DBRS Morningstar Finalises Provisional Ratings on Ares Lusitani - STC, S.A. (Pelican Finance No. 2)

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Ares Lusitani – STC, S.A. (Pelican Finance No. 2) (the Issuer):

-- Class A Notes at AA (sf)
-- Class B Notes at A (sf)
-- Class C Notes at BBB (sf)
-- Class D Notes at B (high) (sf)

DBRS Morningstar did not rate the Class E and Class X Notes also 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, Class C, and Class D Notes address the ultimate payment of interest while junior to other outstanding classes of notes but the timely payment of scheduled interest when they are the senior-most tranche, and the ultimate repayment of principal by the legal final maturity date.

The transaction is a securitisation of Portuguese auto and consumer loan receivables originated by Caixa Económica Montepio Geral, caixa económica bancária S.A. (Banco Montepio) and Montepio Crédito - Instituição Financeira de Crédito, S.A. (Montepio Crédito; collectively, the originators).

The ratings are based on a review of the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement to support DBRS Morningstar's projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the notes.
-- The originators’ capabilities with respect to originations, underwriting, and servicing.
-- The operational risk review of the originators, which DBRS Morningstar deems both to be acceptable servicers.
-- The transaction parties’ financial strength regarding their respective roles.
-- The credit quality and historical and projected performance of the originators’ portfolio.
-- DBRS Morningstar’s sovereign rating of the Republic of Portugal at BBB (high) with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The transaction represents the issuance of Class A, Class B, Class C, Class D and Class E Notes backed by a static portfolio of fixed- and floating-rate, amortising auto and personal loans granted to individuals domiciled in Portugal and serviced by the originators. The Class X Notes were not collateralised by the loan receivables.

The transaction benefits from a cash reserve equal to 1% of the outstanding balance of the rated notes funded by the notes issuance proceeds at closing. During the pre-enforcement periods, the reserve is available to the Issuer when the interest collections are not sufficient to cover the shortfalls in senior expenses and interest on the rated notes and would amortise during the note redemption period, subject to a 0.5% floor of the initial collateral balance. During the post-enforcement period, the outstanding reserve amount is included in the available fund to repay the notes.

COUNTERPARTIES
Citibank N.A. London Branch (Citibank) is the account bank. Based on DBRS Morningstar’s rating on Citibank and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank to be commensurate with the ratings assigned.

Crédit Agricole Corporate and Investment Bank (CA-CIB) is the cap provider for the transaction. DBRS Morningstar's private rating on CA-CIB meets the criteria to act in such capacity at closing. The transaction documents contain downgrade provisions consistent with DBRS Morningstar’s criteria.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

PORTFOLIO ASSUMPTIONS AND COVID-19 CONSIDERATIONS
While the originators have a long operating history of consumer loan lending in Portugal, the historical data provided for detailed vintage analysis is relatively short compared with the terms of the loans. DBRS Morningstar elected to set its portfolio-level assumptions of lifetime expected gross default and recovery at 5.66% and 56.8%, respectively, reflecting the historical data received, the performance of previous securitisation transactions of the originators and the benchmarking of comparable consumer loan portfolios in Portugal.

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 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.

The DBRS Morningstar Sovereign group released 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 2 November 2021, DBRS Morningstar updated its 8 May 2020 commentary above on the performance of DBRS Morningstar-rated auto ABS transactions in Europe. For more details, please see:
https://www.dbrsmorningstar.com/research/387320/european-auto-abs-recovery-performance-update.

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” (29 October 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.

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 “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 data and information used for these ratings include the following provided by the originators through the arrangers, Stormharbour Securities and CA-CIB:

-- Quarterly vintage defaults by loan type from Q1 2012 to Q1 2021 (Banco Montepio), from Q1 2014 to Q1 2021 (Montepio Crédito) and from Q1 2015 to Q3 2021(aggregate);
-- Quarterly vintage recoveries by loan type from Q1 2012 to Q1 2021 (Banco Montepio), from Q1 2014 to Q1 2021 (Montepio Crédito) and from Q1 2015 to Q3 2021(aggregate);
-- Quarterly dynamic prepayments by loan type from Q1 2015 to Q2 2021;
-- Quarterly dynamic delinquencies by loan type from Q1 2012 to Q1 2021 (Banco Montepio), from Q1 2014 to Q1 2021 (Montepio Crédito) and from Q1 2015 to Q3 2021 (aggregate); and
-- Stratification tables as of 31 October 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 new 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 to the parameters used to determine the ratings:

-- Expected Default Rate of 5.66%, 25% and 50% increases.
-- Expected Recovery of 56.8% and Loss Given Default (LGD) of 43.2%, 25% and 50% increases.

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

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Class A Notes: AA (low) (sf), A (sf), A (high) (sf), A (sf), BBB (high) (sf), A (sf), BBB (high) (sf) , BBB (high) (sf)
-- Class B Notes: A (low) (sf), BBB (high) (sf), BBB (high) (sf), BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), BB (high) (sf)
-- Class C Notes: BBB (sf), BBB (low) (sf), BBB (low) (sf), BB (high) (sf), BB (sf), BB (high) (sf), BB (sf), B (high) (sf)
-- Class D Notes: B (high) (sf), B (sf), B (high) (sf), B (low) (sf), below B (low) (sf), B (low) (sf), below B (low) (sf), 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: Roberto Perez, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 12 November 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 (29 October 2021), https://www.dbrsmorningstar.com/research/387042/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.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 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
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-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].