DBRS Morningstar Finalises Its Provisional Credit Ratings on Clavel Residential 3 DAC

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional credit ratings on the following classes of notes issued by Clavel Residential 3 DAC (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (low) (sf)

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the final maturity date in January 2076. The credit rating on the Class B Notes addresses the timely payment of interest once it becomes the most senior note outstanding and the ultimate payment of principal on or before the final maturity date. The credit ratings on the Class C and Class D Notes (together with the Class A and Class B Notes, the Rated Notes) address the ultimate payment of interest and the ultimate repayment of principal on or before the final maturity date. DBRS Morningstar did not assign credit ratings to the Class RFN, Class Z1, Class Z2, and Class X Notes (together with the Rated Notes, the Notes) also issued in the transaction. All the Notes, with the exception of the Class RFN and Class X Notes, are collateralised.

The credit ratings are based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release.

The Issuer will use the proceeds from the issuance of the Notes to pay various costs and expenses and to (1) pay any interest rate cap fees due and payable by the Issuer; (2) purchase a series of unitranche bonds (the fondo de titulización (FT) Lantana bonds) issued by a Spanish securitisation fund (FT Lantana), which are backed by a portfolio of reperforming Spanish residential mortgage loans serviced by Banco Santander SA (Banco Santander; rated A (high) with a Stable trend by DBRS Morningstar) and represented by mortgage certificates; and (3) purchase a series of unitranche notes (the Clavel bonds) issued by an Irish designated activity company (Clavel Residential DAC or Clavel), backed by a portfolio of reperforming Spanish residential mortgage loans serviced by Banco Bilbao Vizcaya Argentaria, S.A. (BBVA; rated A (high) with a Stable trend by DBRS Morningstar) and represented by mortgage certificates.

FT Lantana and Clavel transferred the FT Lantana bonds and the Clavel bonds, respectively, to the seller and the seller subsequently transferred them to the Issuer on the closing date. As of 31 March 2023 (the cut-off date), the FT Lantana bonds represented 76.0% of the collateral and the Clavel bonds represented 24.0%.

Banco Santander, Banesto SA (Banesto) and Banco Popular, S.A. (Banco Popular) originated the mortgage loans backing the FT Lantana bonds. Both Banesto and Banco Popular are part of Banco Santander. In 1994, Banco Santander acquired majority ownership of Banesto, bringing it into the Banco Santander Group. Since then, Banco Santander increased its ownership of Banesto until its absorption in April 2013. In June 2017, the Single Resolution Board (SRB) and the Fondo de Reestructuración Ordenada Bancaria (FROB) resolved Popular and the bank was transferred to Banco Santander, which finally absorbed Popular in September 2018. Banco Santander has managed the mortgage loans since the absorption dates.

Caixa d’Estalvis de Catalunya (Caixa Catalunya), Caixa d’Estalvis de Manresa (Caixa Manresa), and Caixa d’Estalvis de Tarragona (Caixa Tarragona) originated the mortgage loans backing the Clavel bonds. Caixa Catalunya, Caixa Manresa, and Caixa Tarragona merged into Caixa d’Estalvis de Catalunya, Tarragona i Manresa, which was subsequently transferred to Catalunya Banc, S.A. (CX) by virtue of a spin-off on 27 September 2011. During 2011 and 2012, CX received a capital investment from the FROB, effectively nationalising the bank and, in 2014, BBVA acquired the bank from the FROB.

The Notes will be paid sequentially following the principal priority of payments, which provide the Notes with credit enhancement in the form of subordination.

A Class A liquidity reserve fund (Class A LRF) will be set up at closing, providing liquidity support to the Class A Notes in case of an interest shortfall and will also be available to cover senior expenses. Furthermore, the Class A LRF may provide additional credit support to the Rated Notes when any excess amount is available. The Class A LRF balance will amount to 2.0% of the initial balance of the Class A Notes at closing and will be floored at 1.0% of the initial balance of the Class A Notes.

