Press Release

DBRS Morningstar Confirms Ratings on European Residential Loan Securitisation 2020-NPL1 DAC, Trend Remains Negative

Nonperforming Loans

November 23, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Class A notes issued by European Residential Loan Securitisation 2020-NPL1 DAC (the Issuer) at A (sf) and maintained its Negative trend.

The transaction represents the issuance of Class A, Class P, and Class Z notes. The rating of the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date (24 January 2060). DBRS Morningstar does not rate the Class P or Class Z notes.

At issuance, the notes were backed by a EUR 381.8 billion by gross book value portfolio consisting of first-charge nonperforming Irish residential mortgage loans originated by Permanent TSB p.l.c. (the Originator).

The receivables are serviced by Start Mortgages DAC (the Servicer). Hudson Advisors Ireland DAC also operates as the issuer administration consultant and, as such, acts in an oversight and monitoring capacity and provides input on asset resolution strategies.

RATING RATIONALE
The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 September 2021, focusing on: (1) a comparison between actual collections and the Servicer’s initial business plan forecast; (2) the collection performance observed over the past months, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: loan pool composition as of September 2021 and the evolution of its core features since issuance.
-- Transaction liquidating structure: the principal on the Class P and Class Z notes is paid only after Class A notes have been redeemed in full. The Class P notes may get principal repayment, before redemption of the Class A notes in the event of a portfolio sale.
-- Liquidity: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A notes and senior fees. The cash reserve target amount, which is currently fully funded, is equal to the greater of (1) 5.5% of the outstanding balance of the Class A notes; and (2) 0.25% of the initial amount of the Class A notes.

TRANSACTION AND PERFORMANCE
According to the latest investor report from October 2021, the outstanding principal amounts of the Class A notes, Class P notes, and Class Z notes were equal to EUR 122.0 million, EUR 32.5 million, and EUR 195.9 million, respectively. The balance of the Class A notes has amortised by 20.5% since issuance. The current aggregated transaction balance is EUR 350.3 million.

As of September 2021, the transaction was performing slightly above the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 37.6 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 37.5 million for the same period. Therefore, as of September 2021, the transaction was overperforming by 0.1% compared with the business plan expectations.

The Negative trend assigned to the rating is retained with a view to closely monitor the performance compared with the servicer’s business plan observed thus far, in light of the material drop in the gross cumulative collection ratio to 100.1% as of the October 2021 interest payment date (IPD) from 169.6% as of the September 2021 IPD.

The final maturity date of the transaction is in January 2060.

DBRS Morningstar analysed the transaction 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. 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/384146 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: “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: 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.

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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. The 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 this rating include the Issuer, Hudson Advisors Ireland DAC, and US Bank Global Corporate Trust, which comprise, in addition to the information received at issuance; the investor report as of October 2021; the loan level data as of September 2021; and the detail performance data as of September 2021.

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 23 November 2020, when DBRS Morningstar assigned an A (sf) rating with a Negative trend to 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 confirm the rating (the base case):

-- DBRS Morningstar concludes that in a declining interest rate scenario a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A notes to A (low) (sf).
-- DBRS Morningstar concludes that in a declining interest rate scenario a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to BBB (high) (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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: 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.

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

Lead Analyst: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 November 2020

DBRS Ratings GmbH
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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: 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].

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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