Press Release

DBRS Morningstar Assigns Ratings to Rathlin Residential 2021-1 DAC, Negative Trends

Nonperforming Loans

October 28, 2021

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to the following classes of notes issued by Rathlin Residential 2021-1 DAC (the Issuer):

-- Class A Notes at A (low) (sf)
-- Class B Notes at BB (sf)
-- Class C Notes at B (sf)

All trends are Negative.

DBRS Morningstar does not rate the Class Z1 or Class Z2 Notes (together with Class A, Class B, and Class C Notes, the Notes) also issued in the transaction.

The rating on the Class A Notes addresses the timely payment of interest and ultimate repayment of principal by the final legal maturity date. The ratings on the Class B and Class C Notes address the ultimate payment of interest and principal by the final legal maturity date. DBRS Morningstar’s ratings do not address payments of Additional Note Payments (as defined in the transaction documents).

The transaction benefits from an amortising Class A reserve fund and nonamortising Class B and Class C reserve funds that provide liquidity support to the Class A, Class B, and Class C Notes, respectively, as well as principal support at maturity, if available.

Proceeds from the issuance of the Notes will be used to purchase a first-charge portfolio composed of nonperforming, semiperforming, and reperforming Irish residential mortgage loans originated by Ulster Bank Ireland DAC with a total outstanding balance of EUR 645.7 million as of 31 July 2021 (the Portfolio). The servicing and administration of the Portfolio is currently conducted by Pepper Finance Corporation (the Administrator), which is also expected to continue as Administrator of the assets for the transaction.

The final maturity date of the transaction is September 2075.

RATING RATIONALE
DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the Administrator to perform collections and resolution activities. DBRS Morningstar estimated the expected collections from the mortgage loans based on the proposed business plan strategies and used them as an input into the cash flow analysis.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated Notes according to the terms of the transaction documents.
-- The sovereign rating of the Republic of Ireland, which DBRS Morningstar rates at A (high) with a Positive trend and R-1 (middle) with a Stable trend as of the date of this press release.
-- The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar analysed the transaction cash flow structure using Intex DealMaker.

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 negative effects may continue in the coming months for many nonperforming loan (NPL) transactions. In particular, the deterioration of macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collaterals. 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, the Negative trend reflects the ongoing uncertainty amid the coronavirus pandemic. DBRS Morningstar gives partial credit to house price increases from 2023 onward in non-investment-grade scenarios.

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.

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/381146 and https://www.dbrsmorningstar.com/research/360393.

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: “Rating European Nonperforming Loans Securitisations” (19 May 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.

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 provided by the Administrator and the transaction arrangers include a loan data tape as of the cut-off date of 31 July 2021, historical performance from April 2017 to August 2021, historical sales data covering from March 2020 to April 2021, and the portfolio business plan.

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 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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to confirm the rating (the Base Case):

-- Recovery Rates Used: Cumulative Base Case recovery amount (declining interest rate scenario) of approximately EUR 380.2 million, EUR 442.9 million and EUR 464.8 million at the A (low) (sf), BB (sf) and B (sf) stress levels, respectively and 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 downgrades of the rated Notes (Class A, Class B and Class C notes) to BBB (sf), B (sf) and below B (sf) respectively.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to downgrades of the rated Notes (Class A, Class B and Class C notes) to BB (high) (sf), below B (sf) and below B (sf) respectively.

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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alberto Cruces de la Rosa, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 October 2021

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://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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