Morningstar DBRS Confirms Credit Ratings on Clavel Residential 3 DAC

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the notes issued by Clavel Residential 3 DAC (the Issuer), as follows:

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

CREDIT RATING RATIONALE
The credit rating 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;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the notes to cover the expected losses at their respective credit rating levels.

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the final maturity date in January 2076. The credit rating on the Class B Notes addresses the timely payment of interest once it becomes the most senior note outstanding and the ultimate payment of principal on or before the final maturity date. The credit ratings on the Class C and Class D Notes (together with the Class A and Class B Notes, the rated notes) address the ultimate payment of interest and the ultimate repayment of principal on or before the final maturity date.

The Issuer used the proceeds from the issuance of the notes to purchase: (1) a series of unitranche bonds issued by a Spanish securitisation fund (FT Lantana), backed by a portfolio of reperforming Spanish residential mortgage loans serviced by Banco Santander SA (Banco Santander) and represented by mortgage certificates; and (2) to purchase a series of unitranche bonds issued by an Irish designated activity company (Clavel), backed by a portfolio of reperforming Spanish residential mortgage loans serviced by Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) and represented by mortgage certificates.

PORTFOLIO PERFORMANCE
As of the April 2024 payment date, loans that were up to 30 days, 30 to 60 days, and 60 to 90 days delinquent represented 7.0%, 6.5%, and 4.1% of the outstanding principal balance of the collateral portfolio, respectively, while loans more than 90 days delinquent represented 21.0% of the outstanding principal balance of the collateral portfolio. No defaults were reported to date, with cumulative losses being reported at 0.02% of the initial portfolio balance.

The performance of the portfolio is deteriorating at a fast pace. Morningstar DBRS continues to closely monitor the transaction's performance and will take appropriate credit rating actions if the performance continues worsening beyond our expectations.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions to 36.1% and 23.3%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations provides credit enhancement to the rated notes. As of the April 2024 payment date, credit enhancements to the rated notes increased to 41.5%, 33.4%, 27.4%, and 22.6%, respectively, up from 38.4%, 30.9%, 25.5%, and 21.0%, respectively, at transaction's closing date one year ago.

The transaction benefits from two liquidity reserve funds (LRF) separately for Class A and Class B Notes and funded at closing from the proceeds of the issuance of the unrated Class RFN Notes, initially sized at 2.0% of the initial balance of the Class A Notes and 2.5% of the initial balance of the Class B Notes. As of the April 2024 payment date, the total amount of the LRF was EUR 8.9 million, down from EUR 9.9 million at closing.

Class A LRF provides liquidity support to the Class A Notes with the target amount of the greater of 2.0% of the current principal balance of the Class A Notes and 1.0% of the principal balance of the Class A Notes on the closing date. The target amount is zero when Class A Notes are fully redeemed. The Class A LRF provides liquidity support for interest payments on the Class A Notes. Any excess amount forms part of the available funds. As of the April 2024 payment date, the Class A LRF was at its target level of EUR 7.6 million.

Class B LRF provides liquidity support to the Class B Notes with the target amount of 2.5% of the current principal balance of the Class B Notes. The Class B LRF does not amortise. The target amount is zero when Class B Notes are fully redeemed. The Class B LRF provides liquidity support for interest payments on the Class B Notes. Any excess amount forms part of the available funds. As of the April 2024 payment date, the Class B LRF was at its target level of EUR 1.3 million.

Elavon Financial Services DAC (Elavon) acts as the Issuer account bank. Based on the Morningstar DBRS' private rating on Elavon, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risks arising from the exposure to the account bank to be consistent with the credit ratings on the rated notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

BNP Paribas S.A. (BNP) acts as the interest rate cap provider to the Issuer. Morningstar DBRS' public Long Term Critical Obligations Rating of BNP at AA (high) is above the first rating threshold as described in Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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, 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 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 the "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 investor reports provided by U.S. Bank Trustees Limited, and loan-level data provided by Morgan Stanley.

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 purpose 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 2 August 2023, when Morningstar DBRS finalised its provisional ratings on the rated notes at AAA (sf), AA (sf), A (low) (sf), and BBB (low) (sf).

The lead analyst responsibilities for this transaction have been transferred to Shalva Beshia.

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):

-- 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 assumptions for the remaining collateral pool are 36.1% and 23.3%, 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 AA (sf)
-- 50% increase in LGD, expected credit rating of A (high) (sf)
-- 25% increase in PD, expected credit rating of A (high) (sf)
-- 50% increase in PD, expected credit rating of BBB (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 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 (high) (sf)

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

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (sf)
-- 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD, expected credit rating of BB (high) (sf)
-- 50% increase in PD, expected credit rating of BB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (low) (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 (high) (sf)
-- 25% increase in PD, expected credit rating of B (high) (sf)
-- 50% increase in PD, expected credit rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of CCC (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: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Associate Managing Director
Initial Credit Rating Date: 31 July 2023

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://www.dbrsmorningstar.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 (28 June 2024),
https://dbrs.morningstar.com/research/435165
-- 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 (28 June 2024),
https://dbrs.morningstar.com/research/435278
-- Derivative Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435260
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030
-- European RMBS Insight Methodology (25 March 2024) and European Asset RMBS Insight Model v 8.0.0.1,
https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Spanish Addendum (8 March 2024),
https://dbrs.morningstar.com/research/429109

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 info-DBRS@morningstar.com.