DBRS Morningstar Upgrades and Confirms Credit Ratings on Two Finance Ireland RMBS Transactions Following Release of European RMBS Insight: Irish Addendum

DBRS Ratings GmbH (DBRS Morningstar) took the following credit rating actions on the notes issued by Finance Ireland RMBS No.4 DAC (Finance Ireland 4) and Finance Ireland RMBS No. 5 DAC (Finance Ireland 5):

Finance Ireland 4:
-- Class A confirmed at AAA (sf)
-- Class B confirmed at AA (high) (sf)
-- Class C upgraded to AA (high) (sf) from AA (low) (sf)
-- Class D upgraded to A (high) (sf) from A (low) (sf)
-- Class E upgraded to BBB (sf) from BBB (low) (sf)
-- Class F confirmed at BB (high) (sf)
-- Class X upgraded to BBB (low) (sf) from BB (high) (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 legal final maturity date in December 2061. The credit ratings on the Class B, Class C, and Class D notes address the ultimate payment of interest and principal on or before the legal final maturity date while junior, and timely payment of interest while the senior-most class outstanding. The credit ratings on the Class E, Class F, and Class X notes address the ultimate payment of interest and principal on or before the legal final maturity date.

Finance Ireland 5:
-- Class A confirmed at AAA (sf)
-- Class B upgraded to AA (high) (sf) from AA (sf)
-- Class C upgraded to A (high) (sf) from A (sf)
-- Class D upgraded to BBB (high) (sf) from BBB (low) (sf)
-- Class E upgraded to BB (high) (sf) from BB (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 legal final maturity date in September 2062. The credit ratings on the Class B and Class C notes address the ultimate payment of interest and principal on or before the legal final maturity date while junior, and timely payment of interest while the senior-most class outstanding. The credit ratings on the Class D and Class E notes address the ultimate payment of interest and principal on or before the legal final maturity date.

Additionally, DBRS Morningstar removed the ratings on the Class C, D, E, F, and X notes in Finance Ireland 4 and the ratings on the Class B, C, D, and E notes in Finance Ireland 5 from Under Review with Positive Implications (UR-Pos.), where they were placed on 9 June 2023.

The credit rating actions are the result of an annual review of the transactions 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 transactions, 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) credit ratings, and, where relevant, Irish covered bonds credit 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;
-- 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.

Finance Ireland 4 is a static securitisation of Irish first-lien residential mortgages originated primarily by Finance Ireland Credit Solutions DAC (Finance Ireland) as well as Pepper Finance Corporation (Ireland) DAC, which also acts as the servicer of the mortgage portfolio. The transaction closed in February 2022 with an initial portfolio balance of EUR 339.3 million, of which 98% were mortgages originated by Finance Ireland between May and December 2021.

Finance Ireland 5 is a static securitisation of Irish first-lien residential mortgages originated primarily by Finance Ireland Credit Solutions DAC (Finance Ireland) as well as Pepper Finance Corporation (Ireland) DAC, which also acts as the servicer of the mortgage portfolio. The transaction closed in October 2022 with an initial portfolio balance of EUR 413.0 million, of which 69% were mortgages originated by Finance Ireland in 2022.

PORTFOLIO PERFORMANCE
Finance Ireland 4:
As of the June 2023 payment date, loans one to two months and two to three months in arrears represented 0.2% and 0.1% of the outstanding portfolio balance, respectively, while loans more than three months in arrears amounted to 0.1%. There have not been any repossessions or cumulative losses reported to date.

Finance Ireland 5:
As of the June 2023 payment date, loans one to two months and two to three months in arrears represented 0.2% and 0.1% of the outstanding portfolio balance, respectively, while loans more than three months in arrears amounted to 0.1%. There have not been any repossessions or cumulative losses reported to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
For Finance Ireland 4, DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base-case PD and LGD assumptions to 2.2% and 10.0%, respectively. For Finance Ireland 5, DBRS Morningstar updated its base-case PD and LGD assumptions to 2.3% and 10.1%, respectively.

