Press Release

DBRS Morningstar Upgrades Ratings on European Residential Loan Securitisation 2019-NPL2 DAC, Stable Trends

Nonperforming Loans

December 16, 2022

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the notes issued by European Residential Loan Securitisation 2019-NPL2 DAC (the Issuer):

-- Class A to AA (low) (sf) from A (sf)
-- Class B to A (sf) from BBB (high) (sf)
-- Class C to BBB (high) (sf) from BBB (low) (sf)

The trends on all classes of notes remain Stable.

The transaction represents the issuance of the Class A, Class B, Class C, Class P, and Class D notes (collectively, the notes). The rating on 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 on 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.

Start Mortgages DAC is the servicer of the receivables. 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 upgrades follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of the portfolio recoveries as of October 2022, with a focus on: (1) a comparison between actual gross collections and the administrator’s initial business plan forecast; (2) recovery performance observed over the past months; (3) the historical collections trend and average pay rate recorded in the last six months; and (4) a comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: The loan pool composition as of 31 October 2022 and the evolution of its core features, including the portfolio breakdown by arrears status following the disposal of a portion of the underlying pool of receivables in October 2022. The disposed portfolio mostly comprised accounts with no days in arrears and had an outstanding balance of about EUR 264.5 million as of August 2022. The proceeds from the portfolio sale accounted for EUR 213.2 million, representing 80.6% of the disposed outstanding balance as of August 2022.
-- Transaction liquidating structure: The order of priority, which 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 begin to amortise following the repayment of the Class B notes; and the Class D and 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. Moreover, the Class P notes may receive principal repayment before a redemption of the rated notes in the event of interest rate cap reductions. Out of the EUR 212.6 million net proceeds from the portfolio sale, the Issuer used EUR 13.2 million, EUR 13.2 million, and EUR 1.0 million on the October 2022 interest payment date to pay down the principal on the Class B, Class C, and Class P notes, respectively, in line with the provisions outlined in the transaction documents.
-- 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.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

According to the latest investor report dated 24 November 2022, the outstanding principal amounts of the Class A, Class B, Class C, Class P, and Class D notes were EUR 140.5 million, EUR 46.4 million, EUR 46.4 million, EUR 118.8 million, and EUR 470.3 million, respectively. The balances of the Class A, Class B, Class C, and Class P notes have amortised by 77.4%, 22.2%, 22.2%, and 0.8%, respectively, since issuance. The current aggregated transaction balance is EUR 822.3 million.

As of the October 2022 collection date, the transaction was performing slightly below the administrator’s initial expectations. The actual cumulative gross collections were EUR 550.6 million, including EUR 213.2 million in proceeds from the disposal, whereas the administrator’s initial business plan estimated cumulative gross collections of EUR 570.1 million for the same period. Therefore, as of October 2022, the transaction was underperforming by 3.4% compared with the business plan expectations. Excluding the proceeds from the portfolio sale, the transaction would have been underperforming the administrator’s initial expectations by 40.8%.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 311.3 million at the A (sf) stressed scenario, EUR 350.2 million at the BBB (high) (sf) stressed scenario, and EUR 380.0 million at the BBB (low) (sf) stressed scenario for the same period. Hence, the transaction is performing ahead of DBRS Morningstar’s initial stressed expectations.

Excluding actual collections, the administrator’s expected future collections from November 2022 account for EUR 651.5 million. In a declining interest rate scenario, the updated DBRS Morningstar AA (low) (sf), A (sf), and BBB (high) (sf) rating stresses assume a haircut of 61.4%, 56.9%, and 54.1% to the administrator’s executed business plan, respectively, considering future expected collections.

The transaction benefits from three reserve funds to support liquidity shortfalls on senior costs, interest due on 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 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 2022, the Class A reserve fund amounted to EUR 6.1 million, which is in line with the target balance, and the Class B and Class C notes reserve fund balance amounted to EUR 1.2 million and EUR 0.5 million, respectively.

The final maturity date of the transaction is 25 February 2058.

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).

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings 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/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 the Issuer, the administrator, and U.S. Bank Global Corporate Trust which comprise, in addition to the information received at issuance, the investor report as of November 2022; the loan-by-loan report as of October 2022; and performance data as of October 2022.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, 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 16 December 2021, when DBRS Morningstar confirmed its ratings on the Class A, Class B, and Class C notes at A (sf), BBB (high) (sf), and BBB (low) (sf), respectively, and changed the trends to Stable from Negative on all classes of notes.

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 to the parameters used to confirm the ratings (the base case):

-- Recovery rates used: Cumulative base case recovery amount (declining interest rate scenario) of approximately EUR 251.5 million, EUR 281.0 million, and EUR 299.2 million at the AA (low) (sf), A (sf), and BBB (high) (sf) levels, respectively, 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 confirmation of the Class A notes at AA (low) (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 at AA (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class B notes at 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 B notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class C notes at BBB (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 C notes to BBB (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: 12 November 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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