Press Release

DBRS Morningstar Assigns Ratings to Retiro Mortgage Securities DAC, Negative Trends

Nonperforming Loans

March 31, 2021

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings of A (sf), BBB (sf), BB (sf), and BB (low) (sf) to the Class A1, Class A2, Class B, and Class C notes (together, the Rated Notes) issued by Retiro Mortgage Securities DAC (the Issuer). All trends are Negative. DBRS Morningstar does not rate the Class D or Class E notes (together with the Rated Notes, the Notes).

DBRS Morningstar's ratings on the Class A1 and Class A2 (together, the Class A notes) address the timely payment of interest and ultimate repayment of principal by the final legal maturity date. Ratings on the Class B and Class C notes address the ultimate payment of interest and principal. The transaction benefits from an amortising Liquidity Reserve Fund and from separate nonamortising Class B and Class C Reserve Funds that provide liquidity support to the Class A, Class B, and Class C notes, respectively, and principal support to the Rated Notes at maturity, if available.

As of November 2020, the current balance of the asset-level loans was approximately EUR 678.4 million. Nonperforming loans (NPLs) represent the vast majority of the portfolio by current balance (91.9%) while more than half of the portfolio by property valuation is Real Estate Owned (REOs). The portfolio is resulting from the aggregation of four subportfolios (Wind, Tag, Normandia, and Tambo) acquired over time by OCM Luxembourg OPPS X S.à r.l., which operates as sponsor and retention holder in the transaction. Redwood MS Limited (Redwood) and VicAsset Holdings LLC (VicAsset) are acting as Master Servicers in this transaction.

RATING RATIONALE

The ratings are based on the following analytical considerations:

-- Portfolio Composition: The portfolio is fully secured with more than half of the assets by valuation already under management (REOs) and mostly comprises residential assets (61.7% of total valuation). The majority of the mortgages are first lien (92.6% by current balance) and 8.1% of the current balance is related to performing and subperforming loans.

-- Geographical Concentration: 26.3% and 27.1% of the portfolio by property valuation is concentrated in the Catalonia and Valencian Community regions, respectively. These two regions have passed regional regulations which could potentially have an impact on the repossession/sale of assets within the portfolio.
Mitigants: Redwood applied a three-month delay in recoveries from properties in the Catalonia and Valencian Community regions. DBRS Morningstar stressed the timing depending on the region and legal stage of each asset. DBRS Morningstar believes that its analysis reflects the geographical distribution of the portfolio since it is based on the historical sales and repossession data provided. Additionally, there are still many uncertainties around these regulations as they are still under negotiation.

-- Sequential Amortisation: The Class A2 notes will begin to amortise following the full repayment of the Class A1 notes unless an Enforcement Notice has been delivered. The Class B notes will begin to amortise following the full repayment of the Class A2 notes and the same applies to the Class C notes.

-- Priority of Payments: Interest and principal payments on the Class B notes are fully subordinated to the repayment of both interest (including Class A Additional Note Payments) and principal repayment of the Class A notes. The interest and principal payments on the Class C notes are subordinated to both interest (including Class B Additional Note Payments) and principal payments on the Class B notes.

-- Liquidity Support: The Liquidity Reserve Fund, the Class B Reserve Fund, and the Class C Reserve Fund provide liquidity support to the respective classes of notes. The initial balance of the Liquidity Reserve Fund will be equal to 5.0% of the initial Class A notes balance, whereas the Class B and C Reserve Funds will be equal to 7.5% and 10.5% of the initial Class B and Class C notes balance at closing, respectively.

-- Servicer Fee Deferral Structure: 50% of the servicing fees payable to the servicers will be subordinated to the Class C notes principal payments if the cumulative gross recoveries are below 80% of the initial business plan.

-- Secured Loan Structure: The structure is not a true sale structure, as most commonly seen in NPL securitisations. The Issuer does not own the securitised assets (mortgage loans and real estate assets), but instead has subscribed to secured loan notes issued by the four Irish entities which own the Spanish mortgage loans as well as the share capital in the Spanish propcos. Security, even when effective, is weaker and less immediate than ownership.
Mitigant: The security package is comprehensive and should be effective; in particular, the Irish share pledges over the shares of the Mortgage Lenders (or Irish Borrowers) would permit to take control of each Mortgage Lender’s loan portfolio and its Spanish propco subsidiaries.

-- Additional Note Payments and Liquidating Structure: DBRS Morningstar does not rate the payment of Additional Note Payments, but the Additional Note Payments on the Class A notes have a higher ranking than the paydown of interest and principal amounts due on the Class B notes and could have an impact on the Issuer’s ability to meet payment obligations to Class B noteholders. The same applies to the Class C noteholders in respect of Class A and Class B Additional Note Payments.
Mitigant: The rating analysis conducted by DBRS Morningstar in relation to the Class B and Class C notes has accounted for the cash flow leakages deriving from the payment of the Additional Note Payments on the Class A and Class B notes.

-- Squatters and Vandalised Properties: If there are squatters on any property, the squatters may need to be incentivised to leave and/or a court order may be required to evict them, causing delay and additional cost.
Mitigants: Out of 9,480 assets in the portfolio, 773 were squatted as of 30 November 2020. To account for potential delays and lower recoveries due to greater costs, Redwood anticipated some squatter eviction costs in its initial business plan. DBRS Morningstar followed the same approach and applied an additional six-month delay in the sale of properties occupied by squatters.

