DBRS Morningstar Finalises Provisional Ratings on Finance Ireland RMBS No. 5 DAC

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following residential mortgage-backed floating-rate notes issued by Finance Ireland RMBS No. 5 DAC (the Issuer):

-- Class A rated AAA (sf)
-- Class B rated AA (sf)
-- Class C rated A (sf)
-- Class D rated BBB (low) (sf)
-- Class E rated BB (low) (sf)

DBRS Morningstar does not rate the Class X, Class Y, and Class Z notes also issued in the transaction.

The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal. The ratings on the Class B and Class C notes address the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date. The ratings on the Class D and Class E notes address the ultimate payment of interest and principal.

The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in Ireland. The issued notes have been used to fund the purchase of Irish residential mortgage loans originated by Finance Ireland Credit Solutions DAC (Finance Ireland) and Pepper Finance Corporation DAC (Pepper).

Since 2018, Finance Ireland has been offering residential mortgage loans within the Irish market distributed by regulated intermediaries. Finance Ireland’s residential mortgages are available exclusively through appointed mortgage brokers. Pepper began originating mortgage loans in 2016 and, in December 2018, it sold its mortgage business to Finance Ireland.

All mortgages have been originated post-crisis and in accordance with the new mortgage code of conduct. As of August 2022, the mortgage portfolio aggregated to EUR 413.0 million. There will be 26 loans (with a balance of EUR 6.9 million) that will not be sold to the Issuer on the closing date as a result of not satisfying the product switch conditions. Proceeds from the notes totalling EUR 6.9 million will be deemed to constitute available principal funds on the first interest payment date and will be applied in accordance with the relevant priority of payments. All loans were originated between 2016 and 2022, with 69.3% of the pool originated in the past eight months during 2022.

The beneficial interest of the mortgage loans has been transferred to the Issuer whereas the legal titles of the mortgage loans remains with Finance Ireland. Pepper also services the mortgage portfolio, with Intertrust Management Ireland Limited acting as the backup servicer facilitator. Pepper’s servicing capabilities are appropriate to monitor and manage the performance of its mortgage book and securitised mortgage portfolios. In DBRS Morningstar’s view, this setup can mitigate a potential servicer termination and therefore remedy potential interest shortfalls arising from operational issues.

The Class A notes benefit from an amortising liquidity reserve fund (ALRF) providing liquidity support for items senior in the waterfall to payments of interest on the Class A notes. The liquidity reserve has a target amount equal to 0.75% of the outstanding Class A notes balance, down to a floor of EUR 1.35 million. While the amortised amounts are released through the revenue waterfall, the final release of the floor occurs through the principal waterfall when the sum of principal available funds and the ALRF floor is enough to fully redeem the Class A notes.

The general reserve fund (GRF) provides credit support to the rated notes. The GRF has a target amount equal to 0.75% of the outstanding balance of the Class B to Class E notes.

Class B to Class E are locked out of support if there is an outstanding principal deficiency ledger (PDL) balance on the respective class ledger. However, when they are the most-senior classes outstanding, the support will be available regardless of PDL debiting. The GRF can only be used after the ALRF, but in priority to principal to cover the interest shortfalls and debited PDLs. While the amortised amounts are released through the revenue waterfall, the final release of the floor occurs through the principal waterfall when the sum of principal available funds and available reserve fund is enough to fully redeem the Class E notes.

Credit enhancement for the Class A notes is calculated at 14.7% and is provided by the subordination of the Class B to Class Z notes and the reserve funds. Credit enhancement for the Class B notes is calculated at 9.7% and is provided by the subordination of the Class C to Class Z notes and the reserve funds. Credit enhancement for the Class C notes is calculated at 7.0% and is provided by the subordination of the Class D to Class Z notes and the reserve funds. Credit enhancement for the Class D notes is calculated at 5.2% and is provided by the subordination of the Class E to Class Z notes and the reserve funds. Credit enhancement for the Class E notes is calculated at 3.7% and is provided by the subordination of the Class Z notes and the reserve funds.

