Morningstar DBRS Finalises Provisional Credit Ratings on Dilosk RMBS No. 8 (STS) DAC

DBRS Ratings GmbH (Morningstar DBRS) finalised the provisional credit ratings on the residential mortgage-backed notes issued by Dilosk RMBS No. 8 (STS) DAC (the Issuer) as follows:

-- Class A notes at AAA (sf)
-- Class B notes at AA (high) (sf)
-- Class C notes at A (high) (sf)
-- Class D notes at A (low) (sf)
-- Class E notes at BBB (high) (sf)
-- Class F notes at BBB (high) (sf)
-- Class X notes at B (high) (sf)

The final credit ratings assigned to the Class B, Class D, Class E, Class F, and Class X notes differ from the provisional credit ratings of AA (sf), BBB (high) (sf), BB (high), B (low), and CCC (sf), respectively, because of the tighter spreads and step-up margins on Classes A through F in the final structure. For Class F the difference from provisional to final ratings is more pronounced as for the other Classes of notes due to its small size and hence being even more sensitive to significant margin reductions.

The credit rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal. The credit rating on the Class B notes addresses the timely payment once most senior and the ultimate payment of principal on or before the legal final maturity date. The credit ratings on Classes C, D, E, F, and X notes address the ultimate payment of interest and principal on or before the legal final maturity date. Morningstar DBRS does not rate the Class Z notes expected to be issued in this transaction.

CREDIT RATING RATIONALE
The Issuer is a bankruptcy-remote, special-purpose vehicle incorporated in the Republic of Ireland (Ireland). The Issuer has used the proceeds of the notes to fund the purchase of prime and performing Irish owner-occupied (OO) mortgage loans secured over properties located in Ireland. The mortgage loans included in the portfolio were originated by Dilosk DAC (Dilosk; the originator, seller, and servicer) between 2017 and 2024 and includes 23% of loans that were previously securitised under Dilosk RMBS No. 4 DAC, which has been called prior to closing of Dilosk RMBS No. 8 (STS) DAC.

This is the eighth securitisation from Dilosk, following Dilosk RMBS No. 7, which closed in August 2023. The mortgage portfolio consists of EUR 411 million of first-lien mortgage loans collateralised by OO residential properties in Ireland. The mortgage loans are all current on their payments with a portion of 0.1% of the portfolio being one month in arrears. The weighted-average (WA) seasoning of the portfolio is two years.

The mortgage loans will be serviced by BCMGlobal ASI Limited (BCMGlobal), trading as BCMGlobal, in its role as delegated servicer. Morningstar DBRS reviewed both the originator and servicer via an email update in February 2023. Underwriting guidelines are in accordance with market practices observed in Ireland and are subject to the Central Bank of Ireland’s macroprudential mortgage regulations, which specify restrictions on certain lending criteria.

Liquidity in the transaction is provided by the nonamortising general reserve fund (GRF), which the Issuer can use to pay senior costs and interest on the rated notes but also to clear principal deficiency ledger (PDL) balances. Liquidity for the Class A notes is further supported by a liquidity reserve fund (LRF), fully funded at closing and then amortising in line with the referred class of notes. The notes' terms and conditions allow interest payments, other than on the Class A notes and on the Class B notes when they are the most senior notes outstanding, to be deferred if the available funds are insufficient.

The notes were sized off the end of December 2023 collateral balance whereas the portfolio securitised relates to the end of January 2024. The amortisation experienced between December 2023 and January 2024 will be retained from the note proceeds at closing and will be used to amortise the Class A notes on the first IPD.

Morningstar DBRS based its credit ratings on a review of the following analytical considerations:
-- The transaction’s capital structure, including the 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 estimated stress-level probability of default (PD), loss given default (LGD), and expected losses (EL) on the mortgage portfolio. Morningstar DBRS used the PD, LGD, and EL as inputs into the cash flow engine. Morningstar DBRS analysed the mortgage portfolio in accordance with its “European RMBS Insight: Irish Addendum” methodology;
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E, Class F, and Class X notes according to the terms of the transaction documents;
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as a downgrade, and replacement language in 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; and
-- The expected consistency of the transaction’s legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that are expected to address the assignment of the assets to the Issuer.

