Press Release

DBRS Morningstar Upgrades Ratings on European Residential Loan Securitisation 2019-NPL1 DAC, Changes Trend to Stable from Positive

Nonperforming Loans

June 23, 2023

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the following notes issued by European Residential Loan Securitisation 2019-NPL1 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 (low) (sf) from BB (high) (sf)

DBRS Morningstar also changed the trends on all ratings to Stable from Positive.

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.

The Issuer used proceeds from the issuance of the Class A to Class C notes to purchase a portfolio mostly comprising first-charge nonperforming Irish residential mortgage loans. As of 31 May 2019, the portfolio had a total outstanding balance of EUR 455.9 million and included part of the receivables securitised in the transaction. The remaining loans were part of the LSF IX Java Investments DAC (Java Investments) and LSF IX Paris Investments DAC (Paris Investments) portfolios. Java Investments acquired the legal and beneficial titles of the loans from Investec Bank PLC and Nua Mortgages Limited (Nua Mortgages) in September 2014. Paris Investments acquired the legal and beneficial titles of the loans from the Bank of Scotland (Ireland) Limited (BoSI) in October 2014.

BoSI, Start Mortgages DAC (Start Mortgages), and Nua Mortgages originated the mortgage loans. Start Mortgages also services the portfolio. Hudson Advisors Ireland DAC (Hudson) was appointed 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 April 2023, 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 30 April 2023 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 September 2023. The disposed portfolio mostly comprised accounts with no days in arrears and had an outstanding balance of about EUR 45.8 million as of September 2022. The proceeds from the portfolio sale accounted for EUR 36.7 million, representing 80.2% of the disposed outstanding balance as of September 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 than the payments due on the Class B notes. The Class B, Class C, and Class P notes may receive principal repayment before the redemption of the Class A, Class B, and Class C notes, respectively, in the event of a portfolio sale. Of the EUR 36.7 million net proceeds from the portfolio sale, the Issuer used EUR 2.3 million, EUR 2.3 million, and EUR 7,934 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.

TRANSACTION AND PERFORMANCE
According to the latest investor report dated 24 May 2023, the outstanding principal amounts of the Class A, Class B, Class C, Class P, and Class D notes were EUR 61.0 million, EUR 29.0 million, EUR 24.4 million, EUR 38.2 million, and EUR 151.6 million, respectively. As of May 2023, the balances of the Class A, Class B, Class C, and Class P notes had amortised by 69.8%, 15.3%, 17.6%, and 1.4%, respectively, since issuance and the current aggregated transaction balance was EUR 304.1 million.

As of the April 2023 collection date, the transaction was performing below the administrator’s initial expectations. The actual cumulative gross collections were EUR 171.2 million whereas the administrator’s initial business plan estimated cumulative gross collections of EUR 218.5 million for the same period. Therefore, as of April 2023, the transaction was underperforming by 21.7% compared with the business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 132.8 million at the A (sf) stressed scenario, EUR 168.6 million at the BBB (high) (sf) stressed scenario, and EUR 196.5 million at the BB (sf) stressed scenario for the same period. Therefore, as of April 2023, the transaction was performing above DBRS Morningstar’s initial A (sf) and BBB (high) (sf) stressed expectations but below BB (sf) stressed scenario with respect to the initial ratings of the notes. However, the portfolios sales have enable partial repayment of the Class B and C notes principal ahead of the redemption of the Class A notes.

Excluding actual collections, the administrator’s expected future collections from May 2023 account for EUR 258.7 million. In a declining interest rate scenario, the updated DBRS Morningstar AA (low) (sf), A (sf), and BBB (low) (sf) rating stresses assume a haircut of 55.8%, 52.5%, and 47.5% 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 6.5% 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 6.5% 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 May 2023, the Class A reserve fund amounted to EUR 3.8 million, which is EUR 0.16 million below the target balance due to a temporary shortfall to pay interest on the Class A notes, and the Class B and Class C reserve fund balance amounted to EUR 60,294 and EUR 50,804, respectively.

The Class A, B and C 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 (i) the cumulative collection underperformance observed since issuance as compared to the executed business plan, (ii) the higher concentration of the portfolio following the two portfolio sales in September 2020 and September 2022 and the increase in the weighted average loan-to-value of the portfolio, (iii) 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 (iv) the lack of a cash reserve for Class B and Class C Notes and therefore liquidity support after the full redemption of the Class A Notes.

The final maturity date of the transaction is 24 August 2056.

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 ratings is: “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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, Hudson, and U.S. Bank Global Corporate Trust which comprise, in addition to the information received at issuance, the investor report as of May 2023; the loan-by-loan report as of April 2023; and performance data as April 2023.

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 24 June 2022, when DBRS Morningstar confirmed its ratings on the Class A, Class B, and Class C notes at A (sf), BBB (high) (sf), and BB (high) (sf), respectively, and changed the trends to Positive from Stable on all classes of notes.

The lead analyst responsibilities for this transaction have been transferred to Pablo Iturriaga.

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 114.3 million, EUR 122.9 million, and EUR 135.9 million at the AA (low) (sf), A (sf), and BBB (low) (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 downgrade of the Class C notes at 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 C notes to B (high) (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 1 July 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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