DBRS Morningstar Confirms Ratings on Proteus RMBS DAC Following Release of European RMBS Insight: Irish Addendum

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit ratings on the notes issued by Proteus RMBS DAC (the Issuer), and removed the Under Review with Negative Implications (UR-Neg.) status from the Class C, Class D, and Class E Notes, where they were placed on 9 June 2023, as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (sf)
-- Class D at AA (low) (sf)
-- Class E at A (sf)

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 in October 2054. The ratings on the Class B, Class C, and Class D notes address the ultimate payment of interest and principal as well as the timely payment of interest while the senior-most class outstanding on or before the legal final maturity date. The rating on the Class E notes addresses the ultimate payment of interest and principal on or before the legal final maturity date.

The confirmations 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 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 The Methodology superseded DBRS Morningstar’s “Irish Residential Mortgage Addendum” to its “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional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 confirmations are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the July 2023 payment date;
-- Probability of default (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 rating levels.

The transaction is a securitisation of Irish residential mortgages originated by Danske Bank A/S and serviced by Pepper Asset Servicing. The transaction closed in December 2018, and the Issuer used the proceeds to refinance the notes it originally issued in December 2017. The EUR 1,578.4 million portfolio at closing consisted of mortgages for both owner-occupied properties (74.3% of the initial pool balance) and buy-to-let properties (25.7%).

PORTFOLIO PERFORMANCE
As of the July 2023 payment date, loans one to two months and two to three months in arrears represented each 1.1% of the outstanding portfolio balance, while loans more than three months in arrears amounted to 4.0%. Cumulative write-offs have amounted to 0.11% of the original collateral balance.

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 5.7% and 25.1%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations and the general reserve fund provide credit enhancement to the notes. As of the July 2023 payment date, credit enhancement to the Class A, Class B, Class C, Class D, and Class E notes increased to 47.8%, 37.2%, 29.4%, 23.6%, and 18.8%, respectively, from 40.0%, 31.0%, 24.6%, 19.7%, and 15.6% at the time of the previous annual review in December 2022.

The transaction benefits from a general reserve fund that is available to cover senior expenses and interest payments on the rated notes as well as to clear debit balances on the principal deficiency ledgers of the rated notes. The general reserve fund is amortising, with a target balance equal to 0.25% of the outstanding collateral balance, subject to a floor of EUR 1.58 million. As of the July 2023 payment date, the general reserve fund was at EUR 1.45 million, below its target balance of EUR 2.04 million, as a result of the significantly increased interest rates and the unhedged basis risk in the transaction.

Citibank Europe plc acts as the account bank for the transaction. Based on DBRS Morningstar’s Long-Term Issuer Rating of AA (low) on Citibank Europe plc, 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 the account bank to be consistent with the 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 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 impact 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 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 investor reports and loan-level information provided by Citibank N.A., London Branch.

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 credit rating actions on this transaction took place on 9 June 2023, when the Class C, Class D, and Class E notes were placed UR-Neg. following DBRS Morningstar’s finalisation of the Methodology and the Model.

Information regarding DBRS Morningstar 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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the 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 are 2.9% and 25.4%, respectively.
-- The risk sensitivity overview below illustrates the 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), ceteris paribus. If the PD increases by 50%, the rating of the Class A notes would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to remain at AAA (sf).

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

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

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

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

Class E Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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://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 ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 13 December 2018

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology
-- 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
-- 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
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-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
-- 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 these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].