Morningstar DBRS Finalises its Provisional Credit Ratings on Finance Ireland RMBS No. 7 DAC

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit ratings to the residential mortgage-backed notes issued by Finance Ireland RMBS No. 7 DAC (the Issuer) as follows:

-- Class A: AAA (sf)
-- Class B: AA (sf)
-- Class C: A (high) (sf)
-- Class D: BBB (high) (sf)
-- Class E: BB (high) (sf)
-- Class X: BBB (sf)

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal. The credit ratings on the Class B, Class C, Class D, and Class E notes address the timely payment once they become the most senior class of notes outstanding, and the ultimate repayment of principal on or before the legal final maturity date. The credit rating on the Class X notes addresses the ultimate payment of interest and principal on or before the legal final maturity date. The finalised credit ratings on the Class C, Class D and Class E were higher than the provisional credit ratings due to the actual spreads on the rated notes being mainly lower than what had been assumed at the time of assigning the provisional credit ratings.

Morningstar DBRS does not rate the Class Y, Class R1, and Class R2 notes also 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. The Issuer will use the proceeds of the notes to fund the purchase of prime and performing Irish owner-occupied (OO) and buy-to-let (BTL) mortgage loans secured over properties located in Ireland. The majority of the mortgage loans included in the portfolio were originated by Finance Ireland Credit Solutions DAC (Finance Ireland; the originator), however, a subset of these was originated by Pepper Finance Corporation (Ireland) DAC (Pepper; the servicer) and have been subsequently sold to Finance Ireland on December 2018, together with the corresponding legal titles.

This is the seventh securitisation from Finance Ireland, following Finance Ireland RMBS No. 6, which closed in September 2023. The initial mortgage portfolio consists of EUR 264 million of first-lien mortgage loans collateralised by OO and BTL residential properties in Ireland. The mortgages were mostly granted during 2020 and 2021, however, the origination vintages range from 2016 to 2024.

The mortgage loans will be serviced by Pepper. Morningstar DBRS updated its operational review of both the originator and the servicer as of May 2024. 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. Intertrust Management Ireland Limited will act as the back-up servicer facilitator.

As of 31 May 2024, nearly all of the loans in the portfolio repay on an annuity basis, with a small portion repaying on an interest-only basis. At closing, only 0.5% of the loans in the mortgage portfolio were more than one month but less than three months in arrears.

Liquidity in the transaction is provided by the general reserve fund (GRF), which the Issuer can use to cover any shortfalls in interest payments for the rated notes (as long as no debit balance remains on principal deficiency ledgers). Liquidity for the Class A notes will be further supported by a liquidity reserve fund (LRF), fully funded at closing then amortising in line with the referred class of notes, that shall also feature a floor of EUR 1.0 million. The notes' terms and conditions allow interest payments to be deferred if the available funds are insufficient for classes of notes that are not most senior. Once the rated notes become most senior, no deferral of interest is allowed. Any amounts of deferred interest shall also accrue interest.

Credit enhancement for the Class A notes is calculated at 8.00% and is provided by the subordination of the Class B to Class E notes, and the reserve funds. Credit enhancement for the Class B notes is calculated at 5.25% and is provided by the subordination of the Class C to Class E notes, and the reserve funds. Credit enhancement for the Class C notes is calculated at 3.50% and is provided by the subordination of the Class D and Class E notes, and the reserve funds. Credit enhancement for the Class D notes is calculated at 1.75% and is provided by the subordination of the Class E notes, and the reserve funds. Credit enhancement for the Class E notes is calculated at 0.75% and is provided by the reserve funds. The Class X notes do not benefit from credit enhancement as they are excess spread notes and shall be repaid via the revenue priority of payments.

A key structural feature in the transaction is the provisioning mechanism that is linked to the arrears status of a loan besides the usual provisioning based on losses. The degree of provisioning increases in line with increases in the number of months in a loan's arrears status. This is positive for the transaction as provisioning based on the arrears status traps any excess spread much earlier for a loan that may ultimately end up in foreclosure.