A Class B LRF will also be set up at closing, providing liquidity support to the Class B Notes in case of an interest shortfall and will also be available to cover senior expenses. Furthermore, the Class B LRF may provide additional credit support to the Rated Notes (other than the Class A and Class B Notes) when any excess amount is available. The Class B LRF balance will amount to 2.5% of the initial balance of the Class B Notes at closing, with no possibility of amortisation.

The Rated Notes will pay interest linked to three-month Euribor on a quarterly basis. Following the payment date in July 2025 (the step-up date), the margin payable on the Rated Notes will increase.

Banco Santander will act as the primary servicer for the FT Lantana subportfolio. Aktua Soluciones Financieras Holdings, SL (the Spanish subsidiary of Intrum Ireland Limited) will act as the special servicer for the FT Lantana subportfolio, managing loans in arrears for more than 149 days. BBVA will act as master servicer and Anticipa Real Estate SLU (Anticipa) will act as the servicer for the Clavel subportfolio.

Banco Santander and BBVA are acting as collection account bank providers for this transaction. Banco Santander will transfer the mortgage loan collections to an account in FT Lantana’s name at Banco Santander within two business days of receipt. All borrower payments under the mortgage loans will be held in this account until the FT Lantana bonds make payments to the Issuer six business days before each payment date. The transaction contains downgrade provisions relating to the account bank whereby, if Banco Santander is downgraded below “A”, the Issuer will replace the collection account bank. The downgrade provisions are consistent with DBRS Morningstar’s criteria for the AAA (sf) credit rating assigned to the Class A Notes in this transaction.

For the Clavel subportfolio, Anticipa will transfer the mortgage loan collections to an account in Clavel’s name at Elavon Financial Services DAC (Elavon) on a monthly basis. All borrower payments under the mortgage loans will be held in this account until the Clavel bonds make payments to the Issuer six business days before each payment date. The transaction contains downgrade provisions relating to the account bank whereby, if BBVA is downgraded below “A”, the Issuer will replace the collection account bank. The downgrade provisions are consistent with DBRS Morningstar’s criteria for the AAA (sf) credit rating assigned to the Class A Notes in this transaction.

Elavon is the Issuer account bank, custodian, and paying agent for this transaction. DBRS Morningstar privately rates Elavon and concluded that Elavon meets its minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to the Issuer account bank whereby, if Elavon is downgraded below “A”, the Issuer will replace the Issuer account bank. The downgrade provisions are consistent with DBRS Morningstar’s criteria for the AAA (sf) credit rating assigned to the Class A Notes in this transaction.

BNP Paribas SA (BNP Paribas; rated AA (low) with a Stable trend by DBRS Morningstar) provides an interest rate cap with a strike rate that starts at 3.0% and increases over time. DBRS Morningstar concluded that BNP Paribas meets its minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to the interest rate cap provider. The downgrade provisions are consistent with DBRS Morningstar’s criteria for the AAA (sf) credit rating assigned to the Class A Notes in this transaction.

DBRS Morningstar was provided with a portfolio equal to EUR 682.6 million as of the cut-off date, which consisted of 7,670 loans extended to 6,102 main borrowers. Of the portfolio balance, 98.1% of the loans were restructured while, as of the cut-off date, 71.8% were performing, 9.5% were no more than one month in arrears, 12.3% were between one and three months in arrears, 3.6% were between three and six months in arrears, and 2.7% were more than six months in arrears.

DBRS Morningstar assessed the historical performance of the mortgage loans and factored restructuring arrangements into its analysis by selecting a portfolio score of “Low” in its European RMBS Insight Model.

The weighted-average (WA) seasoning of the portfolio as of the cut-off date is 12.6 years whereas the WA remaining term is 22.5 years. The WA original loan-to-value (LTV) ratio stands at 76.8% while the WA indexed current LTV is 59.5%. DBRS Morningstar also considered the latest valuations provided by the Issuer in its analysis, which would increase the WA indexed LTV of the portfolio to 82.1%.

