Press Release

DBRS Morningstar Confirms Credit Ratings on European Residential Loan Securitisation 2019-NPL2 DAC with Stable Trends

Nonperforming Loans

December 05, 2023

DBRS Ratings GmbH (DBRS Morningstar) took the following credit rating actions on the notes issued by European Residential Loan Securitisation 2019-NPL2 DAC (the Issuer):

-- Class A confirmed at AA (low) (sf)
-- Class B confirmed at A (sf)
-- Class C confirmed at BBB (high) (sf)

All trends are Stable.

The transaction represents the issuance of the Class A, Class B, Class C, Class P, and Class D Notes (collectively, the Notes). 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. The credit 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.

At issuance, the Notes were backed by a EUR 1.3 billion, by gross book value, portfolio consisting of first-charge performing and nonperforming Irish residential mortgage loans originated by Permanent TSB p.l.c.

Start Mortgages DAC is the servicer of the receivables. Hudson Advisors Ireland DAC operates as the Issuer administration consultant and, as such, acts in an oversight and monitoring capacity and provides input on asset resolution strategies.

CREDIT RATING RATIONALE
The credit rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of the portfolio recoveries as of 30 September 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 September 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 2022. The disposed portfolio mostly comprised accounts not in in arrears and had an outstanding balance of about EUR 264.5 million as of August 2022. The proceeds from the portfolio sale accounted for EUR 213.2 million, representing 80.6% of the disposed outstanding balance as of August 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 the Class A, Class B and C Notes). Additionally, the payment of interest on the Class B Notes is fully subordinated to the payment of both interest and principal on the Class A Notes, and the payment of interest on the Class C Notes has a lower ranking to the payments due on the Class B Notes. The Class B, Class C, and Class P Notes may get principal repayment before redemption of the Class A, Class B, and Class C Notes (the rated Notes), respectively, in the event of a portfolio sale. Moreover, the Class P Notes may receive principal repayment before a redemption of the rated Notes in the event of interest rate cap reductions. Out of the EUR 212.6 million net proceeds from the portfolio sale, the Issuer used EUR 13.2 million, EUR 13.2 million, and EUR 1.0 million 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 support: 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 October 2023, the principal amounts outstanding on the Class A, Class B, Class C, Class P, and Class D Notes were EUR 79.2 million, EUR 46.4 million, EUR 46.4 million, EUR 118.8 million, and EUR 470.3 million, respectively. The balance of the Class A, Class B, Class C, and Class P Notes amortised by approximately 87.3%, 22.2%, 22.2%, and 0.8%, respectively, since issuance. The current aggregated transaction balance is EUR 761.0 million. The deferred interests on the Class B and Class C Notes were EUR 596.3 thousand and EUR 1.8 million, respectively. Given the payment priority that the interest payments on Class B and Class C Notes are subordinated to Class A Notes principal redemption, the deferred interests on Class B and Class C Notes did not come unexpected.

As of the September 2023 collection date, the transaction was performing below the administrator’s initial expectations. The actual cumulative gross collections were EUR 622.8 million, including the EUR 213.2 million disposal proceeds, whereas the administrator’s initial business plan estimated cumulative gross collections of EUR 687.8 million for the same period. Therefore, as of September 2023, the transaction was underperforming by 9.4% compared with the business plan expectations. Excluding the proceeds from the portfolio sale, the transaction would have been underperforming the administrator’s initial expectations by 40.4%.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 339.5 million at the A (sf) stressed scenario, EUR 525.1 million at the BBB (high) (sf) stressed scenario, and EUR 568.4 million at the BBB (low) (sf) stressed scenario for the same period. Hence, the transaction is performing ahead of DBRS Morningstar’s initial stressed expectations.

Excluding actual collections, the administrator’s expected future collections from October 2023 amount to EUR 533.9 million. In a declining interest rate scenario, the updated DBRS Morningstar AA (low) (sf), A (sf), and BBB (high) (sf) rating stresses assume a haircut of 67.8%, 64.7%, and 62.8% 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 4.0% 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 7.5% 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 October 2023, the Class A reserve fund amounted to EUR 3.4 million, which is in line with the target balance, and both the Class B and Class C Notes reserve fund balances amounted to EUR 125,853.6.

The final maturity date of the transaction is 25 February 2058.

DBRS Morningstar’s credit ratings on the rated Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Class Balance.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the rating on the Class C Notes does not address 3.5% Additional Note Payments.

DBRS Morningstar’s long-term credit rating provides 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 www.dbrsmorningstar.com/research/416784.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: “Master European Structured Finance Surveillance Methodology” (22 October 2023), https://www.dbrsmorningstar.com/research/422281/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 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 Rating of the "Global Methodology for Rating Sovereign Governments" at: https://www.dbrsmorningstar.com/research/421590/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 the Issuer, the administrator, and U.S. Bank Global Corporate Trust, which comprise, in addition to the information received at issuance, the investor report as of October 2023; the loan-by-loan report as of September 2023; and performance data as of September 2023.

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 this transaction took place on 16 December 2022, when DBRS Morningstar upgraded its credit ratings on the Class A Notes to AA (low) (sf) from A (sf), on the Class B Notes to A (sf) from BBB (high) (sf), and on the Class C Notes to BBB (high) (sf) from BBB (low) (sf) and maintained Stable trends.

The lead analyst responsibilities for this transaction have been transferred to Sijia Aulenbacher.

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):

-- Recovery rates used: Cumulative base case recovery amount (declining interest rate scenario) of approximately EUR 172.0 million, EUR 188.5 million, and EUR 198.8 million at the AA (low) (sf), A (sf), and BBB (high) (sf) stress 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 maintain the credit rating 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 maintain the credit rating 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 maintain the credit rating of the Class B Notes at A (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would maintain the credit rating 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 to 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://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: Sijia Aulenbacher, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 12 November 2019

DBRS Ratings GmbH
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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.

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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