Morningstar DBRS Upgrades Credit Rating on Class B Notes Issued by European Residential Loan Securitisation 2019-NPL2 DAC, Confirms Credit Rating on Class C Notes and Changes Trend to Positive from Stable

DBRS Ratings GmbH (Morningstar DBRS) upgraded its credit rating on the Class B Notes issued by European Residential Loan Securitisation 2019-NPL2 DAC (the Issuer) as follows:
-- Class B Notes to A (high) (sf) from A (sf)

In addition, Morningstar DBRS confirmed its credit rating on the Class C Notes as follows:
-- Class C Notes at BBB (high) (sf)

The trend on the Class B Notes is Stable and the trend on the Class C Notes changed to Positive from Stable.

The transaction represents the issuance of the Class A, Class B, Class C, Class P, and Class D Notes (collectively, the notes). The credit ratings on the Class B and Class C Notes address the ultimate payment of interest and principal. Morningstar DBRS does not rate the Class D or Class P Notes. On 6 September 2024, the credit rating on Class A Notes was discontinued because of full redemption.

At issuance, the notes were backed by a EUR 1.3 billion portfolio, by gross book value, consisting of first-charge performing and nonperforming Irish residential mortgage loans originated by Permanent TSB p.l.c.

Mars Capital Finance Ireland DAC is the servicer of the receivables, replacing the previous servicer, Start Mortgages DAC, on 31 May 2024 because of the latter's winding down. Hudson Advisors Ireland DAC operates as the Issuer administration consultant and as such acts in an oversight and monitoring capacity, providing input on asset resolution strategies.

CREDIT RATING RATIONALE
The credit rating actions follow Morningstar DBRS' review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of the portfolio recoveries as of 30 September 2024, with a focus on (1) a comparison between actual gross collections and the administrator's initial business plan forecast, (2) recovery performance observed over the past months, (3) the historical collections trend and average pay rate recorded in the last six months, and (4) a comparison between current performance and Morningstar DBRS' expectations.
-- Portfolio characteristics: The loan pool composition as of September 2024 and the evolution of its core features, including the portfolio breakdown by arrears status following the disposal of two sub-portfolios. In September 2022 the issuer sold a sub-portfolio consisting mostly of accounts not in in arrears with an outstanding balance of about EUR 264.5 million for EUR 213.2 million (80.6% of the disposed outstanding balance as of August 2022). Another portfolio sale took place in July 2024, the proceeds from which accounted for EUR 40.7 million, representing 80.0% of the disposed outstanding balance as of May 2024.
-- Transaction liquidating structure: The order of priority, which entails a fully sequential amortisation of the notes (i.e., the Class C Notes will begin to amortise following the repayment of the Class B Notes; and the Class D and Class P Notes will begin to amortise following the full repayment of the Class B, and Class C Notes). Additionally, the payment of interest on the Class C Notes ranks below interest and principal payments on the Class B Notes. The Class C, and Class P Notes may get principal repayment before redemption of the Class B and Class C Notes (the rated notes), respectively, in the event of a portfolio sale.
-- Liquidity support: The transaction currently benefits from two reserve funds available to mitigate temporary collection shortfalls on the payment of (1) interest on the Class B Notes, and (2) interest on Class C Notes, respectively.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

TRANSACTION AND PERFORMANCE
According to the latest investor report dated 24 October 2024, the principal amounts outstanding on the Class B, Class C, Class P, and Class D Notes were EUR 41.7 million, EUR 43.8 million, EUR 118.8 million, and EUR 470.3 million, respectively. The Class A Notes were fully redeemed in August 2024. The balance of the Class B, Class C, and Class P Notes amortised by approximately 30.1%, 26.5%, and 0.8%, respectively, since issuance. The current aggregated transaction balance is EUR 674.6 million. The deferred interests on the Class C Notes totalled EUR 4.4 million as of October 2024. Given the payment priority in which the interest payments on the Class C Notes are subordinated to the Class A and Class B Notes' principal redemption, the deferred interests on Class C Notes were not unexpected.

