DBRS Morningstar Finalises Provisional Ratings on Mulcair Securities No.2 DAC

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the notes issued by Mulcair Securities No.2 DAC (Mulcair No.2 or the Issuer):

-- Class A rated AAA (sf)
-- Class B rated AA (sf)
-- Class C rated A (low) (sf)
-- Class D rated BBB (low) (sf)
-- Class E rated BB (sf)
-- Class F rated BB (low) (sf)

The Class Z notes also issued in the transaction are not rated by DBRS Morningstar.

The finalised rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal. The finalised rating on the Class B notes addresses the timely payment of interest when the notes are the most senior and the ultimate payment of principal. The finalised ratings on the Class C, Class D, Class E, and Class F notes address the ultimate payment of interest and ultimate payment of principal. An increased margin on all the rated notes is payable from the step-up date in April 2024. Additional amounts are also due to the Class D, Class E, and Class F notes on and from the first interest payment date following the step-up date. Such additional amounts are not rated by DBRS Morningstar.

Mulcair No.2 is a bankruptcy-remote special-purpose vehicle incorporated in Ireland. The issued notes were used to fund the purchase of reperforming Irish residential mortgage loans sold by The Governor and Company of the Bank of Ireland (rated A (low) with a Negative trend by DBRS Morningstar) and secured over properties in Ireland.

As at 31 March 2021, the secured mortgage portfolio consisted of 2,996 loans to 1,172 borrowers with a total portfolio balance of approximately EUR 344.5 million with an additional EUR 5.7 million of unsecured loans. The weighted-average (WA) loan-to-indexed value is 66.9% with a WA seasoning of 14.5 years. Most of the portfolio consists of floating-for-life loans (88.8%) indexed either to the European Central Bank Base Rate (66.9%) or an Standard Variable Rate set by the Bank of Ireland (25.0%). The remaining 11.2% of fixed-rate loans will switch to the SVR. The notes pay a floating rate of interest linked to three-month Euribor.

To partially mitigate the interest rate mismatch, the transaction is structured with an interest rate cap agreement with Natixis, which is privately rated by DBRS Morningstar. The interest rate cap agreement will terminate on 24 April 2028 or, if earlier, the date as of which all amounts due under the Class A, Class B, Class C, Class D, Class E, and Class F notes have been repaid and/or redeemed in full. The Issuer will receive payments to the extent that one-month Euribor is higher than 1.5% for the relevant interest period. The interest rate cap notional balance will be equal to 20.0% of the portfolio balance.

Approximately 82.4% of the mortgage portfolio by loan balance was originated between 2005 and 2008. The performance history for the pool indicates that 43.4% of the outstanding pool has previously been more than three months in arrears and that around 97.8% has undergone some form of forbearance measure. Currently, 1.8% of the portfolio is more than three months in arrears.

The Class A and B notes benefit from liquidity support provided by a senior reserve fund. At closing, the senior reserve fund will be sized at 2.0% of the Class A and B notes balance and will amortise with a floor of 1.0% of the initial Class A and B notes balance.

The Class C, Class D, Class E, and Class F notes benefit from credit and liquidity support provided by the amortising general reserve. The general reserve will be sized at 2.0% of the initial Class C to Class F notes and will amortise with no floor, in line with these notes. The general reserve does not provide support to the Class A notes.

Credit enhancement for the Class A notes is calculated at 28.5% and is provided by the subordination of the Class B to Class Z notes. Credit enhancement for the Class B notes is calculated at 21.8% and is provided by the subordination of the Class C to Class Z notes and the general reserve fund. Credit enhancement for the Class C notes is calculated at 17.0% and is provided by the subordination of the Class D to Class Z notes and the general reserve fund. Credit enhancement for the Class D notes is calculated at 12.8% and is provided by the subordination of the Class E to Class Z notes and the general reserve fund. Credit enhancement for the Class E notes is calculated at 10.3% and is provided by the subordination of the Class F and Class Z notes as well as the general reserve fund. Credit enhancement for the Class F notes is calculated at 8.8% and is provided by the subordination of the Class Z notes and the general reserve fund.

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 in line with increases in the number of months in a loan’s arrears status. This is positive for the transaction as provisioning based on the arrears status will trap any excess spread much earlier for a loan, which may ultimately end up in foreclosure.

Borrower collections are held with The Governor and Company of the Bank of Ireland and are deposited on the next business day into the Issuer deposit account held with The Bank of New York Mellon - London Branch (rated AA (high) with a Stable trend by DBRS Morningstar). DBRS Morningstar’s rating on the Issuer Account Bank, along with the replacement provisions upon downgrade below “A”, is consistent with the threshold for the Account Bank outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:
-- 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 (EL) outputs on the mortgage portfolio. The PD, LGD, and ELs are used as an input into DBRS Morningstar’s cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “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, Class E, and Class F notes according to the terms of the transaction documents.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as a downgrade, and replacement language in the transaction documents.
-- The sovereign rating on the Republic of Ireland at A (high)/R-1 (middle) with Stable trends as of the date of this press release.
-- 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.

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

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for 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, where appropriate, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated an increase in probability of default for certain borrower characteristics, and conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand potential high levels of payment holidays in the portfolio.

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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 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 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 Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 January 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrsmorningstar.com 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.

An asset and a cash flow analysis were both conducted.

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 “Rating Sovereign Governments” methodology 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 Governor and Company of the Bank of Ireland and its agents. DBRS Morningstar was provided with loan-level data as of 31 March 2021, historical monthly borrower payment information, dynamic delinquencies and restructure data covering the period from January 2012 to January 2021.

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 ratings on this financial instrument.

This is the first rating action 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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- In respect of the Class A Notes, a PD of 38.9% and LGD of 60.1%, corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 32.9% and LGD of 48.4%, corresponding to the AA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 27.1% and LGD of 41.0%, corresponding to the A (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 21.9% and LGD of 31.5%, corresponding to the BBB (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E Notes, a PD of 17.1% and LGD of 27.0%, corresponding to the BB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F Notes, a PD of 15.8% and LGD of 24.7%, corresponding to the BB (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS Morningstar concludes the following impact on the rated notes:

Class A:
-- 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 (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 (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 (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 A (high) (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 A (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 A Notes to BBB (high) (sf).

Class B:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class B Notes to A (high) (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 (low) (sf).
-- A hypothetical increase of the base case 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 LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class B Notes to A (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 BBB (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 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 B 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 B Notes to BBB (low) (sf).

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

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

Class E:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead downgrade of the Class E Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class E Notes to BB (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class E Notes to B (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 B (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 B (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 B (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 below B (sf).

Class F:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead downgrade of the Class F Notes to B (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to B (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class F Notes to B (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to B (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 F Notes to B (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 F Notes to below B (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 F Notes to below B (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 F Notes to below B (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.

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

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 18 June 2021

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 80883500

Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.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 (6 April 2021), https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- 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 Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- 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.
-- 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: http://www.dbrs.com/research/278375.

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