to such variable interest not being less than zero.

Payments will be made by the borrowers via direct debit into a collection account held with BNP Paribas, Dublin Branch, and will be transferred on a daily basis to the transaction account, held with the same bank. Based on its private rating and on the replacement provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings on a 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 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 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, 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 Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many structured finance transactions, some meaningfully. 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.

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 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-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.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the ratings of DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see https://www.dbrsmorningstar.com/research/360599.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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” (21 September 2020).

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 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 source of data and information used for these ratings was Dilosk. DBRS Morningstar was provided with a loan-by-loan data tape as of 30 November 2020. The data tape is comprehensive; however, the payment due for loans originated in the month of November is missing. For those loans, in order to estimate the ICR of BTL loans, DBRS Morningstar estimated the due payment through the annuity formula in Excel.
DBRS Morningstar was also provided with the following historical data sets:
• Aggregated monthly dynamic arrears from April 2017 to September 2020;
• Aggregated monthly prepayment rates from April 2017 to September 2020;
• Coronavirus Disease (COVID-19) payment holiday history at pool level.

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.
This is the first rating action on this transaction since the Initial Rating Date.
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 determine the ratings (the Base Case):
-- In respect of the Class A notes, a PD of 34.6% and LGD of 54.7%, corresponding to the AAA (sf) 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 30.1% and LGD of 43.5%, corresponding to the AA (high) (sf) 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 22.9% and LGD of 39.7%, corresponding to the AA (low) (sf) 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 15.9% and LGD of 30.6%, corresponding to the BBB (high) (sf) 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 12.8% and LGD of 23.1%, corresponding to the BBB (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.

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 AA (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 AA (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 AA (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 AA (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 AA (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 AA (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 AA (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 A (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 AA (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 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 B 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 B notes to A (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 A (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 A (low) (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 (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 A (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 (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 C notes to A (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 BBB (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 BBB (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 BBB (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 (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to BBB (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 (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D 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 D 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 D 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 D 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 D notes to BB (high) (sf).

Class E Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would not lead to a rating change.
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would not lead to a rating change.
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E 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 E 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 E 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 E 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 E notes to BB (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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 25 January 2021

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

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 January 2021) and European RMBS Credit Model v 1.0.0.0,
https://www.dbrsmorningstar.com/research/372339/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.

-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.

-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators

-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers

-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.

-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].