Morningstar DBRS Confirms Credit Rating on Class A Notes Issued by Luna Securities Designated Activity Company
RMBSDBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Class A notes issued by Luna Securities Designated Activity Company (the Issuer).
The credit rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal by the legal final maturity date in December 2080. Morningstar DBRS does not rate the Class Z notes also issued in this transaction.
CREDIT RATING RATIONALE
The credit rating confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the November 2024 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the revolving pool of receivables;
-- Current available credit enhancement to the Class A notes to cover the expected losses at the AAA (sf) credit rating level, and
-- No revolving termination event occurred so far.
The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the Republic of Ireland. The Issuer used the proceeds of the notes to fund the purchase of prime and performing Irish private-dwelling home and buy-to-let mortgage loans secured over properties located in Ireland. The Governor and Company of the Bank of Ireland (Bank of Ireland), Bank of Ireland Mortgage Bank, and KBC Bank Ireland plc originated the mortgage loans included in the portfolio.
PORTFOLIO PERFORMANCE
As of the November 2024 payment date, loans two to three months in arrears represented 0.05% of the outstanding portfolio balance. Loans more than three months in arrears increased to 0.14% from 0.0% at closing one year ago. The cumulative default ratio was 0.12% over the same period.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the revolving pool of receivables and updated its base case PD and LGD assumptions to 2.9% and 10.5%, respectively.
CREDIT ENHANCEMENT
Credit enhancement to the Class A notes is provided by subordination of the Class Z notes. Due to the revolving period, credit enhancement to the Class A notes remained at 7.5%.
The transaction benefits from an amortising liquidity reserve fund, which provides liquidity support to the Class A notes and was fully funded through the issuance of the subordinated loan of EUR 92.3mn at closing. The target amount of the liquidity reserve fund is 0.75% of the Class A notes' outstanding balance.
Bank of Ireland acts as the account bank for the Issuer. Based on the account bank's reference credit rating of "A", which is one notch below its Morningstar DBRS Long Term Critical Obligations Rating (COR) of A (high), 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 AAA (sf) credit rating on the Class A notes, as described in Morningstar DBRS' "Legal and Derivatives Criteria for European Structured Finance Transactions" methodology.
Bank of Ireland acts also as the swap counterparty to the Issuer. Morningstar DBRS' Long Term COR of A (high) on Bank of Ireland is above the first credit 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, GOVERNANCE CONSIDERATIONS
There were no Social/Environmental/Governance factors that had a significant or relevant impact 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 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 these 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 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 this credit rating include investor reports provided by Bank of Ireland, and loan-level data provided by the European DataWarehouse GmbH.
Morningstar DBRS did not rely upon third-party due diligence to conduct its analysis.
At the time of the initial rating, Morningstar DBRS was supplied with third-party assessment. However, this did not impact the rating analysis.
Morningstar DBRS considers the data and information available to it for the purpose 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 the transaction took place on 29 January 2024, when Morningstar DBRS assigned AAA (sf) credit rating on the Class A notes.
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 at dbrs.morningstar.com.
Sensitivity Analysis: To assess the impact of changing the transaction's 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 of 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 rating.
-- The base case PD and LGD assumptions for the collateral pool are 2.9% and 10.5%, 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 assumptions.
Class A Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD, expected credit rating of AA (sf)
-- 50% increase in PD, expected credit rating of A (high) (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 AA (low) (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 (high) (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.
This credit rating is 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 Rating Date: 29 January 2024
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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
-- European RMBS Insight Methodology (3 December 2024) and European RMBS Insight Model v10.1.0.0
https://dbrs.morningstar.com/research/444100
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024)
https://dbrs.morningstar.com/research/443196
-- 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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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