Press Release

DBRS Morningstar Confirms Rating on ProSil Acquisition S.A., Trend Remains Negative

Nonperforming Loans

July 30, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A notes issued by ProSil Acquisition S.A. (the Issuer) at BB (high) (sf) with a Negative trend.

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

The notes are collateralised by a pool of mostly secured Spanish nonperforming loans (NPLs) originated by Abanca Corporación Bancaria, S.A. and Abanca Corporación División Immobilaria S.L. ProSil Acquisition S.A., Cell Number 1, Cell Number 2, and Cell Number 3 (the Transferor) sold the receivables to ProSil Acquisition S.A., Cell Number 5 (the Issuer). As of the closing date in March 2019, the gross book value of the loan pool was approximately EUR 494.7 million. Cortland Investors II S.à r.l. operates as sponsor and retention holder in the transaction and, over time, acquired the three portfolios that are part of the pool (Avia, Lor, and Sil). HipoGes Iberia S.L. services the loans and manages the following Spanish property companies as at the date of closing: Beautmoon Spain, S.L.; Osgood Invest, S.L.; Butepala Servicios y Gestiones S.L.; and Vetapana Servicios y Gestiones S.L.

RATING RATIONALE
The confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: Assessment of the portfolio recoveries as of March 2021, with a focus on:
(1) Comparison of actual gross collections and the servicer’s initial business plan forecast;
(2) Recovery performance observed over the last six months, including the period following the outbreak of the Coronavirus Disease (COVID-19); and
(3) Comparison of current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: Loan pool composition as of March 2021 and evolution of its core features since issuance.
-- Transaction 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 and the Class J notes will amortise following the full 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 net present value cumulative profitability ratio are lower than 90%. This trigger has been breached since the April 2020 interest payment date (IPD).
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure, covering against potential interest shortfall on the Class A notes and senior fees. The current amount of the cash reserve is equal to EUR 6.7 million and the target amount is equal to 4.5% of the Class A notes (EUR 7.65 million at closing).

TRANSACTION AND PERFORMANCE
According to the latest investor report dated 30 April 2021, the principal amount outstanding on the Class A, Class B, Class J, and Class Z notes was equal to EUR 146.9 million, EUR 30.0 million, EUR 15.0 million, and EUR 16.0 million, respectively. The balance of the Class A notes amortised by approximately 13.6% since issuance. The current aggregated transaction balance is EUR 207.9 million.

As of March 2021, the transaction was performing significantly below the servicer’s initial expectations. The actual cumulative gross collections equal EUR 52.0 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 106.7 million for the same period. Therefore, as of March 2021, the transaction was underperforming by EUR 54.7 million (-51.3%) compared with initial expectations.
As of March 2021, the profitability on closed borrowers (397), accounting for approximately 75.3% of portfolio´s cumulative gross collections (EUR 39.1m), was below the Servicer´s initial expectations as reflected in the NPV Cumulative Profitability Ratio at 93.8%.

The cumulative net collection ratio of 47% is below the 90% trigger level and interest on the Class B notes has been subordinated to principal payments on the Class A notes since the April 2020 IPD.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 36.5 million at the BBB (low) (sf) stressed scenario. Therefore, as of March 2021, the transaction was performing above DBRS Morningstar’s stressed initial expectations.

In February 2021, the servicer provided DBRS Morningstar with a revised business plan as of December 2020, which is slightly below the initial expectations in terms of cumulative gross collections but provides for timing delays as a result of result of the coronavirus pandemic. In this updated business plan, the servicer expects total cumulative gross collections accounting for EUR 316.3 million, which is 2.8% lower than the EUR 325.4 million expected in the initial business plan.

Without including actual collections, the expected future collections from January 2021 are now accounting for EUR 270.1 million (EUR 235.2 million in the initial business plan). Hence, the servicer revised its expectation for collection on the remaining portfolio upward. The updated DBRS Morningstar BB (high) (sf) rating stress assumes a haircut of 30.4% to the servicer’s latest business plan, considering expected collections from April 2021 onward.

The final maturity date of the transaction is 31 October 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 noninvestment grade scenarios. The Negative trend reflects the ongoing uncertainty amid the coronavirus pandemic.

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 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.

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 rating 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/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include the Issuer and/or its agents, which comprise an updated business plan as of 31 December 2020, a detailed servicer report as of March 2021, and a quarterly investor report dated 30 April 2020.

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

At the time of the initial rating, 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 this rating 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 31 July 2020, when DBRS Morningstar downgraded the rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Clarice Baiocchi.

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):

-- Recovery Rates Used: Cumulative Base Case Recovery Amount of approximately EUR 183.2 million at the BB (high) (sf) stress level, a 5% and 10% decrease of the Cumulative Base Case Recovery Rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A notes to CCC (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 A notes to CCC (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: Clarice Baiocchi, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 July 2019

DBRS Ratings GmbH
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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: 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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