Press Release

DBRS Morningstar Upgrades Rating on Ares Lusitani STC, S.A. (Gaia), Trend Remains Stable

Nonperforming Loans

July 01, 2022

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class B notes issued by Ares Lusitani STC, S.A. (Gaia) (the Issuer) to A (sf) from BBB (sf) and maintained the Stable trend.

The transaction represents the issuance of Class A, Class B, and Class J Notes (collectively, the Notes). DBRS Morningstar discontinued its rating on the Class A Notes following their full redemption on the November 2021 interest payment date (IPD). The rating on the Class B Notes addresses the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class J Notes in the transaction.

The Issuer used the proceeds from the issuance of the Notes to purchase a Portuguese nonperforming loan (NPL) portfolio originated by Caixa Económica Montepio Geral and Caixa Económica Bancária, S.A., which Mimulus Finance DAC sold to the Issuer. The total outstanding balance of the portfolio was EUR 234.3 million as of December 2018 (the cut-off date). The loan pool is composed of secured commercial and residential loans (41% of the outstanding balance) and unsecured receivables (59% of the outstanding balance). The servicer for both the secured and unsecured pools is doValue Portugal, Unipessoal, Lda. (the Servicer; formerly Proteus Asset Management, Unipessoal, Lda).

RATING RATIONALE
The upgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: Assessment of portfolio recoveries as of 30 April 2022, focusing on: (1) a comparison between actual collections and the Servicer’s initial business plan forecast; (2) the collection performance observed over recent 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. On the May 2022 interest payment date the cumulative collection ratio or the present value cumulative profitability ratio were 79.4% and 100.5%, respectively, according to the Servicer.
-- The Servicer’s updated business plan, which DBRS Morningstar received in June 2022, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of April 2022 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the Notes (i.e., the Class B Notes began to amortise following the full repayment of the Class A Notes and the Class J Notes will amortise following the repayment of the Class B Notes).
-- Liquidity support: The transaction benefitted from a cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A Notes and senior fees. The cash reserve, whose target amount was EUR 1.88 million until the interest payment date falling in November 2020 and 3.0% of the Class A Notes principal outstanding balance thereafter, was entirely released on the November 2021 IPD after the full redemption of the Class A Notes’ outstanding balance.

TRANSACTION AND PERFORMANCE
According to the latest investor report from May 2022, the outstanding principal amounts of the Class B and Class J Notes were EUR 5.4 million and EUR 15.0 million, respectively, while the class A Notes were fully redeemed in November 2021. As of the May 2022 IPD, the balance of the Class B Notes had amortised by approximately 28.2% since issuance. The current aggregated transaction balance is EUR 20.4 million.

As of April 2022, the transaction was performing below the Servicer’s business plan expectations. The actual cumulative gross collections equalled EUR 62.3 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 82.5 million for the same period. Therefore, as of April 2022, the transaction was underperforming by EUR 20.2 million (-24.5%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 37.0 million at the CCC (sf) stressed scenario. Therefore, as of April 2022, the transaction was performing above DBRS Morningstar’s initial stressed expectations with respect to the initial rating of the Class B Notes.

In June 2022, the Servicer provided DBRS Morningstar with a revised business plan starting from 1 May 2022. In the updated business plans, the Servicer assumed lower recoveries compared with initial expectations. The total cumulative gross collections (including actual collections) from the updated business plans were EUR 93.4 million, which is 11.4% lower than the EUR 105.4 million expected in the initial business plans.

Excluding actual collections, the Servicer’s expected future collections from May 2022 account for EUR 31.1 million. The updated DBRS Morningstar A (sf) rating stress assumes a haircut of 59.0% to the Servicer’s updated business plan, considering future expected collections from May 2022.

The Class B Notes may pass higher rating stress scenarios; however, DBRS Morningstar believes that higher ratings would not be commensurate with the risk of the transaction considering the potential higher variability of NPLs’ cash flows. The rating on the Class B notes also considers the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents (i.e., a minimum rating of BBB (low)) and the lack of a cash reserve and hence liquidity support, following the full redemption of the Class A Notes.

The final maturity date of the transaction is in November 2039.

The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in commercial real estate prices for certain property types.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 29 June 2022. 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/399022/baseline-macroeconomic-scenarios-for-rated-sovereigns-june-2022-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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings..

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

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. 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 and/or its agents (Citibank, N.A. and the Servicer), which comprise, in addition to the information received at issuance, the investor report as of May 2022; the semiannual Servicer report and data tape as of April 2022; and the updated business plan received in June 2022.

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 16 December 2021, when DBRS Morningstar discontinued its rating on the Class A Notes. The last rating on the Class B Notes took place on 21 May 2021 when DBRS Morningstar upgraded the rating to BBB (sf) from CCC (sf).

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 with the parameters used to confirm the rating (the Base Case):

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class A Notes to A (sf)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes to A (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.

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: 2 May 2019

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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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