Currently, 89.2% of the portfolio comprises floating-rate loans linked to 12-month Euribor while 10.2% is linked to other Spanish indices. The remaining 0.6% of the portfolio comprises fixed-rate loans. The Notes issued are floating rate linked to three-month Euribor. Any basis risk mismatch will remain unhedged. DBRS Morningstar took basis risk into account in its cash flow analysis.

Loans representing 13.4% of the total amount are currently in their grace period, with deferred principal payments and reduced interest rates. DBRS Morningstar considered these in its assessment.

Of the pool, 13.3% consists of multicredit loans that permit the borrower to make additional drawdowns of up to EUR 19.3 million. The additional drawdowns are not funded and will be provided by available funds or by the seller in case of insufficient funds. The borrower may not draw down more than the amounts stated in the mortgage agreement. Drawdowns are possible under strict performance requirements and historical drawdowns were low.

Banco Santander may repurchase loans from the portfolio following certain events, most notably when the debtor of the loan is at risk of vulnerability or when material reputational harm or loss may arise to Banco Santander as originator. If the repurchase price is lower than the outstanding principal amount of the repurchased loan, the seller shall pay the difference to the Issuer.

In their roles as servicers, Banco Santander and Anticipa can renegotiate with the borrowers the terms of any loan that is less than five months in arrears and three months in arrears, respectively, without the Issuer's authorisation, subject to the satisfaction of certain conditions. Permitted variations are limited to margin reduction and maturity extension, with certain limits. DBRS Morningstar considered the optionality in its analysis by extending the maturity and decreasing the margin for some loans in its cash flow analysis.

RATING RATIONALE
DBRS Morningstar based its credit ratings on the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar received historical mortgage performance data as well as loan-level data for the mortgage portfolio. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss levels on the mortgage portfolio, which it uses as inputs in the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum”.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the Noteholders according to the terms and conditions in the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker. DBRS Morningstar considered additional sensitivity scenarios of 0% conditional repayment rate stress.
-- The transaction parties’ financial strength to fulfil their respective roles and the structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology as well as the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- DBRS Morningstar’s sovereign rating on the Kingdom of Spain at “A” with a Stable trend as of the date of this press release.

DBRS Morningstar’s credit ratings on the Class A, Class B, Class C, and Class D Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the Notes are the related Interest Payment Amounts and the related Principal Payment Amounts.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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 (4 July 2023) https://www.dbrsmorningstar.com/research/416784/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 methodologies applicable to the credit ratings are the “European RMBS Insight Methodology” (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology, and the “European RMBS Insight: Spanish Addendum” (1 March 2023), https://www.dbrsmorningstar.com/research/410420/european-rmbs-insight-spanish-addendum.

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.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit ratings include historical performance data from April 2014 to January 2023 for the Clavel subportfolio and historical performance data from January 2017 to January 2023 for the FT Lantana subportfolio. The sources of information also include loan-level data as at 15 January 2023 for both subportfolios as provided by the arranger.

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 credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

This credit rating concerns a newly issued financial instrument.

This is the first credit rating action since the Initial Rating Date.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

-- In respect of the Class A Notes, the PD of 59.8% and LGD of 47.1%, corresponding to a AAA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class B Notes, the PD of 55.8% and LGD of 42.3%, corresponding to an AA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class C Notes, the PD of 48.1% and LGD of 37.0%, corresponding to an A (low) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class D Notes, the PD of 41.9% and LGD of 29.0%, corresponding to a BBB (low) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.

Class A Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to AA (low) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).

Class B Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BBB (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to A (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).

Class C Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to B (high) (sf).

Class D Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to CCC (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://registers.esma.europa.eu/cerep-publication/. 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 credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 31 July 2023

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27 28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight model v 6.0.0.0,
https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology.
-- European RMBS Insight: Spanish Addendum (1 March 2023),
https://www.dbrsmorningstar.com/research/410420/european-rmbs-insight-spanish-addendum.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730/legal-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.
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023),
https://www.dbrsmorningstar.com/research/415976/derivative-criteria-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 (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/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].