Morningstar DBRS Assigns Credit Ratings to Luna Securities Designated Activity Company

DBRS Ratings GmbH (Morningstar DBRS) assigned a credit rating to the following class of notes issued by Luna Securities Designated Activity Company (the Issuer) as follows:

-- Class A notes at AAA (sf)

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal.

Morningstar DBRS does not rate the Class Z notes also issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the Republic of Ireland. The Issuer will use the proceeds of the notes to fund the purchase of prime and performing Irish private-dwelling home and buy-to-let (BTL) mortgage loans secured over properties located in Ireland. The Governor and Company of the Bank of Ireland, Bank of Ireland Mortgage Bank, and KBC Bank Ireland plc originated the mortgage loans included in the portfolio.

The Issuer issued two tranches of collateralised mortgage-backed securities to finance the purchase of the mortgage portfolio. A liquidity reserve fund, which provides liquidity support to the Class A notes, was fully funded at closing through the issuance of the subordinated loan.

As of 31 August 2023, the portfolio consisted of 96,844 loans with an aggregate principal balance of EUR 13.4 billion. The transaction comprises both recent originations and loans originated before the sovereign debt crisis in 2010 (42.1%), with a weighted-average (WA) seasoning of 9.2 years and a WA remaining term of 19.9 years.

The majority of the portfolio comprises owner-occupied properties (94.8% of the current balance) while the remaining are BTL properties (5.2%).

The WA original loan-to-value (OLTV) of the portfolio is 76.7%, and 50.0% have an OLTV greater than 80%.

The transaction has a revolving period of two years, during which the Issuer will use principal repayments from the mortgage loans to purchase new assets and the liabilities may not amortise.

The transaction documents specify the additional loan conditions that must be complied with during the replenishment period. Morningstar DBRS stressed the portfolio in accordance with the additional loan conditions to assess the potential deterioration that the portfolio could suffer during the revolving period.

Approximately 61.4% of the mortgage loans in the portfolio pay a fixed rate with a future switch to a floating rate while 38.5% pay a variable interest rate. To address this interest rate mismatch, the transaction is structured with a fixed-to-floating interest rate swap that swaps the fixed interest rate of 1% payable by the Issuer with three-month Euribor. The notional of the swap is the outstanding balance of the fixed-rate loans for the applicable calculation period. The swap documents reflect Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions”.

The transaction benefits from an initial portfolio all-in rate of 3.6%. The seller also covenants that there is a guaranteed WA rate floor of 3.25% for variable-rate loans.

Morningstar DBRS calculated credit enhancement for the Class A notes at 7.5%, provided by the subordination of the Class Z notes.

The transaction benefits from a funded liquidity reserve, which can be used to cover senior fees and interest shortfalls on the Class A notes. Moreover, principal can be drawn to cover interest on the Class A notes, thus further decreasing the risk of a default on the timely interest payment of the Class A notes.

Morningstar DBRS based its credit rating on a review of the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. Morningstar DBRS calculated probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio. Morningstar DBRS used the PD, LGD, and EL as inputs into the cash flow tool. Morningstar DBRS analysed the mortgage portfolio in accordance with its “European RMBS Insight: Irish Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A notes according to the terms of the transaction documents.
-- The sovereign credit rating of AA (low) with a Stable trend on the Republic of Ireland as of the date of this press release.
-- The consistency of the legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

Morningstar DBRS’ credit rating on the Class A notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Interest Payment Amounts and the related Class Balances.

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

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: “European RMBS Insight Methodology” (27 March 2023), https://dbrs.morningstar.com/research/411634.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include those provided by Bank of Ireland and its representatives. Morningstar DBRS received loan-level data for the mortgage loans as of 31 August 2023 and historical performance data (delinquencies and prepayment data) covering the period from January 2016 to March 2023.

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

Morningstar DBRS was supplied with third-party assessments. However, this did not impact the credit rating analysis.

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

Morningstar DBRS 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 Morningstar DBRS credit rating on this financial instrument.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- In respect of the Class A notes, a PD of 19.6% and an LGD of 31.0% corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

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

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alejandro Tendero, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 29 January 2024

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://dbrs.morningstar.com/about/methodologies.

-- European RMBS Insight: Irish Addendum (5 June 2023) and European RMBS Insight Model v. 6.0.2.0, https://dbrs.morningstar.com/research/415306
-- European RMBS Insight Methodology (27 March 2023), https://dbrs.morningstar.com/research/411634
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://dbrs.morningstar.com/research/420573
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].