Press Release

DBRS Morningstar Finalises Provisional Rating of BBB (low) (sf) with Negative Trend on Hestia Financing S.à r.l.

Nonperforming Loans

December 13, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional rating of BBB (low) (sf) with a Negative trend on the Class A notes issued by Hestia Financing S.à r.l. (the Issuer). The Negative trend reflects the ongoing uncertainty amid the Coronavirus Disease (COVID-19) pandemic.

DBRS Morningstar did not rate the Class Z notes also issued in the transaction.

The rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal by the final legal maturity date.

The transaction benefits from an amortising Class A reserve fund that provides liquidity support to the Class A notes, and principal support to the Class A notes at maturity, if available.

As of September 2019, the total claimable amount of the portfolio was approximately EUR 2.2 billion. Most of the portfolio relates to nonperforming loans (NPLs) secured over real estate collateral, with a total Open Market Value (OMV) of EUR 1.7 billion including only first-lien properties.

The portfolio was sold by Bank of Cyprus (BoC) to Oxalis Holding S.à r.l. (Oxalis or the Risk Retention Holder). After a three-month transitional period during which the assets were serviced by BoC, the portfolio is now serviced by a newly established servicer, Themis Portfolio Management Ltd, which is wholly owned by the vehicle holding the assets, Themis Portfolio Management Holdings Limited, a Cypriot Credit Acquiring Company (the CyCAC).

The final maturity date of the transaction is December 2066.

RATING RATIONALE
DBRS Morningstar based its rating on a review of the following analytical considerations:
-- Portfolio Composition: The portfolio is mostly secured with more than half of the assets by valuation being residential assets (57.3% of total OMV). By OMV, 39.4% of the properties are used as a first residence. The majority of the mortgages are first lien (94.9%).
-- Geographical Concentration: The properties are highly concentrated in Nicosia and Limassol (36.3% and 27.6% by OMV, respectively), the two most stable areas in Cyprus in terms of the real estate market.
-- Cash Sweep Event: If a Cash Sweep Event occurs, then the transaction benefits from a sequential amortisation where the Class Z notes will begin to amortise following the full repayment of the Class A notes. In the event of a cash sweep, the transaction also benefits from a liquidating structure where interest on the Class Z notes is subordinated to principal payments on the Class A notes. If no Cash Sweep Event occurs, then only 80% of the available funds will be used to repay the Class A notes and the rest will be used to pay junior servicing fees, interest, and principal on the Class Z notes.
-- Interest Rate Cap agreement: The Issuer entered into an interest rate cap agreement terminating in July 2026. On the termination date of the cap agreement, the coupon cap rate (Coupon Cap Rate) on the Notes become applicable. The interest rate cap fees will be paid in full on the closing date and in return the Issuer will receive payments to the extent the three-month Euribor rate is above 1% (the strike rate).
-- Coupon Cap Rate: The coupon on the Class A notes is subject to a 3.5% cap from the interest payment date (IPD) falling in October 2026.
-- Nonstandard Legal Structure: The structure is based on a secured loan rather than on a true sale and includes other non-standard features. DBRS Morningstar has, based on external legal advice, determined that the legal risks associated with the nonstandard features of the structure are in its view commensurate with the rating assigned.

DBRS Morningstar based its rating on an analysis of the projected recoveries of the underlying collateral, the historical performance and expertise of the servicer, the availability of liquidity to fund interest shortfalls and special-purpose vehicle expenses, and the transaction’s legal and structural features. DBRS Morningstar’s BBB (low) (sf) rating stress assumes a haircut of approximately 33.1% to the servicer’s initial business plan for the portfolio.

Collections on the portfolio are payable into a CyCAC collection account at Bank of Cyprus. These collections will then be transferred weekly to the CyCAC transaction account where the CyCAC waterfall will be run quarterly and the rest will be paid to the issuer transaction account. To mitigate concentration risk, the transfer will switch to daily if the balance of the CyCAC collection account is greater than Euro 2,000,000. Both transaction accounts are with Citibank Europe Plc, Luxembourg Branch.

DBRS Morningstar currently rates Citibank Europe Plc. It has a public rating with a Long-Term rating of AA (low) with a Stable trend. This counterparty meets DBRS Morningstar’s minimum criteria to act in such capacity.
The transaction documents contain downgrade provisions relating to the transaction accounts bank where, if downgraded below BBB (low), the Issuer will replace the account bank. The downgrade provision is consistent with DBRS Morningstar’s criteria for the initial rating of BBB (low) (sf) with a Negative trend assigned to the Class A notes.

Barclays Bank PLC is the interest-rate-cap counterparty for the transaction. DBRS Morningstar rates Barclays Bank PLC A Stable/R-1 (low) Stable and concluded that it meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade provisions with respect to Barclays Bank PLC's role as hedging counterparty, consistent with DBRS Morningstar criteria.

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 NPL transactions. In particular, the deterioration of macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collaterals. The rating is 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 releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update 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: 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.

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 transaction arrangers include a loan data tape as of the cut-off date of 30 September 2019, historical sales data, and the portfolio business plan. To be able to update the data tape since the cutoff, DBRS Morningstar was provided with a lockbox reflecting closed collaterals.

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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar public rating on this financial instrument.

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 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 of approximately EUR 722 million at the BBB (low) (sf) stress level, 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 a downgrade of the Class A notes to BB (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 BB (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: Sebastiano Romano, Assistant Vice President
Rating Committee Chair: Erin Stafford, Managing Director
Initial Rating Date: 10 December 2021

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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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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