As of the September 2024 collection date, the transaction was performing slightly below the administrator's initial expectations. The actual cumulative gross collections were EUR 720.3 million, including the EUR 254.0 million disposal proceeds, whereas the administrator's initial business plan estimated cumulative gross collections of EUR 729.4 million for the same period. Therefore, as of September 2024, the transaction was underperforming by 1.3% compared with the business plan expectations. Excluding the proceeds from the portfolio sale, the transaction would have been underperforming the administrator's initial expectations by 36.1%.

At issuance, Morningstar DBRS estimated cumulative gross collections of EUR 634.3 million at the A (sf) stressed scenario, EUR 685.0 million at the BBB (high) (sf) stressed scenario, and EUR 737.7 million at the BBB (low) (sf) stressed scenario for the same period. Hence, the transaction is performing ahead of Morningstar DBRS' initial collection assumptions at the A (sf) stressed scenario and at the BBB (high) (sf) stressed scenario but below the initial assumptions at the BBB (low) (sf) stressed scenario.

Excluding actual collections, the administrator's expected future collections from October 2024 amount to EUR 492.2 million. In a declining interest rate scenario, the updated Morningstar DBRS A (high) (sf) and BBB (high) (sf) credit rating stresses assume a haircut of 73.0% and 70.7%, respectively, to the administrator's executed business plan considering future expected collections.

The transaction currently benefits from two reserve funds to support liquidity shortfalls on interest due on the rated notes, and, ultimately, the repayment of principal on them if available:
-- The Class B reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 7.5% of the Class B Notes' balance, and stood at EUR 337,943 as of October 2024; and
-- The Class C reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 10.0% of the Class C Notes' balance, and stood at EUR 104,910 as of October 2024.

Credits to the Class B and Class C reserves are made outside the waterfall based on the proceeds of the interest rate cap allocated proportionately to the respective sizes of the Class B and Class C Notes relative to the cap notional. The Class B reserve fund is sufficient to cover one IPD's interest payment on Class B Notes, while the Class C reserve fund is currently too low to cover one IPD interest payment on Class C Notes.

The final maturity date of the transaction is 25 February 2058.

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 (13 August 2024) at 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 the credit ratings is: 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 surveillance section of 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 the Issuer, the administrator, and U.S. Bank Global Corporate Trust, which comprise, in addition to the information received at issuance, the investor report as of October 2024, the loan-by-loan report as of September 2024, and performance data as of September 2024.

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 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 the Class A Notes of this transaction took place on 6 September 2024, when Morningstar DBRS discontinued its AA (low) (sf) credit rating on Class A Notes because of full redemption. The last credit rating action on the Class B and Class C Notes took place on 5 December 2023, when Morningstar DBRS confirmed its ratings on the Class B and Class C Notes at A (sf) and BBB (high) (sf), respectively, and maintained Stable trends on both classes of rated notes.

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 ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):
-- Recovery rates used: Cumulative base case recovery amount (declining interest rate scenario) of approximately EUR 132.9 million and EUR 144.0 million at the A (high) (sf) and BBB (high) (sf) stress levels, respectively, 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 maintain the credit rating of the Class B Notes at A (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would maintain the credit rating of the Class B Notes at A (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would maintain the credit rating of the Class C Notes at BBB (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would maintain the credit rating of the Class C Notes at BBB (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.

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

Lead Analyst: Sijia Aulenbacher, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 12 November 2019

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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 and Reperforming Loans Securitisations (19 November 2024), https://dbrs.morningstar.com/research/443201
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- Master European Structured Finance Surveillance Methodology (19 November 2024), https://dbrs.morningstar.com/research/443204
-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024), https://dbrs.morningstar.com/research/439583
-- European RMBS Insight Methodology (18 September 2024),
https://dbrs.morningstar.com/research/439573
-- European RMBS Insight: Irish Addendum (22 April 2024),
https://dbrs.morningstar.com/research/431544
-- European CMBS Rating and Surveillance Methodology (17 January 2024), https://dbrs.morningstar.com/research/426818
-- 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
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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.