A key structural feature is the provisioning mechanism in the transaction that is linked to the arrears status of a loan besides the usual provisioning based on losses. The degree of provisioning increases in line with increases in the number of months in a loan’s arrears status. This is positive for the transaction as provisioning based on the arrears status traps any excess spread much earlier for a loan that may ultimately end up in foreclosure.

In order to hedge against the possible variance between the fixed rates of interest payable on the fixed-rate loans in the portfolio and the interest rate under the notes calculated by reference to the three-month Euribor, the Issuer has entered into a fixed-to-floating interest rate swap transaction with BofA Securities Europe SA (rated privately by DBRS Morningstar). The Issuer can restructure the hedging agreement to increase the notional of the original swap agreement in order to hedge the exposure to additional fixed-rate loans resulting from product switches and further advances before the step-up date. For the increased portion of the notional, the Issuer will pay the prevailing mid-market swap rate on the swap determination date following the collection period during which the switch to the fixed rate occurred. The fixed-rate loans are subject to a floor of 1.5% margin over the prevailing mid-market swap rate at the time of switch/reset. DBRS Morningstar modelled a locked-in post-swap margin of 1.5% for all loans that reset to a new fixed rate or switch to a fixed rate before the step-up date. To hedge the floating-rate portion of the portfolio, the loans that are currently paying a standard variable rate (SVR) rate, revert to SVR, or switch to SVR are subject to a minimum rate of one-month Euribor (floored at zero) plus 2.4%.

Borrower collections are held with the Governor and Company of the Bank of Ireland (rated A (low) with a Stable trend by DBRS Morningstar) and The Allied Irish Banks, p.l.c. (rated A (low) with a Stable trend by DBRS Morningstar) and are deposited on the next business day into the Issuer transaction account held with Elavon Financial Services DAC, UK Branch. DBRS Morningstar’s private rating on the issuer account bank is consistent with the threshold for the account bank outlined in its “Legal Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio. The PD, LGD, and EL are used as inputs into DBRS Morningstar’s cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D and Class E notes according to the terms of the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker.
-- The DBRS Morningstar sovereign rating of AA (low)/R-1 (middle) with Stable trends (as of the date of this press release) on the Republic of Ireland.
-- The consistency of the legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

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 (17 May 2022).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (8 July 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.

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/401817/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 these ratings include Finance Ireland. DBRS Morningstar received the loan-by-loan payment history of the pool to be securitised (starting from 2017) and the current loan-by-loan data template as of 31 August 2022 provided in European DataWarehouse format.

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 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.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):
-- In respect of the Class A notes, a PD of 21.9% and LGD of 59.4%, corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class B notes, a PD of 14.4% and LGD of 47.0%, corresponding to the AA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class C notes, a PD of 10.1% and LGD of 40.8%, corresponding to the A (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class D notes, a PD of 5.1% and LGD of 28.5%, corresponding to the BBB (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.
-- In respect of the Class E notes, a PD of 2.1% and LGD of 20.8%, corresponding to the BB (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD, respectively.

DBRS Morningstar concludes the following impact on the rated notes:

Class A:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to AA (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would not lead to a downgrade of the Class A notes.
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class A notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A notes to AA (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A notes to AA (low) (sf).

Class B:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class B notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class B notes to A (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B notes to AA (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class B notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B notes to BBB (high) (sf).

Class C:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class C notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C notes to BBB (low) (sf).

Class D:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would not lead to a downgrade of the Class D notes.
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D notes to BB (high) (sf).

Class E:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead downgrade of the Class E notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E notes to B (high) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class E notes to BB (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class E notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E notes to B (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E notes to B (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E notes to 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: Lina Mukhitdinova, Senior Analyst
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 6 October 2022

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
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.

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (8 July 2022) and European RMBS Credit Model v 1.0.0.0,
https://www.dbrsmorningstar.com/research/399669/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-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.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].