DBRS Morningstar Finalises Provisional Ratings on TAGUS – Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No.2)

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by TAGUS – Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No.2) (the Issuer or Ulisses Finance No.2), a limited liability company incorporated under the laws of Portugal:

-- Class A Notes at AA (low) (sf)
-- Class B Notes at A (low) (sf)
-- Class C Notes at BBB (low) (sf)
-- Class D Notes at BB (low) (sf)
-- Class E Notes at B (low) (sf)

DBRS Morningstar did not assign ratings to the Class F Notes, Class G Notes, and Class Z Notes issued in this transaction. The rating of the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date. The ratings of the Class B Notes, Class C Notes, Class D Notes, and Class E Notes address the ultimate repayment of interest (timely when most senior) and the ultimate repayment of principal by the legal final maturity date.

The transaction represents the issuance of notes backed by assigned rights of receivables related to auto loans granted by 321Crédito – Instituição Financeira de Crédito, S.A. (321C) to borrowers in the Republic of Portugal. 321C acts as servicer for the transaction.

The underlying receivables consist of fully amortising auto loan contracts granted for the purpose of acquiring used vehicles (99.6% of the initial portfolio). There are neither balloon loans nor auto lease contracts contained within the portfolio and, therefore, the Issuer is not directly exposed to residual value risk.

The transaction includes a one-year revolving period during which time the originator may offer additional receivables that the Issuer may purchase, provided that eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as a breach of performance triggers, an insolvency of the seller, or default of the servicer.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, a cash reserve, and excess spread;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar's projected cumulative net loss assumptions under various stressed cash flow assumptions for the Rated Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- 321C's capabilities with regard to originations, underwriting, and servicing;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the originator’s portfolio;
-- DBRS Morningstar's sovereign rating on the Republic of Portugal, currently at BBB (high) with a Stable trend; and
-- The consistency of the transaction's legal structure with DBRS Morningstar’s Legal Criteria for European Structured Finance Transactions methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
During the revolving period, and prior to the delivery of an enforcement notice or an optional redemption event, the Issuer applies the available funds in accordance with a combined priority of payments that incorporates a specific carve out for the repayment of principal on the asset-backed notes (the application of the principal withholding amount). Prior to a sequential redemption event principal is allocated to the asset-backed notes on a pro rata basis. Following a sequential redemption event principal is allocated on a sequential basis. Once the amortisation becomes sequential it cannot be switched to pro rata.

Except for the then most senior notes, interest on the asset-backed notes may be deferred to protect the payment of principal of the notes senior to itself. Interest deferral is subject to note-specific conditions that evaluate principal deficiencies for each asset-backed note. These deferrals are curable and potentially allow for interest payments previously deferred to switch back to their higher position in the pre-enforcement payment priority.

The structure incorporates a cash reserve available to cover senior expenses and interest shortfalls on the Class A Notes, Class B Notes, and Class C Notes. However, after these notes have been redeemed the target cash reserve amount is equal to zero.

There is an interest rate mismatch as 94.9% of the initial portfolio represents fixed-rate loans whilst floating-rate asset-backed notes have been issued. There is also a degree of basis risk as floating-rate loans are indexed to three-month Euribor while the Rated Notes are indexed to one-month Euribor. The Issuer has entered into an interest rate cap agreement with Deutsche Bank AG in order to hedge the exposure to fixed-rate loans. Floating-rate loans are repriced on a quarterly basis and represent a relatively small proportion of the portfolio.

COUNTERPARTIES
Deutsche Bank AG has been appointed as the Issuer’s account bank and cap counterparty for the transaction. DBRS Morningstar's public Long-Term Issuer rating of Deutsche Bank AG is at A (low) with a Stable trend, which meets the criteria to act in these capacities. The transaction documents contain downgrade provisions relating to the account bank and cap counterparty consistent with DBRS Morningstar’s legal and derivative criteria, respectively. The Issuer's accounts include the payment account, cash reserve account, and collateral account. Under the cap agreement, the Issuer has paid at closing a premium to the cap counterparty and will receive, on each payment date, the positive difference between one-month Euribor and 1.5%.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

CORONAVIRUS DISEASE (COVID-19) CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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 asset-backed securities (ABS) transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar applied a moderate haircut to its expected recovery rate.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings. 

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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: Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020).

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.

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. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include 321C and Deutsche Bank AG acting in its capacity as arranger.

DBRS Morningstar received the following data and information presented on a total portfolio basis only:
-- Dynamic and static default and recovery data from Q1 2015 and up to Q1 2021;
-- Dynamic data (including originations, outstanding balances, delinquencies, and prepayments) from January 2015 and up to May 2021;
-- Loan-level data for the proposed pool and accompanying stratification tables as at the end of July 2021; and
-- A theoretical amortisation schedule as at the end of July 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 newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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

-- Expected default rate: 6.9%
-- Expected recovery rate: 44.1%.
-- Loss given default (LGD): 66.5% for the AA (low) (sf) scenario, 64.9% for the A (low) (sf) scenario, 61.1% for BBB (low) (sf) scenario, 58.6% for the BB (low) (sf) scenario, 55.9% for the B (low) (sf) scenario.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in LGD.
Scenario 4: A 50% increase in LGD.
Scenario 5: A 25% increase in both the expected default and LGD.
Scenario 6: A 25% increase in the expected default and 50% increase in LGD.
Scenario 7: A 50% increase in the expected default and 25% increase in LGD.
Scenario 8: A 50% increase in both the expected default and LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: A (high) (sf), A (sf), BBB (high) (sf), BBB (sf), BBB (sf), BB (sf), BB (high) (sf), and BB (low) (sf).
-- Class B Notes: BBB (high) (sf), BBB (sf), BBB (sf), BB (high) (sf), BB (high) (sf), BB (low) (sf), BB (sf), and B (low) (sf).
-- Class C Notes: BB (sf), B (sf), BB (low) (sf), B (low) (sf), B (low) (sf), Below B (low) (sf), Below B (low) (sf), and Below B (low) (sf).
-- Class D Notes: B (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), and Below B (low) (sf).
-- Class D Notes: Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), Below B (low) (sf), and Below 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: 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: Guglielmo Panizza, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 September 2021

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

-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (30 July 2021), https://www.dbrsmorningstar.com/research/382486/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (16September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/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].