Morningstar DBRS Takes Credit Rating Actions on LSF11 Boson Investments S.à.r.l. (Compartment 2)

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the notes issued by LSF11 Boson Investments S.à.r.l. (Compartment 2) (the Issuer) and resolved the Under Review with Negative Implications (UR-Neg.) status of the credit ratings where they were placed on 8 December 2023:

-- Class A1 notes confirmed at A (low) (sf) with Stable trend
-- Class A2 notes confirmed at BBB (high) (sf) with Stable trend
-- Class B notes confirmed at BB (high) (sf) with Stable trend
-- Class C notes downgraded to BB (low) (sf) from BB (sf) with Negative trend

The credit ratings on the Class A1 and Class A2 notes (together, the Class A notes) address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date. The credit ratings on the Class B and Class C notes address the ultimate payment of interest and principal by the legal final maturity date. Morningstar DBRS’ credit ratings do not address Additional Note Payments (as defined in the transaction documents). Morningstar DBRS does not rate the Class D or Class P notes (together with the rated notes, the notes) also issued in this transaction.

The notes are collateralised by a pool of secured Spanish nonperforming loans (NPLs) and real estate owned assets (REOs) originated by Banco de Sabadell S.A (Sabadell) and acquired by Lone Star from Sabadell via one of its subsidiaries, LSF11 Boson Investments S.à.r.l. (Compartment 2) (formerly LSF113 S.à.r.l.; the transferor) in December 2020 (the original purchase date). In July 2021, Sabadell and the transferor also entered into a subparticipation agreement in respect of certain nonaccelerated loans included in the portfolio. The transferor allocated all its contractual positions to the Issuer in 2021. As of the July 2021 cut-off date, the gross book value of the loan pool was approximately EUR 626.8 million and the total outstanding balance of the subparticipated loans was EUR 21.7 million. The total real estate value (REV) backing the portfolio amounted to EUR 564.9 million and mostly consisted of residential properties situated in Spain (93.8% by REV). About 5.4% of the real estate assets by value were already repossessed as of the cut-off date.

Servihabitat Servicios Inmobiliarios, S.L.U. services the secured loans and REOs. Hudson Advisors Spain, S.L.U. is the asset manager and backup administrator facilitator and, as such, acts in an oversight and monitoring capacity, providing 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: Assessment of the portfolio recoveries as of 31 October 2023, with a focus on: (1) a comparison of actual gross collections against the servicer’s initial business plan forecast; (2) the collection performance observed over the past months; and (3) a comparison of current performance and Morningstar DBRS’ expectations.
-- Updated business plan: The servicer’s updated business plan as of October 2023, received in January 2024, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of 31 October 2023 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the notes (i.e., the Class A2 notes will begin to amortise following the full repayment of the Class A1 notes unless an enforcement notice has been delivered; the Class B notes will begin to amortise following the full repayment of the Class A2 notes, and the Class C notes will begin to amortise following the full repayment of the Class B notes).
-- Liquidity support: The Class A, Class B, and Class C reserve funds provide liquidity support to the respective classes of notes and currently stand at EUR 8.2 million, EUR 0.3 million, and EUR 0.5 million, respectively (amounts at closing of EUR 11.0 million, EUR 1.0 million, and EUR 1.8 million, respectively, and target amounts equivalent to 5.0%, 8.25%, and 11.0% of the outstanding balances, respectively).
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

Additionally, the Issuer operating expenses account, the Issuer general account, and the REO company (ReoCo) general account are aimed at providing support to both the Issuer and the ReoCo in respect of operating expenses, corporate costs, servicing fees and expenses, and subparticipation fees since inception. The accounts were funded at closing with proceeds from the issuance of the notes at EUR 1.0 million, EUR 2.0 million, and EUR 3.0 million, respectively, and they are replenished on each interest payment date (IPD) for an amount equal to the estimated budget for the following two IPDs. The total balance of the three accounts as of the November IPD was EUR 4.1 million.

