Press Release

DBRS Morningstar Confirms Ratings on European Residential Loan Securitisation 2019-NPL2 DAC; Changes Trends to Stable

Nonperforming Loans

December 16, 2021

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by European Residential Loan Securitisation 2019-NPL2 DAC (the Issuer):

-- Class A confirmed at A (sf)
-- Class B confirmed at BBB (high) (sf)
-- Class C confirmed at BBB (low) (sf)

DBRS Morningstar also changed the trends on all classes of notes to Stable from Negative.

The transaction represents the issuance of the Class A, Class B, Class C, Class P, and Class D 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. The ratings of the Class B and Class C notes address the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class D or Class P notes.

At issuance, the notes were backed by a EUR 1.3 billion by gross book value portfolio consisting of first-charge performing and 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 confirmations follow the second annual review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 October 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 31 October 2021 and the evolution of its core features since issuance, including the portfolio breakdown by arrears status and the observed increase in the share of reperforming loans since issuance.
-- Transaction liquidating structure: the order of priority entails a fully sequential amortisation of the notes – i.e., the Class B notes will begin to amortise following the full repayment of the Class A notes; the Class C notes will amortise following the repayment of the Class B notes; the Class D and the Class P notes will begin to amortise following the full repayment of all the rated notes. Additionally, the repayment of interest on the Class B notes is fully subordinated to the repayment of both interest and principal on the Class A notes, and the repayment of interest on the Class C notes has a lower ranking to the payments due on the Class B notes. The Class B, Class C, and Class P notes may get principal repayment, before redemption of the Class A, Class B, and Class C notes, respectively, in the event of a portfolio sale.
-- Liquidity: the transaction benefits from three reserve funds available to mitigate temporary collection shortfalls on the payment of (1) senior costs and interest on the Class A notes, (2) interest on the Class B notes, and (3) interest on Class C notes, respectively.

TRANSACTION AND PERFORMANCE
According to the latest investor report from 24 November 2021, the principal amount outstanding of the Class A, Class B, Class C, Class P, and Class D notes were equal to EUR 433.3 million, EUR 59.6 million, EUR 59.6 million, EUR 119.8 million, and EUR 470.3 million, respectively. The balance of the Class A notes has amortised by 30.3% since issuance. The current aggregated transaction balance is EUR 1,142.6 million.

As of October 2021, the transaction was performing below the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 223.4 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 445.1 million for the same period. Therefore, as of October 2021, the transaction was underperforming by 49.8% compared with the business plan expectations.

Excluding actual collections, the Servicer’s expected future collections from November 2021 account for EUR 776.6 million. In a declining interest rate scenario, the updated DBRS Morningstar A (sf), BBB (high) (sf) and BBB (low) rating stress assume a haircut of 26.9%, 22.3% and 15.6% respectively to the Servicer’s executed business plans, considering future expected collections.

The trend change reflects the stable performance registered by the transaction since last annual review and the increased proportion of loans classified as performing by the servicer which now account for 23.8%, according to October 2021 loan-level data, compared to 9.9% as of the first collection date in December 2019.

The transaction benefits from three reserve funds to support liquidity shortfalls on senior costs, interest due in relation to the rated notes and, ultimately, the repayment of principal on the same, if available:
-- The Class A reserve fund, which was fully funded at closing to an initial amount equal to 4.0% of the Class A notes balance and amortises based on the same;
-- The Class B reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 7.5% of the Class B notes balance; and
-- The Class C reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 10.0% of the Class C notes balance;
Credits to the Class B and Class C reserves are made outside of the waterfall based on the proceeds of the interest rate cap allocated proportionately to the respective size of the Class B and Class C notes relative to the cap notional.
According to the investor report dated 24 November 2021, the Class A reserve fund amounted to EUR 17.7 million, which is in line with the target balance, and the Class B and Class C notes reserve fund balance amounted to EUR 2.4 million and EUR 2.3 million, respectively.

The final maturity date of the transaction is in February 2058.

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 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/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 ratings 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 these ratings 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 November 2021; the loan-level data as of October 2021; and the detailed performance data as of October 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 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.

The last rating action on this transaction took place on 21 December 2020, when DBRS Morningstar confirmed the ratings on the Class A, Class B, and Class C notes with Negative trends.

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 confirmation of the Class A notes at A (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 confirmation of the Class A notes at A (sf).
-- 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 confirmation of the Class B notes at BBB (high) (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 B notes at BBB (sf).
-- 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 confirmation of the Class C notes at BBB (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 C notes at BB (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: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 12 November 2019

DBRS Ratings GmbH
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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: 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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