Morningstar DBRS Publishes Final Rating European Nonperforming and Reperforming Loans Securitisations Methodology

Morningstar DBRS finalised its "Rating European Nonperforming and Reperforming Loans Securitisations" methodology. Morningstar DBRS also updated the related sections in its "Operational Risk Assessment for European Structured Finance Servicers" methodology and the "Master European Structured Finance Surveillance Methodology" (together with the "Rating European Nonperforming and Reperforming Loans Securitisations" methodology, the Methodologies).

The Methodologies present the criteria for which credit ratings to securitisations backed by European nonperforming loans (NPLs) and reperforming loans (RPLs) are assigned and/or monitored, together with an update of the market value decline rates (MVDs) for Cyprus.

The "Rating European Nonperforming and Reperforming Loans Securitisations" methodology supersedes the "Rating European Nonperforming Loans Securitisations" methodology published on 5 June 2023 and is effective as of 6 August 2024. The updated "Operational Risk Assessment for European Structured Finance Servicers" methodology and "Master European Structured Finance Surveillance Methodology" also supersede the prior versions published on 15 September 2023 and 7 March 2024, respectively, and are also effective as of 6 August 2024.

Morningstar DBRS deems the changes to be material, given its expansion of the coverage in collateral securitised and the updated Cypriot MVDs in the "Rating European Nonperforming and Reperforming Loans Securitisations" methodology; no credit ratings are expected to be affected and, therefore, there is no credit rating impact.

Rating European Nonperforming and Reperforming Loans Securitisations
Please refer to the "Rating European Nonperforming and Reperforming Loans Securitisations" methodology, which presents the principal asset class methodology that Morningstar DBRS applies to assign new credit ratings in the European NPL and RPL asset class. The "Rating European Nonperforming and Reperforming Loans Securitisations" methodology provides a discussion of the key analytical and credit considerations, collateral quality and metrics, legal and regulatory considerations, and cash flow analysis applicable to Morningstar DBRS' analysis of NPL and RPL securitisations, and specifically defines for RPLs: (1) type of RPLs covered, (2) analytical data requests in addition to that for nonperforming loans (NPLs), and (3) redefault rate assumptions, redefault timing, and redefault rate stresses.

While for NPL portfolios the assumed default rate is 100%, Morningstar DBRS assumes for RPL portfolios also a 100% redefault rate as an analytical starting point (i.e., the same analytical approach as for NPL pools). This would typically be the case for loans that are either not on a long-term restructure (e.g., payment holiday) or, after a long-term restructure, have not yet had any payment track record.

For RPLs where performance history after loan restructuring is available, a redefault rate lower than 100% may be assumed. This will be assessed by analysis of payment history data for those loans as well as the performance history of other similarly restructured loans. Furthermore, other loan attributes including borrower, loan, and property information (if relevant) as well as type of restructures, servicing strategy, and servicer/sponsor expectations on redefault rates as per the payment plan may be considered in deriving an expected lifetime redefault rate. Redefault rate and default timing stresses are analysed following the same approach as described in Morningstar DBRS' rating methodologies for assessing performing loans. The loss given default analysis for RPLs will follow the same approach as for NPLs and/or as described in Morningstar DBRS' rating methodologies for assessing performing loans.

The "Rating European Nonperforming and Reperforming Loans Securitisations" methodology also includes an update to the MVDs for Cyprus, which have been updated considering updated data.

Operational Risk Assessment for European Structured Finance Servicers
Please refer to the "Operational Risk Assessment for European Structured Finance Servicers" methodology, which now includes the particularities of operational risk reviews of servicers in the NPL and RPL asset classes.

Master European Structured Finance Surveillance Methodology
Please refer to the "Master European Structured Finance Surveillance Methodology", which now includes the criteria that Morningstar DBRS applies in connection with the surveillance of Morningstar DBRS credit ratings on European NPL and RPL securitisation transactions.

No comments were received during the request for comment (RFC) period for any of the Methodologies. All comments received during the RFC period are published to the Morningstar website, except in cases where confidentiality is requested by the respondent.

Notes:
Morningstar DBRS methodologies are publicly available on its website dbrs.morningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.