In order to hedge against the possible variance between the fixed rates of interest payable on the fixed-rate loans in the portfolio and the interest rate under the notes calculated by reference to the three-month Euribor, the Issuer will enter into a fixed-to-floating interest rate swap transaction with BofA Securities Europe SA (privately rated by Morningstar DBRS). The Issuer can restructure the hedging agreement to increase the notional of the original swap agreement in order to hedge the exposure to additional fixed-rate loans resulting from product switches and further advances before the step-up date. For the increased portion of the notional, the Issuer will pay the prevailing mid-market swap rate on the swap determination date following the collection period during which the switch to the fixed rate occurred. The fixed-rate loans are subject to a floor of 1.5% margin over the prevailing mid-market swap rate at the time of switch/reset, less any applicable swap adjustment charges. Morningstar DBRS modelled a locked-in post-swap margin of 1.5% minus a swap adjustment charge for all loans that reset to a new fixed rate or switch to a fixed rate before the step-up date. To hedge the floating-rate portion of the portfolio, the loans that are currently paying a standard variable rate (SVR) rate, revert to SVR, or switch to SVR are subject to a minimum rate of one-month Euribor (floored at zero) plus 2.4%.

Borrower collections are held with the Governor and Company of the Bank of Ireland and The Allied Irish Banks, p.l.c. (both rated by Morningstar DBRS with a long-term Critical Obligations Rating of A (high), Stable trend) and are deposited on the next business day into the Issuer transaction account held with Elavon Financial Services DAC, UK Branch (Elavon). Morningstar DBRS' private rating on Elavon in its role as the Issuer Account Bank is consistent with the threshold for the account bank outlined in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology, given the ratings assigned to the notes.

Morningstar DBRS based its credit ratings 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 uses the PD, LGD, and ELs as inputs into the cash flow tool. Morningstar DBRS analysed the mortgage portfolio in accordance with Morningstar DBRS' "European RMBS Insight Methodology: Irish Addendum".
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E, and Class X notes according to the terms of the transaction documents. Morningstar DBRS analysed the transaction structure using Intex DealMaker.
-- The sovereign rating of AA (low) with a Positive trend (as of the date of this press release) on the Republic of Ireland.
-- 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 rated 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 Payment Amounts and the related Class Balances.

Morningstar DBRS' credit rating does 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/434095.

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" (25 March 2024), https://dbrs.morningstar.com/research/430103 and "European RMBS Insight: Irish Addendum" (22 April 2024), https://dbrs.morningstar.com/research/431544.

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.

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 Finance Ireland and its representatives. Morningstar DBRS was provided with loan-level data for the mortgage loans as of 31 May 2024 and historical performance data which included data on borrower paid amounts, principal amounts, arrears, scheduled monthly payments, days past due, and additional information such as origination date and loan amount, loan status, pool, occupancy type, rate type, and reversion date. The data covered the period April 2016 to February 2024, and was reported on a monthly basis.

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 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 16.5% and an LGD of 28.2% corresponding to the AAA (sf) 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 13.4% and an LGD of 22.3% corresponding to the AA (sf) 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 9.9% and an LGD of 16.4% corresponding to the A (high) (sf) 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 6.7% and an LGD of 11.3% corresponding to the BBB (high) (sf) 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 3.5% and an LGD of 10.5% corresponding to the BB (high) (sf) 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 6.2% and an LGD of 11.0% corresponding to the BBB (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

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

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

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

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

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

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

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

Lead Analyst: André Soutinho, Senior Analyst
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 10 June 2024

DBRS Ratings GmbH
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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.

-- European RMBS Insight: Irish Addendum (22 April 2024) and European RMBS Insight Model v. 8.0.0.0, https://dbrs.morningstar.com/research/431544/european-rmbs-insight-irish-addendum.
-- European RMBS Insight Methodology (25 March 2024), https://dbrs.morningstar.com/research/430103/european-rmbs-insight-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.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 (08 May 2024), https://dbrs.morningstar.com/research/432502/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (07 March 2024), https://dbrs.morningstar.com/research/429054/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.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (07 June 2024),
https://dbrs.morningstar.com/research/434095/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-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].