Morningstar DBRS Confirms Credit Ratings on European Residential Loan Securitisation 2019-NPL1 DAC, Maintains Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the following classes of notes issued by European Residential Loan Securitisation 2019-NPL1 DAC (the Issuer):

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

Morningstar DBRS also maintained the Stable trends on all credit ratings.

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 repayment 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. Morningstar DBRS does not rate the Class D or Class P notes.

The Issuer used the proceeds from the issuance of the Class A to Class C notes to purchase a portfolio mostly comprising first-charge nonperforming Irish residential mortgage loans. As of 31 May 2019, the portfolio had a total outstanding balance of EUR 455.9 million and included part of the receivables securitised in the transaction. The remaining loans were part of the LSF IX Java Investments DAC (Java Investments) and LSF IX Paris Investments DAC (Paris Investments) portfolios. Java Investments acquired the legal and beneficial titles of the loans from Investec Bank PLC and Nua Mortgages Limited (Nua Mortgages) in September 2014. Paris Investments acquired the legal and beneficial titles of the loans from the Bank of Scotland (Ireland) Limited (BoSI) in October 2014.

BoSI, Start Mortgages DAC (Start), and Nua Mortgages originated the mortgage loans. Hudson Advisors Ireland DAC (Hudson) was appointed as the Issuer administration consultant and, as such, acts in an oversight and monitoring capacity and provides input on asset resolution strategies.

Pursuant to Clause 17.2(b) of the Administration Agreement, in November 2023 Morningstar DBRS was notified of the termination of the Administration Agreement with Start and the subsequent appointment of Mars Capital Finance DAC (Mars) in place of Start as administrator and legal title holder of the Issuer's mortgage portfolio. The transfer was completed on 31 May 2024. Morningstar DBRS concluded that the replacement would not in and of itself and at that time, result in the rated notes issued by ERLS 2019-NPL1 DAC being downgraded or the related credit rating being withdrawn as the observed historical performance data provided by the newly appointed administrator results in lower DSD assumptions compared to Start, the prior administrator.

CREDIT RATING RATIONALE
The confirmations follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of the portfolio recoveries as of April 2024, 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 Morningstar DBRS' expectations.
-- Portfolio characteristics: The loan pool composition as of April 2024 and the evolution of its core features, including the portfolio breakdown by arrears status.
-- 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 all the rated notes). Additionally, the payment of interest on the Class B notes is fully subordinated to the repayment of both interest and principal on the Class A notes, and the payment of interest on the Class C notes has a lower ranking than the payments due on the Class B notes. The Class B, Class C, and Class P notes may receive principal repayment before the redemption of the Class A, Class B, and Class C notes, respectively, in the event of a portfolio sale.
-- Liquidity: The transaction benefits from three reserve funds available to mitigate temporary collection shortfalls on the payment of (1) senior costs and interest due on the Class A notes, (2) interest due on the Class B notes, and (3) interest due on the 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 May 2024, the outstanding principal amounts of the Class A, Class B, Class C, Class P, and Class D notes were EUR 49.4 million, EUR 29.0 million, EUR 24.4 million, EUR 38.2 million, and EUR 151.6 million, respectively. As of May 2024, the balances of the Class A, Class B, Class C, and Class P notes had amortised by 75.5%, 15.3%, 17.6%, and 1.4%, respectively, since issuance and the current aggregated transaction balance was EUR 292.6 million.

As of the April 2024 collection date, the transaction was performing below the administrator's initial expectations. The actual cumulative gross collections were EUR 189.8 million whereas the administrator's initial business plan estimated cumulative gross collections of EUR 240.2 million for the same period. Therefore, as of April 2024, the transaction was underperforming by 21.0% compared with the business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections of EUR 200.2 million at the A (sf) stressed scenario, EUR 232.8 million at the BBB (high) (sf) stressed scenario, and EUR 266.9 million at the BB (sf) stressed scenario for the same period. Therefore, as of April 2024, the transaction was performing below Morningstar DBRS' initial A (sf), BBB (high) (sf), and BB (sf) stressed expectations with respect to the initial credit ratings of the notes. However, the administrator has actively managed the portfolio to increase the amount of performing/restructured loans in the portfolio, improving the pool's delinquency mix and weighted average recovery rate, resulting in higher Morningstar DBRS' expectations for future collections.

Excluding actual collections, the administrator's expected future collections from May 2024 account for EUR 237.0 million. In a declining interest rate scenario, the updated Morningstar DBRS AA (low) (sf), A (sf), and BBB (low) (sf) credit rating stresses assume a haircut of 58.9%, 55.0%, and 49.8% 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 6.5% 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 6.5% 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 were 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 amount. The interest rate cap agreement was terminated in August 2023; therefore, no credits have been made to the Class B and Class C reserves since then and the balance of both reserves are EUR 0. As of May 2024, the cumulative deferred interest on the Class B and C notes amounts to EUR 2.3 million and EUR 1.88 million, respectively. According to the investor report dated May 2024, the Class A reserve fund amounted to EUR 3.2 million.

The Class A and Class B Notes may pass higher credit rating stress scenarios; however, Morningstar DBRS believes that higher credit ratings would not be commensurate with the risk of the transaction. The credit ratings of Rated Notes also consider (i) the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents (i.e., a minimum credit rating of BBB (low)), (ii) the lack of a cash reserve for Class B and Class C notes and therefore liquidity support after the full redemption of the Class A notes and (iii) the lower DSDs observed in Mars' historical data.

The final maturity date of the transaction is 24 August 2056.

Morningstar DBRS' credit ratings on the Class A, Class B and Class C notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Amounts and the Principal Amount Outstanding.

Morningstar DBRS' credit ratings do not address nonpayment 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, 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" (23 January 2024); https://dbrs.morningstar.com/research/427030.

Morningstar DBRS 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" (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 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, Hudson, and U.S. Bank Global Corporate Trust, which comprise, in addition to the information received at issuance, the investor report as of May 2024; the loan-by-loan report as of April 2024; and performance data as April 2024.

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 not 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 transaction took place on 23 June 2023, when Morningstar DBRS upgraded its credit ratings on the Class A, Class B, and Class C notes to AA (low) (sf), A (sf), and BBB (low) (sf), respectively, from A (sf), BBB (high) (sf), and BB (high) (sf), respectively, and changed the trends on all the credit ratings to Stable from Positive.

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 to 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 97.3 million, EUR 106.6 million, and EUR 118.9 million at the AA (low) (sf), A (sf), and BBB (low) (sf) levels, respectively, a 5% and 10% decrease in the base case recovery rate.
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class A notes at AA (low) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to A (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation of the Class B notes at A (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to A (low) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a downgrade of the Class C notes to B (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class C notes to Below B (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: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 1 July 2019

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27 28046 Madrid, Spain
Tel. +34 (91) 903 6500

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.

-- 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 (7 March 2024), https://dbrs.morningstar.com/research/429051
-- European RMBS Insight Methodology (25 March 2024),
https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Irish Addendum (22 April 2024), https://dbrs.morningstar.com/research/431544
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- 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].