Morningstar DBRS Confirms Credit Ratings on Ares Lusitani - STC, S.A. (Pelican Finance No. 2)

DBRS Ratings GmbH (Morningstar DBRS) confirmed the following credit ratings on the notes (collectively, the rated notes) issued by Ares Lusitani - STC, S.A. (Pelican Finance No. 2) (the Issuer):

-- Class A Notes at AA (high) (sf)
-- Class B Notes at A (high) (sf)
-- Class C Notes at BBB (high) (sf)
-- Class D Notes at BB (sf)

The credit rating on the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date in January 2035. The credit ratings on the Class B, Class C, and Class D Notes address the ultimate payment of interest while junior to other outstanding classes of notes but the timely payment of scheduled interest when they are the senior-most tranche, as well as the ultimate repayment of principal by the legal final maturity date.

CREDIT RATING RATIONALE
The 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 October 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective credit rating levels.

The transaction is a static securitisation of Portuguese consumer and auto loan receivables originated and serviced by Caixa Económica Montepio Geral and Montepio Crédito - Instituição Financeira de Crédito, S.A. The transaction closed in December 2021 with an initial portfolio balance of EUR 356.8 million and has been repaying principal on the rated notes on a pro rata basis since.

PORTFOLIO PERFORMANCE
As of the October 2024 payment date, loans that were 0 to 30, 30 to 60, and 60 to 90 days delinquent represented 3.0%, 0.5%, and 0.2% of the outstanding collateral balance, respectively. Gross cumulative defaults, defined as loans more than 90 days in arrears, amounted to 1.9% of the original collateral balance, of which 31.3% has been recovered to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and marginally updated its base case PD and LGD assumptions to 5.6% and 41.9%, respectively.

CREDIT ENHANCEMENT
Credit enhancement to the rated notes is provided by the subordination of the respective junior obligations and, partially, the cash reserve, as amortised amounts are released as principal available funds to amortise the notes. As of the October 2024 payment date, credit enhancement to the Class A, Class B, Class C, and Class D Notes was 19.7%, 13.8%, 8.9%, and 3.5%, respectively, down from 20.0%, 14.2%, 9.3% and 3.9%, one year ago. The credit enhancement decreased due to the cash reserve no longer releasing principal to the structure as the reserve is currently at its floor, while principal collections are used to repay the partially uncollateralised Class E Notes. However, any amount outstanding on the cash reserve at the time of when the rated notes are fully repaid, or at final maturity, will be released back into the principal available funds.

The amortising cash reserve, fully funded at closing to EUR 3.43 million, has a target balance equal to 1.0% of the outstanding balance of the rated notes, subject to a floor of EUR 1.78 million. The reserve provides liquidity support to the transaction as it is available to cover senior expenses and interest payments on the Class A Notes. As of the October 2024 payment date, the reserve was equal to its floor level of EUR 1.78 million.

Citibank N.A., London Branch (Citibank London) acts as the account bank for the transaction. Based on Morningstar DBRS' private credit rating on Citibank London, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk 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 and Derivative Criteria for European Structured Finance Transactions" methodology.

Crédit Agricole Corporate and Investment Bank (CACIB) acts as the cap counterparty for the transaction. Morningstar DBRS' private credit rating on CACIB is consistent with the first rating threshold as described in Morningstar DBRS' "Legal and 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 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 Factors in Credit Ratings https://dbrs.morningstar.com/research/437781.

Morningstar DBRS analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to these credit ratings is the Master European Structured Finance Surveillance Methodology (19 November, 2024) https://dbrs.morningstar.com/research/443204.

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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include investor reports provided by Citibank London and loan-level data provided by the European DataWarehouse GmbH.

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 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 issuer took place on 6 December 2023, when Morningstar DBRS upgraded its credit ratings on the Class A, Class B, Class C, and Class D Notes to AA (high) (sf), A (high) (sf), BBB (high) (sf) and BB (sf), respectively, from AA (sf), A (sf), BBB (sf), and B (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Preben Cornelius Overas.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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):

-- 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 of the current pool of loans for the Issuer are 5.6% and 41.9% 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 AA (sf)
-- 25% increase in PD, expected credit rating of AA (sf)
-- 50% increase in PD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (low) (sf)

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

Class C Notes risk sensitivity:
-- 25% increase in LGD, expected credit rating of BBB (high) (sf)
-- 50% increase in LGD, expected credit rating of BBB (sf)
-- 25% increase in PD, expected credit rating of BBB (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 (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BBB (low) (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 D Notes risk sensitivity:
-- 25% increase in LGD, expected credit rating of BB (sf)
-- 50% increase in LGD, expected credit rating of B (sf)
-- 25% increase in PD, expected credit rating of BB (sf)
-- 50% increase in PD, expected credit rating of BB (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (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 B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of B (low) (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: Preben Cornelius Overas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Associate Managing Director
Initial Rating Date: 12 November 2021

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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.

-- Master European Structured Finance Surveillance Methodology (19 November 2024)
https://dbrs.morningstar.com/research/443204.
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024)
https://dbrs.morningstar.com/research/439571.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024)
https://dbrs.morningstar.com/research/439913.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024)
https://dbrs.morningstar.com/research/439583.
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024)
https://dbrs.morningstar.com/research/443196.
-- Rating European Structured Finance Transactions Methodology (19 November 2024)
https://dbrs.morningstar.com/research/443199.

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/439604.

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