CREDIT ENHANCEMENT
Credit enhancement to the rated notes is provided by subordination of the respective junior classes and the general reserve fund. For Finance Ireland 4, as of the June 2023 payment date, credit enhancement available to the Class A, Class B, Class C, Class D, Class E, Class F, and Class X notes was 19.1%, 12.1%, 8.5%, 5.2%, 3.3%, 2.2%, and 0.0%, respectively, up from 17.6%, 10.9%, 7.4%, 4.2%, 2.4%, 1.3%, and 0.0%, respectively, at the time of the last annual review in February 2023. For Finance Ireland 5, as of the June 2023 payment date, credit enhancement available to the Class A, Class B, Class C, Class D, and Class E notes was 16.2%, 10.7%, 7.6%, 5.7%, and 4.0%, respectively, up from 14.7%, 9.7%, 7.0%, 5.2%, and 3.7%, respectively, at the time of DBRS Morningstar’s initial credit rating in October 2022.

The transactions benefit from a liquidity reserve fund and a general reserve fund providing liquidity support and credit support to the structures, respectively.

The liquidity reserve fund is available to cover senior fees and interest on the Class A notes. In Finance Ireland 4, it is currently at its target level of EUR 1.93 million as of the June 2023 payment date, equal to 0.75% of the outstanding principal balance of the Class A notes, subject to a floor of EUR 1.0 million. In Finance Ireland 5, it is currently at its target of EUR 2.45 million as of the June 2023 payment date, equal to 0.75% of the outstanding principal balance of the Class A notes, subject to a floor of EUR 1.35 million.

The general reserve fund is available to cover senior fees, interest, and principal (via the principal deficiency ledgers) on the rated notes. In Finance Ireland 4, the general reserve fund is currently at its target level of EUR 387,825 as of the June 2023 payment date, equal to 0.75% of the outstanding principal balance of the rated notes minus the liquidity reserve target amount. In Finance Ireland 5, the general reserve fund is currently funded to EUR 20,460 as of the June 2023 payment date, below its target balance of EUR 340,500 (equal to 0.75% of the outstanding principal balance of the Class B to Class E notes) as a result of the significantly increased interest rates.

Elavon Financial Services DAC (Elavon) acts as the account bank for the transactions. Based on DBRS Morningstar’s private credit rating on Elavon, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the credit ratings assigned to the respective notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

BNP Paribas SA acts as the swap provider for Finance Ireland 4, while BofA Securities Europe SA (BofA Europe) acts as the swap provider for Finance Ireland 5. DBRS Morningstar's public Long Term Critical Obligations Rating of AA (high) on BNP Paribas SA and the private credit rating assigned to BofA Europe are above the first rating threshold as described in DBRS Morningstar's "Derivative 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 on the notes also address the credit risk associated with the increased rate of interest applicable to the notes if the notes are not redeemed on the Optional Redemption Date (as defined in and) in accordance with the applicable 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 structures 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 these transactions are listed at the end of this press release.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions 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 actions.

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 provided by U.S. Bank Global Corporate Trust Limited (the cash manager) and loan-level data provided by the European DataWarehouse GmbH.

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 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.

The last credit rating actions on these transactions took place on 9 June 2023, when DBRS Morningstar placed the Class C, D, E, F, and X notes of Finance Ireland 4 and the Class B, C, D, and E notes of Finance Ireland 5 UR-Pos. following DBRS Morningstar’s finalisation of the Methodology and the Model.

The lead analyst responsibilities for Finance Ireland 5 have been transferred to Daniel Rakhamimov.

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 are 1.4% and 13.3%, 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 credit rating on the Class A notes of Finance Ireland 4 would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, the credit rating on the Class A notes of Finance Ireland 4 would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the credit rating on the Class A notes of Finance Ireland 4 would be expected to remain at AAA (sf).

Finance Ireland 4 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)

Finance Ireland 4 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 (low) (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 (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Finance Ireland 4 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 (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (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 (high) (sf)

Finance Ireland 4 Class D Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (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 (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Finance Ireland 4 Class E Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Finance Ireland 4 Class F Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)

Finance Ireland 4 Class X Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

Finance Ireland 5 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 AA (high) (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 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)

Finance Ireland 5 Class B Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (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 (high) (sf)

Finance Ireland 5 Class C Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 50% increase in PD, expected rating of A (low) (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 A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Finance Ireland 5 Class D Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (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 (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Finance Ireland 5 Class E Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (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: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 13 January 2022 (Finance Ireland 4); 6 October 2022 (Finance Ireland 5)

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 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 version 6.0.0.0, 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
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023), https://www.dbrsmorningstar.com/research/415976/derivative-criteria-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].