-- Interest Rate Risk: The coupon payable on the Notes is linked to three-month Euribor and a potential rise could have an impact on the Issuer’s ability to meet interest payments on the Notes.
Mitigants: The Issuer will enter into an interest rate cap agreement, whereby the interest rate cap provider will be obliged to make payments to the Issuer on each payment date if three-month Euribor exceeds 0.0% for the first three years and 0.5% for a further two years. Following the termination of the interest rate cap agreement, the coupon and the Additional Note Payment payable on the Rated Notes will become subject to a capped rate. Additionally, cash flows have been assessed in accordance with DBRS Morningstar’s “Interest Rate Stresses for European Structured Finance Transactions” methodology.

-- Tax Risks: The multijurisdictional structure, involving Spanish propcos, Irish Mortgage Lenders, and Luxembourg holding companies ultimately controlled by Cayman Island funds, could potentially be challenged by the Spanish tax authorities if they believe that it has been set up with a view to avoiding withholding taxes.
Mitigants: DBRS Morningstar understands that the structure reflects the substantial operational and managerial capabilities of the Oaktree Capital Management, L.P. group in Ireland and Luxembourg.

-- Coronavirus Disease (COVID-19)’s Impact on the Spanish Economy: In order to tackle the coronavirus crisis, the Spanish national government and the Catalonian regional government have granted COVID-19 Legal Moratoria. The impact of the pandemic and the moratoria on the portfolio is difficult to forecast. However, this could result in a temporary reduction and/or postponement of recoveries and ultimately affect the Issuer’s available funds to pay the amounts due under the Notes.
Mitigants: The COVID-19 Legal Moratoria have had little impact on the portfolio so far. Only 10 borrowers had agreed to a three-month extension on the maturity date of their loans and 19 tenants had agreed to either 50% forgiveness of between two and four months of rent or the temporary rent payment holiday. No coronavirus-related moratoria have been granted to borrowers in relation to the Tambo or Normandia subportfolios. DBRS Morningstar incorporated its revised expectation of a moderate medium-term decline in residential property prices.

DBRS Morningstar based its ratings on an analysis of the projected recoveries of the underlying collateral, the historical performance and expertise of the servicers, the availability of liquidity to fund interest shortfalls and special-purpose vehicle expenses, and the transaction’s legal and structural features. DBRS Morningstar’s A (sf) rating stress assumes a haircut of approximately 44.2% to the servicers’ initial business plan for the portfolio. For the BBB (sf), BB (sf), and BB (low) (sf) rating stresses, DBRS Morningstar assumes a haircut of approximately 38.9%, 31.4%, and 29.7% to the servicers’ initial business plan, respectively.

Collections on the asset-level loans and in relation to the REO Assets are payable into a collection account in the name of a Mortgage Lender or a propco with Banco Bilbao Vizcaya Argentaria, S.A.; Banco Santander SA; or CaixaBank, S.A. These collections (minus various expenses) will be paid monthly to a Mortgage Lender Payment Account with Citibank Europe Plc and (minus various Mortgage Lender deductions and expenses) from such Mortgage Lender Payment Accounts to a transaction account in the name of the Issuer. DBRS Morningstar currently rates Citibank Europe Plc with a public Long-Term Issuer Rating of AA (low) with a Stable trend. This counterparty meets DBRS Morningstar’s minimum criteria to act in such capacity. The transaction documents contain downgrade provisions relating to the transaction account bank where, if downgraded below BBB (low), the Issuer will replace the account bank. The downgrade provision is consistent with DBRS Morningstar’s criteria for the initial rating of A (sf) with a Negative trend assigned to the Class A1 notes.

BNP Paribas SA is the interest rate cap counterparty for the transaction. DBRS Morningstar rates BNP Paribas SA at AA (low) and R-1 (middle) with Stable trends and concluded that it meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade provisions with respect to BNP Paribas SA's role as hedging counterparty, consistent with DBRS Morningstar criteria.

The final maturity date of the transaction is in July 2075.

The coronavirus and the resulting isolation measures have resulted in a sharp economic contraction, increases in unemployment rates, and reduced investment activities. DBRS Morningstar anticipates that collections in European NPL securitisations will continue to be disrupted in the coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs 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 incorporated its expectation of a moderate medium-term decline in property prices; however, partial credit to house price increases from 2023 onwards is given in non-investment-grade scenarios.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-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.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 these ratings is: “Rating European Non-Performing Loans Securitisations” (13 May 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: http://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 a loan-by-loan data tape as of 30 November 2020, historical performance from Redwood, historical sales data from both servicers and two business plans prepared by the Master Servicers (the Wind and Tag subportfolios prepared by Redwood and Normandia and Tambo prepared by VicAsset).

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 a newly issued financial instrument. These are the first DBRS Morningstar public ratings on these financial instruments.

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 with the parameters used to determine the rating (the Base Case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 352.5 million, EUR 385.8 million, EUR 433.6 million, and EUR 444.1 million at the A (sf), BBB (sf), BB (sf), and BB (low) (sf) stress levels, respectively, a 5% and 10% decrease in the base case recovery rate.
-- 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 (sf) and to downgrades of the other Rated Notes (Class A2, Class B and Class C notes, respectively) to BB (high) (sf), BB (low) (sf), and B (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to downgrades of the Rated Notes (Class A1, Class A2, Class B, and Class C notes respectively) to BBB (high) (sf), BB (sf), B (sf), and CCC (high) (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: http://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: Sebastiano Romano, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 31 March 2021

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://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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