Morningstar DBRS Confirms Credit Ratings on TAGUS - Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No.3)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the notes (collectively, the rated notes) issued by TAGUS - Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No.3) (the Issuer) as follows:

-- Class A Notes at AA (sf)
-- Class B Notes at A (high) (sf)
-- Class C Notes at BBB (sf)
-- Class D Notes at BB (sf)
-- Class E Notes at B (sf)
-- Class F Notes at B (low) (sf)

CREDIT RATING RATIONALE
The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the April 2024 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 rated notes to cover the expected losses at their respective credit rating levels.

The transaction is a Portuguese securitisation of auto loan receivables granted and serviced by 321 Crédito - Instituição Financeira de Crédito, S.A., a subsidiary of Banco CTT, S.A., after the acquisition that closed in May 2019. The transaction closed in June 2022 and included an initial 12-month revolving period, which ended on the June 2023 payment date. As of the April 2024 payment date, the EUR 159.6 million portfolio (excluding defaulted receivables) consisted primarily of loans granted for the purchase of used vehicles (more than 99% of the outstanding pool balance).

PORTFOLIO PERFORMANCE
As of the April 2024 payment date, loans that were one-to-two months and two-to-three months in arrears represented 1.9% and 0.6% of the portfolio balance, respectively. Gross cumulative defaults represented 1.9% of the aggregated original portfolio balance, with cumulative recoveries of 71.5% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of the receivables and maintained its base case PD and LGD assumptions at 6.9% and 53.9%, respectively.

CREDIT ENHANCEMENT
The subordination of the junior obligations provides credit enhancement to the rated notes. As of the April 2024 payment date, credit enhancement to the Class A, Class B, Class C, Class D, Class E, and Class F Notes was 16.0%, 12.0%, 6.0%, 3.0%, 0.5%, and 0.0%, respectively. Credit enhancement has remained stable at their levels since closing because of the pro rata amortisation of the notes.

The cash reserve account is available to cover senior expenses and interest shortfalls on the Class A Notes, and, if the notes are not deferred in the waterfall, interest on the Class B, Class C, Class D, Class E, and Class F Notes. The cash reserve account was funded at closing with EUR 1.5 million and its required balance is set at 0.8% of the rated notes' balance, subject to a floor of EUR 0.8 million. As of the April 2024 payment date, the cash reserve is at EUR 1.2 million.

Deutsche Bank AG acts as the account bank for the transaction. Based on Morningstar DBRS' reference rating of A (high) on Deutsche Bank (one notch below its Long Term Critical Obligations Rating of AA (low)), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit ratings assigned to the rated notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Crédit Agricole Corporate & Investment Bank (CACIB) acts as the swap counterparty for the transaction. Morningstar DBRS' private credit rating on CACIB is consistent with the credit ratings assigned to the rated notes, as described in Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit rating on the notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS' credit rating does 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
General Considerations
Environmental (E) Factors
The initial portfolio has a high exposure to older petrol and diesel engine vehicles that are unlikely to be classified as Euro 6 as 58.4% of receivables at closing were related to vehicles registered prior to 2016. Morningstar DBRS considers that risks related to greenhouse gas emissions may be associated with future restrictions on these vehicle types, including bans and additional taxes. These risks may lead to changes in expected vehicle valuations and borrower behaviours that could subsequently influence future default, recovery, and prepayment activity. Morningstar DBRS considers that this exposure combined with the longer than typical contract tenors is a relevant environmental factor within its analysis.

There were no Social or 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 ratings is: Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.

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 payment reports and investor reports provided by Deutsche Bank and loan-level data provided by European DataWarehouse GmbH.

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

At the time of the initial credit rating, 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.

The last credit rating action on this issuer took place on 1 June 2023, when Morningstar DBRS confirmed its credit ratings on the Class A, Class B, Class C, Class D, Class E, and Class F Notes at AA (sf), A (high) (sf), BBB (sf), BB (sf), B (sf), and B (low) (sf), respectively.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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):

-- Morningstar DBRS 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 pool of loans for the Issuer are 6.9% and 53.9%, 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.

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

Class B Notes 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)
-- 50% 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 (low) (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 BB (sf)

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

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

Class E Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of B (low) (sf)
-- 50% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD, expected credit rating of B (sf)
-- 50% increase in PD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)

Class F Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD, expected credit rating of B (low) (sf)
-- 50% increase in PD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating below B (low) (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.

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

Lead Analyst: Preben Cornelius Overas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President.
Initial Rating Date: 17 May 2022

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (7 March 2024),
https://dbrs.morningstar.com/research/429051
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- 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 (7 March 2024), https://dbrs.morningstar.com/research/429054
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754
-- 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].