Morningstar DBRS Confirms Credit Rating on the Class A Notes Issued by Hestia Financing S.à r.l., Changes Trend to Positive from Negative

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit rating on the Class A notes issued by Hestia Financing S.à r.l. (the Issuer) at BBB (low) (sf) and changed the trend to Positive from Negative.

The transaction represents the issuance of Class A and Class Z notes (collectively, the Notes). The credit rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before its final maturity date. Morningstar DBRS does not rate the Class Z notes.

As of September 2019, the total claimable amount of the portfolio was approximately EUR 2.2 billion. Most of the portfolio relates to nonperforming loans secured over real estate collateral, with a total open market value of EUR 1.7 billion, including only first-lien properties.

The portfolio was sold by Bank of Cyprus (BoC) to Oxalis Holding S.à r.l. (the risk retention holder). After a three-month transitional period during which BoC serviced the assets, the portfolio is now serviced by a newly established servicer, Themis Portfolio Management Ltd, which is wholly owned by the vehicle holding the assets, Themis Portfolio Management Holdings Limited, a Cypriot credit Acquiring Company (the CyCAC).

CREDIT RATING RATIONALE
The credit rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of March 2024, focusing on (1) a comparison between actual collections and the initial business plan forecast, (2) the collection performance observed over recent months, and (3) a comparison between the current performance and Morningstar DBRS' expectations.
-- Updated business plan: The Servicer's updated business plan as of September 2023, received in May 2024, and the comparison with the initial collection expectations.
-- Portfolio characteristics: Loan pool composition as of March 2024 and the evolution of its core features since issuance.
-- Cash sweep event: If a cash sweep event occurs, then the transaction benefits from a sequential amortisation where the Class Z notes will begin to amortise following the full repayment of the Class A notes. In the event of a cash sweep, the transaction also benefits from a liquidating structure where interest on the Class Z notes is subordinated to principal payments on the Class A notes. If no cash sweep event occurs, then only 80% of the available funds will be used to repay the Class A notes and the rest will be used to pay junior servicing fees, interest, and principal on the Class Z notes. A cash sweep event occurred on the April 2024 interest payment date (IPD), being principal amount outstanding of the Class A notes being greater than the target note amount in respect of such IPD.
-- Liquidity support: The transaction benefits from an amortising Class A reserve fund that provides liquidity support to the Class A notes and principal support to the Class A notes at maturity, if available. The cash reserve target amount is equal to 4.5% of the Class A notes' principal outstanding balance. It is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from April 2024, the outstanding principal amounts of the Class A and Class Z notes were EUR 234.6 million, and EUR 1,721.7 million, respectively. As of the April 2024 payment date, the balance of the Class A notes had amortised by 50.6% since issuance and the current aggregated transaction balance was EUR 1,956.3 million.

As of March 2024, the transaction was performing below the initial business plan expectations. The actual cumulative collections from July 2021 equaled EUR 315.3 million whereas the initial business plan estimated cumulative gross collections of EUR 588.7 million for the same period. Therefore, as of March 2024, the transaction was underperforming by EUR 273.4 million (46.4%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of EUR 316.4 million at the BBB (low) (sf) stressed scenario. Therefore, as of March 2024, the transaction was performing below Morningstar DBRS' initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement in May 2024, the Servicer delivered an updated portfolio business plan as of September 2023. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 257.4 million from July 2021 to September 2023, results in a total of EUR 967.0 million, which is 3.7% lower than the total gross collections of EUR 1,004.7 million estimated in the initial business plan for the same period.

Considering the increased collateralisation of the Class A notes by the updated business plan, the rated bonds may now pass higher credit rating stresses in the cash flow analysis. However, considering the underperformance registered as of March 2024 and the Servicer's downward revision of the collection expectations in the updated portfolio business plan, Morningstar DBRS believes that higher credit ratings would not be commensurate with the risk of the transaction.
Therefore, the credit rating on the Class A notes was confirmed and the trend was changed to Positive from Negative.

Excluding actual collections, the Servicer's expected future collections from April 2024 account for EUR 630.9 million. The updated Morningstar DBRS BBB (low) (sf) credit rating stress assumes a haircut of 41.0% to the Servicer's updated business plan, considering future expected collections.

The final maturity date of the transaction is in December 2066.

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 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 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 (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 this credit rating include the Issuer and the Servicer and comprise, in addition to the information received at issuance, the updated business plan as of September 2023, the investor report as of April 2024, and the quarterly servicer report as of March 2024.

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 this credit rating 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 6 June 2023, when Morningstar DBRS confirmed its credit rating on the Class A notes at BBB (low) (sf) with Negative trend.

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):

Recovery rates used: Cumulative base-case recovery amount of approximately EUR 372.0 million at the BBB (low) (sf) stress level, 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 BBB (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 BB (high) (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.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: William Taliento, Assistant Vice President
Credit Rating Committee Chair: Alfonso Candelas, Associate Managing Director
Initial Credit Rating Date: 5 November 2021

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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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.

-- 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 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 (28 June 2024), https://dbrs.morningstar.com/research/435260
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278
-- 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].