Morningstar DBRS’ 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 for each of the rated notes are the related Interest Payment Amounts and the related Class Balances.

Morningstar DBRS’ credit ratings on the rated notes also address the credit risk associated with the increased rate of interest applicable to each of the rated notes if the rated notes are not redeemed on the Optional Redemption Date (as defined in and) in accordance with the applicable transaction documents.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents 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-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Morningstar DBRS analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the credit ratings are: “European RMBS Insight Methodology” (27 March 2023), https://www.dbrsmorningstar.com/research/411634/european-rmbs-insight-methodology, and the “European RMBS Insight: Irish Addendum” (5 June 2023; https://dbrs.morningstar.com/research/415306/european-rmbs-insight-irish-addendum).

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

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

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 Morningstar DBRS 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 these credit ratings include those provided by Dilosk and its representatives. Morningstar DBRS was provided with loan-level, property, and margin data as of 31 January 2024, and the following historical data:
-- Dynamic delinquencies, referred to OO exposures only, from September 2019 to September 2023
-- Dynamic monthly prepayments, referred to OO exposures only, from September 2019 to September 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 affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings 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.

These credit ratings concern newly issued financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

This is the first credit rating action since the Initial Rating Date.

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 ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

-- In respect of the Class A Notes, a PD of 15.1% and an LGD of 33.1% corresponding to the AAA (sf) credit rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B notes, a PD of 13.2% and an LGD of 28.7% corresponding to the AA (high) (sf) credit rating scenario was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C notes, a PD of 9.2% and an LGD of 21.5% corresponding to the A (high) (sf) credit rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D notes, a PD of 7.3% and an LGD of 19.4% corresponding to the A (low) (sf) credit rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E notes, a PD of 5.7% and an LGD of 15.3% corresponding to the BBB (high) (sf) credit rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F notes, a PD of 5.7% and an LGD of 15.3% corresponding to the BBB (high) (sf) credit rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class X notes, a PD of 1.4% and an LGD of 11.3% corresponding to the B (high) (sf) credit 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 AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (sf)

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

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

Class E Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in LGD, expected credit rating of BBB (high) (sf)
-- 25% increase in PD, expected credit rating of BBB (high) (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, expected credit rating of BBB (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 F Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (sf) or below
-- 50% increase in LGD, expected credit rating of BBB (low) (sf) or below
-- 25% increase in PD, expected credit rating of BBB (low) (sf) or below
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf) or below
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf) or below
-- 50% increase in PD, expected credit rating of BB (high) (sf) or below
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf) or below
-- 50% increase in PD and 50% increase in LGD, expected credit rating of BB (high) (sf) or below

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

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: Ronja Dahmen, Vice President
Rating Committee Chair: Rehanna Sameja, Senior Vice President
Initial Rating Date: 18 January 2024

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 this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- “European RMBS Insight Methodology” (27 March 2023) and European RMBS Insight Model v. 6.0.2.0., https://dbrs.morningstar.com/research/411634/european-rmbs-insight-methodology
-- “European RMBS Insight: Irish Addendum” (5 June 2023), https://dbrs.morningstar.com/research/415306/european-rmbs-insight-irish-addendum
-- “Legal Criteria for European Structured Finance Transactions” (30 June 2023), https://dbrs.morningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions
-- “Derivative Criteria for European Structured Finance Transactions” (18 September 2023), https://dbrs.morningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions
-- “Operational Risk Assessment for European Structured Finance Servicers” (15 September 2023), https://dbrs.morningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers
-- “Operational Risk Assessment for European Structured Finance Originators” (15 September 2023), https://dbrs.morningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators
-- “Interest Rate Stresses for European Structured Finance Transactions” (15 September 2023), https://dbrs.morningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions
-- “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (23 January 2024),
https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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].