According to the investor report dated 27 November 2023, the principal amounts outstanding on the Class A1, Class A2, Class B, Class C, Class P, and Class D notes were EUR 139.6 million, EUR 20.0 million, EUR 12.0 million, EUR 16.0 million, EUR 2.0 million, and EUR 376.8 million, respectively. The balance of the Class A1 notes has amortised by approximately 30.2% since issuance. The current aggregated transaction balance is EUR 566.4 million.

As of October 2023, the transaction was performing significantly below the servicer’s initial expectations. The actual cumulative net collections (before servicing fees and corporate costs) was EUR 60.4 million, whereas the servicer’s initial business plan estimated cumulative net collections (before servicing fees and corporate costs) of EUR 100.8 million for the same period. Therefore, as of October 2023, the transaction was underperforming by EUR 40.3 million (-40.0%) compared with initial expectations.

At issuance, Morningstar DBRS estimated cumulative net collections (before servicing fees and corporate costs) for the same period of EUR 40.1 million, EUR 41.4 million, EUR 43.2 million, and EUR 43.7 million at the A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (sf) stressed scenarios, respectively. Therefore, as of November 2023, the transaction was above Morningstar DBRS’ initial stressed scenarios.

Pursuant to the requirements set out in the receivable servicing agreement, an updated portfolio business plan was approved and delivered in January 2024. The updated portfolio business plan, combined with the actual cumulative net collections as of October 2023, resulted in a total of EUR 356.9 million, which is 17.5% lower than the total net disposition proceeds of EUR 432.8 million estimated in the initial business plan. Excluding actual net collections, the Servicer’s expected future net collections from November 2023 account for EUR 296.5 million, and are expected to be realised over a longer period of time. The updated Morningstar DBRS A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (low) (sf) credit rating stresses assume a haircut of 24.6%, 21.1%, 18.4%, and 16.5%, respectively, to the Servicer’s updated business plan, considering future expected net collections.

The final maturity date of the transaction is 30 November 2060.

Morningstar DBRS’ credit rating 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.

Morningstar DBRS’ credit rating 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 rating provides 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, 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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: “Master European Structured Finance Surveillance Methodology” (11 December 2023), https://dbrs.morningstar.com/research/425148.

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 surveillance section of 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 action.

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 these credit ratings include the Issuer, the servicer, and Citibank, N.A., which comprise, in addition to the information received at issuance, the investor report as of November 2023, and the quarterly servicer report as of October 2023 and servicer’s updated business plan as of October 2023.

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

At the time of the initial credit ratings, 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 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.

The last credit rating action on this transaction took place on 8 December 2023, when Morningstar DBRS placed the credit ratings on the Class A1, Class A2, Class B, and Class C notes UR-Neg.

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):

-- Recovery rates used: Cumulative base case net recovery amount of approximately EUR 223.4 million, EUR 234.1 million, EUR 241.9 million, and EUR 247.7 million at the A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (low) (sf) stress levels, a 5% and 10% decrease in the base case recovery rate.

-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a confirmation on the Class A1 notes at A (low) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a confirmation on the Class A1 notes at A (low) (sf).

-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a confirmation on the Class A2 notes at BBB (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a confirmation on the Class A2 notes at BBB (high) (sf).

-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a downgrade on the Class B notes to BB (sf).
-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a downgrade on the Class B notes to CCC (high) (sf).

-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a downgrade on the Class C notes to CCC (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a downgrade on the Class C notes below CCC (sf).

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 9 December 2021

DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500

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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.

-- Rating European Nonperforming Loans Securitisations (5 June 2023),
https://dbrs.morningstar.com/research/415383.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730.
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219
-- European RMBS Insight Methodology (27 March 2023),
https://dbrs.morningstar.com/research/411634.
-- European RMBS Insight: Spanish Addendum (1 March 2023),
https://dbrs.morningstar.com/research/410420.
-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754.
-- 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 https://dbrs.morningstar.com or contact us at [email protected].