Press Release

DBRS Morningstar Upgrades Ratings on Ares Lusitani STC, S.A. (Gaia), Changes All Trends to Stable

Nonperforming Loans

May 21, 2021

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the Class A Notes issued by Ares Lusitani STC, S.A. (Gaia) (the Issuer) to A (sf) from BBB (low) (sf) and the Class B Notes to BBB (sf) from CCC (sf). DBRS Morningstar also changed all trends to Stable from Negative as a result of the transaction’s performance to date.

The transaction represents the issuance of Class A, Class B, and Class J Notes (collectively, the Notes). The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final legal maturity date. The rating on the Class B Notes addresses the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class J Notes in the transaction.

The Issuer used the proceeds from the issuance of the Notes to purchase a Portuguese nonperforming loan (NPL) portfolio originated by Caixa Económica Montepio Geral and Caixa Económica Bancária, S.A., then sold to the Issuer by Mimulus Finance DAC. The total outstanding balance of the portfolio was EUR 234.3 million as of December 2018 (the Cut-Off Date). The loan pool is composed of secured commercial and residential loans (41% of the outstanding balance) and unsecured receivables (59% of the outstanding balance). The servicer for both the secured and unsecured pool is Altamira Asset Management Portugal, Unipessoal, Lda. (the Servicer) (formerly Proteus Asset Management, Unipessoal, Lda.).

RATING RATIONALE
The rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: an assessment of portfolio recoveries as of 31 October 2020, focusing on: (1) a comparison between actual collections and the Servicer’s initial business plans’ forecast; (2) the collection performance observed since issuance, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) a comparison between the current performance and DBRS Morningstar’s initial expectations.
-- The Servicer’s updated business plans: a review of the updated business plans, which DBRS Morningstar received in April 2021, and a comparison with the initial business plans’ expectations.
-- Portfolio characteristics: the loan pool composition as of October 2020 and the evolution of its core features since issuance.
-- Transaction liquidating structure: the order of priority includes 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 and the Class J Notes will amortise following the repayment of the Class B Notes). Additionally, interest payments on the Class B Notes become subordinated to principal payments on the Class A Notes if the cumulative collection ratio or the net present value (NPV) cumulative profitability ratio is lower than 90%. These triggers were not breached on the November 2020 interest payment date, at which time the actual figures were 109% and 111%, respectively, according to the latest investor report.
-- Liquidity support: the transaction benefits from a cash reserve providing liquidity to the structure, covering potential interest shortfall on the Class A Notes and senior fees. The cash reserve, whose target amount is EUR 1.88 million until the interest payment date falling in November 2020 and 3.0% of the Class A Notes principal outstanding balance thereafter, is currently fully funded.

According to the latest investor report in November 2020, the outstanding principal amounts of the Notes were EUR 16.6 million, EUR 7.6 million, and EUR 15.0 million, respectively. The balance of the Class A Notes has amortised by approximately 65.0% since issuance. The current aggregated transaction balance is EUR 39.2 million.

As of October 2020, the transaction was performing slightly below the Servicer’s initial expectations. The actual cumulative gross collections equalled EUR 41.6 million whereas the Servicer’s initial business plans estimated cumulative gross collections of EUR 42.1 million for the same period. Therefore, as of October 2020, the transaction was underperforming by EUR 0.4 million (-1.0%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 4.9 million at the BBB (low) (sf) stressed scenario and EUR 5.3 million at the CCC (sf) stressed scenario. Therefore, as of October 2020, the transaction was overperforming compared with DBRS Morningstar’s stressed initial expectations.

In April 2021, the Servicer provided DBRS Morningstar with revised business plans starting from 1 November 2020. In the updated business plans, the Servicer assumed lower recoveries compared with initial expectations. The total cumulative gross collections (including actual collections) from the updated business plans were EUR 99.7 million, which is 5.5% lower than the EUR 105.4 million expected in the initial business plans.

Excluding actual collections, the Servicer’s expected collections from November 2020 are now EUR 58.0 million versus EUR 63.4 million in the initial business plans. Hence, the Servicer revised its expectation for collection on the remaining portfolio downward. The updated DBRS Morningstar expectations assume a haircut of 51.2% and 48.0% to the Servicer’s latest business plan at the A (sf) and BBB (sf) levels, respectively, considering expected collections.

The upgrade is mainly driven by the transaction’s healthy performance compared with DBRS Morningstar’s stressed initial expectations, which led to a faster-than-anticipated deleveraging compared with initial expectations. The Stable trend reflects the transaction’s adequate ability to withstand potential reductions in the collection expectations amid the outbreak of the coronavirus pandemic.

The rating on the Class A Notes also considers the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents (i.e., a minimum rating of BBB (low)).

The final maturity date of the transaction is in November 2039.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

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.

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 the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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.

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.

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 (J.P. Morgan Securities PLC; Citibank, N.A.; and the Servicer), which comprise, in addition to the information received at issuance, the updated business plans received in April 2021, updated servicer reports and data tape as of October 2020, and the investor report as of 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 29 May 2020, when DBRS Morningstar confirmed the ratings on the Class A and Class B Notes at BBB (low) (sf) and CCC (sf), respectively, with Negative trends.

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 rating, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to confirm the rating (the base case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 28.3 million and EUR 30.1 million at the A (sf) and BBB (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 a downgrade of the Class B Notes to BBB (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes at A (sf) and to a downgrade of the Class B Notes to 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. 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.

This rating is 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: 2 May 2019

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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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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