DBRS Morningstar Downgrades and Confirms Credit Ratings on Roundstone Securities No.1 DAC

DBRS Ratings GmbH (DBRS Morningstar) took the following credit rating actions on the bonds issued by Roundstone Securities No.1 DAC (the Issuer):
-- Class A notes confirmed at AAA (sf)
-- Class B notes confirmed at AA (high) (sf)
-- Class C notes downgraded to A (high) (sf) from AA (sf)
-- Class D notes downgraded to A (high) (sf) from AA (sf)
-- Class E notes downgraded to BBB (low) (sf) from A (sf)

DBRS Morningstar also removed Classes C, D, and E from Under Review with Negative Implications, where they were placed on 9 June 2023.

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in September 2055. The credit ratings on the Class B, Class C, Class D, and Class E notes address the ultimate payment of interest and principal on or before the final maturity date.

The rating actions are the result of an annual review of the transaction following DBRS Morningstar’s finalisation of its “European RMBS Insight: Irish Addendum” (the Methodology) and corresponding European RMBS Insight Model (the Model) on 5 June 2023, and the end of the review period for the transaction, which began on 9 June 2023. For more details, please see the following press release: https://www.dbrsmorningstar.com/research/415601/dbrs-morningstar-places-ratings-on-six-irish-rmbs-transactions-under-review-following-release-of-european-rmbs-insight-irish-addendum.

The Methodology presents the criteria for which Irish residential mortgage-backed securities (RMBS) ratings, and, where relevant, Irish covered bonds ratings, are assigned and/or monitored. The Methodology superseded DBRS Morningstar’s “Irish Residential Mortgage Addendum” to its “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” published on 28 November 2022, and introduced a new proprietary credit model to forecast the expected default rates and losses for portfolios of Irish residential mortgages. The Model combines a loan scoring approach (LSA) and dynamic delinquency migration matrices (DMM) to calculate loan-level defaults and losses. The LSA and DMM were developed using jurisdictional specific data on loans, borrowers, and collateral types. In addition, the Model uses a house price approach to generate market value decline assumptions. For more details, please see the following press release: https://www.dbrsmorningstar.com/research/415309/dbrs-morningstar-publishes-final-methodology-on-european-rmbs-insight-irish-addendum-and-withdraws-irish-residential-mortgage-addendum-to-master-european-rmbs-rating-methodology.

Along with the material changes introduced in the Methodology, the credit rating actions are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the June 2023 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the notes to cover the expected losses at their respective credit rating levels.

The Issuer is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in Ireland. The Issuer used the notes to fund the purchase of Irish residential mortgage loans originated by Bank of Scotland plc (Bank of Scotland) and secured over properties located in Ireland. Bank of Scotland sold the portfolio in May 2018 to Erimon Home Loans Ireland Ltd., a bankruptcy-remote SPV wholly owned by Barclays Bank PLC.

PORTFOLIO PERFORMANCE
As of June 2023, loans that were two to three months in arrears represented 1.0% of the outstanding portfolio balance, up from 0.5% in June 2022. In the same period, the 90+ day delinquency ratio was 10.7%, up from 6.2%, and the cumulative loss ratio was 0.04%, slightly up from 0.03%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base-case PD and LGD assumptions to 16.3% and 17.0%, respectively. The base-case PD assumption increased from 2.7% at the previous annual review of the transaction. The main reason for the increase of the base-case PD assumption is the new Irish RMBS Insight model which applies an additional penalty on all loans originated before 2010. The transaction is up to 100% composed of such loans.

CREDIT ENHANCEMENT
Credit enhancement is provided in the form of subordination of the junior notes and the general reserve fund. As of the June 2023 payment date, the credit enhancement of the Class A, Class B, Class C, Class D, and Class E notes were 38.7%, 30.3%, 24.5%, 21.0%, and 15.3%, respectively, up from 32.9%, 25.6%, 20.7%, 17.7%, and 12.7%, respectively, one year ago.

The transaction benefits from the general reserve fund, which is available to support the Class A to Class E notes. It was funded at closing at 1.5% of the initial balance of the rated notes, less the liquidity reserve fund. The liquidity reserve fund is sized at 1.5% of the Class A notes’ balance and provides liquidity support to cover revenue shortfalls on senior fees, Class X1 payments (unrated), and interest on the Class A notes. The notes will additionally be provided with liquidity support from principal receipts, which can be used to cover interest shortfalls on the most-senior class of notes, provided a debit is applied to the principal deficiency ledgers in reverse-sequential order. As of the June 2023 payment date, the general reserve fund was equal to EUR 20.0 million, EUR 1.3 million below its target, and the liquidity reserve fund was at its target level of EUR 18.9 million.

A key structural feature is the provisioning mechanism in the transaction, which is linked to the loan’s arrears status as well as the usual provisioning based on losses. The degree of provisioning increases alongside the number of months that the loan is in arrears. Such provisioning is positive for the transaction as it traps any excess spread on the loan, which may ultimately end up in foreclosure, much earlier.

The Issuer’s account bank, paying agent, and cash manager is Citibank, N.A./London Branch (Citibank). Based on DBRS Morningstar’s private rating on Citibank, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to Citibank to be consistent with the credit ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit ratings on the Class A, Class B, Class C, Class D, and Class E notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings do 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 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 in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the “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 credit rating action.

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 investor reports and loan-level data provided by Citibank.

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

At the time of the initial credit 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 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.

The last credit rating action on this transaction took place on 9 June 2023, when DBRS Morningstar placed the ratings on the Class C, Class D, and Class E notes Under Review with Negative Implications. Prior to that, on 21 September 2022, DBRS Morningstar confirmed its ratings on the Class A, Class B, and Class C notes at AAA (sf), AA (high) (sf), and AA (sf), respectively, and upgraded its ratings on the Class D and Class E notes to AA (sf) and A (sf), respectively, from A (high) (sf) and A (low) (sf), respectively.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available at 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):

-- DBRS Morningstar expected a lifetime Base Case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to Base Case assumptions and therefore have a negative effect on credit ratings.

-- The Base Case PD and LGD of the current pool of loans for the Issuer at the B (sf) credit rating level are 16.3% and 17.0%, respectively.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the Base Case assumption. For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A notes would be expected to drop to BBB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would also be expected to drop to BBB (high) (sf).

Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of A (high) (sf)
-- 50% increase in PD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BBB (high) (sf)

Class B Risk Sensitivity
-- 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 50% increase in LGD, expected credit rating of A (high) (sf)
-- 25% increase in PD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BBB (low) (sf)

Class C Risk Sensitivity
-- 25% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in LGD, expected credit rating of A (high) (sf)
-- 25% increase in PD, expected credit rating of A (sf)
-- 50% increase in PD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BBB (sf)

Class D Risk Sensitivity
-- 25% increase in LGD, expected credit rating of A (low) (sf)
-- 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD, expected credit rating of BBB (high) (sf)
-- 50% increase in PD, expected credit rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf)

Class E Risk Sensitivity
-- 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD, expected credit rating of BB (high) (sf)
-- 50% increase in PD, expected credit rating of BB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of 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://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: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Date: 28 September 2018

DBRS Ratings GmbH
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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.

-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions
-- Master European Structured Finance Surveillance Methodology (7 February 2023),
https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology
-- 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
-- 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
-- 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
-- European RMBS Insight Methodology (27 March 2023) and European RMBS Insight Model v6.0.0.0,
https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology
-- European RMBS Insight: Irish Addendum (5 June 2023),
https://www.dbrsmorningstar.com/research/415306/european-rmbs-insight-irish-addendum

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].