DBRS Assigns Public Ratings to Class A, B and C Notes issued by ERLS 2016-1 DAC

DBRS Ratings Limited (DBRS) has today assigned ratings of A (sf) to the EUR 272,300,000 Class A Notes, BBB (sf) to the EUR 12,300,000 Class B Notes and BB (sf) to the EUR 12,300,000 Class C Notes (Rated Notes) issued by European Residential Loan Securitisation 2016-1 DAC (Issuer). The Class P and Class D Notes are unrated and will be retained by the Seller. The rating on the Class A Notes addresses timely payment of interest and ultimate payment of principal. The ratings on the Class B and Class C Notes address ultimate payment of interest and ultimate payment of principal. The transaction benefits from an amortising Reserve Fund which provides liquidity support to the Rated Notes and provides principal support at maturity of the Rated Notes. The Reserve Fund support to the Class B and Class C Notes is subject to performance-related triggers.

Proceeds from the issuance of the Class A to D Notes will be used to purchase first charge performing and non-performing Irish residential mortgage loans. The outstanding balance of the total portfolio transferred to the issuer is equal to EUR 557,597,053. 3.8% of the portfolio has been excluded from the analysis (excluded loans). The excluded loans consist of loans where enforcement procedures have been completed and a shortfall is realised and loans where administrative and/or security issues have been identified and are not expected to be remedied within 12 months. Whilst collections received in respect of excluded loans will form available funds of the issuer and could be applied in accordance with the relevant priority of payments, no initial consideration will be paid by the issuer to Shoreline Residential DAC (Seller). DBRS analysis is based on the the total portfolio minus the excluded loans (Analysed Pool) which is equal to EUR 536,524,150. 65.5% of the analysed portfolio is in various stages of the arrears/litigation process.

The mortgage loans were originated by Irish Nationwide Building Society (INBS) and are secured by Irish residential properties and a small proportion of Non-Irish residential properties. Loans secured by Non-Irish properties represent 0.50% of the analysed pool. INBS was effectively nationalised in August 2010 following a state bailout. In 2011, INBS under state ownership was merged with Anglo Irish Bank to form the Irish Banking Resolution Corporation (IBRC). In February 2013 IBRC was put into special liquidiation by the Irish government as part of their strategy to resolve legacy bank assets. The mortgage loans were acquired by Lone Star Funds, through the Seller in March 2014. Servicing of the portfolio was subsequently migrated over to Pepper Finance Corporation (Ireland) DAC (PAS). PAS will be appointed as Administrator of the assets for the transaction. Hudson Advisors Ireland DAC (Hudson) will be appointed as the Issuer Administration Consultant and as such will act in an oversight and monitoring capacity and provide input on asset resolution strategies.

The intial balance of the Class A to Class D Notes will equal the outstanding balance of the total portfolio minus the excluded loans. The credit enhancement available to the Class A Notes as a percentage of the total portfolio minus the excluded loans is 49.25%. The credit enhancment available to the Class B Notes as a percentage of the total portfolio minus the excluded loans is 46.95%. The credit enhancement available to the Class C Notes as a percentage of the total portfolio minus the excluded loans is 44.66%.

Following the step-up date in October 2019, the margin above one-month Euribor payable on the Rated Notes increases. The issuer will enter into an Interest Rate Cap Agreement with HSBC Bank USA, N.A. (HSBC USA). The cap agreement will terminate on 24 October 2021 or, if earlier, the date as of which all amounts due under the Class A, Class B and Class C Notes have been repaid and/or redeemed in full or no amounts remain to be paid under the Class A, Class B and Class C Notes pursuant to the conditions of the notes. On the termination date of the cap agreement, the coupon cap on the notes becomes applicable. The issuer will pay the interest rate cap fees in full on the closing date and in return will receive payments to the extent one-month Euribor is above 1% for the relevant interest period. The Issuer can unwind or sell part of the Interest Rate Cap at the mark-to-market position provided the notional amount of the Interest Rate Cap does not fall below the outstanding balance of the Class A, Class B and Class C Notes.

The coupon payable on the Rated Notes becomes subject to a capped rate on the payment date falling on 24 October 2021. The coupon cap on the Class A, Class B and Class C Notes is equal to 4.25%, 6.00% and 6.00%, respectively. Interest payable on the Class B and Class C Notes can be deferred subject to the performance-related triggers.

The issuer may sell part of the portfolio subject to sale covenants. The sale price must be at least 85% of the aggregate current balance of the mortgage loans which are subject to a sale. Portfolio Sale Proceeds, which represent between 75% and 85% of the aggregate current balance of the sold mortgage loans, net of costs, will be credited to the Portfolio Sale Reserve.

The Class P Notes may receive excess amounts from any portfolio sale as repayments of principal. Excess amounts are calculated as the sale proceeds which are greater than 85% the current balance of the relevant mortgage loans net of portfolio sale costs. The Class P Notes can also receive amounts arising from the unwinding or sale of the Interest Rate Cap. As a consequence the Class P Notes may amortise before the Rated Notes. Payments received to the Class P Notes are capped at initial balance of the Class P Notes. Following repayment in full of the Class P Notes, any amount otherwise due to be paid to the Class P Notes will be applied as available funds.

Citibank N.A., London Branch, (Citibank) is the Issuer Transaction Account Bank. DBRS privately rates Citibank with a Stable trend. DBRS has concluded Citibank meets DBRS’s criteria to act in such capacity. The transaction documents contain downgrade provisions relating to the Transaction Account bank where, if downgraded below BBB(low), the Issuer will replace the account bank. The downgrade provision is consistent with DBRS’s criteria for the initial rating of A(sf) assigned to the Class A Notes. The interest rate received on cash held in the account bank is not subject to a floor of 0% which can create a potential liability for the issuer. DBRS has assessed potential negative interest rates on the account bank in the cash flow analysis.

The ratings are based upon a review by DBRS of the following analytical considerations:

-- Transaction capital structure, proposed ratings and form and sufficiency of available credit enhancement.
-- The credit quality of the performing mortgage loan portfolio and the ability of the servicer to perform collection and resolution activities. DBRS stressed the expected collections from the mortgage portfolio based on the Business and Resolution strategies. The expected collections are used as an input into the cash flow model. The mortgage portfolio was analysed in accordance with DBRS’s “Rating European Non-Performing Loan Securitisations” and “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” methodologies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B and Class C Notes according to the terms of the transaction documents. The transaction cash flows were modelled using the expected collection from the mortgage loans. The transaction structure was modelled using Intex.
-- The sovereign rating of the Republic of Ireland rated A(high)/R-1(middle) /Stable (as of the date of this rating).
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted. The principal methodology applicable is:
“Rating European Non-Performing Loan Securitisations”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include Shoreline Residential DAC and its agents.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was supplied with third party assessments. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- The expected principal and interest collection in a rising interest scenario at A(sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collection in a rising interest scenario at BBB(sf) rating level, a 5% and 10% reduction in the expected collections.
-- The expected principal and interest collection in a rising interest scenario at BB(sf) rating level, a 5% and 10% reduction in the expected collections.

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of Class A Notes at A (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating of the Class A Notes at A (sf).

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of the Class B Notes at BBB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating of the Class B Notes at BBB (sf).

-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 5%, ceteris paribus, would maintain the rating of the Class C Notes at BB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would maintain the rating Class C Notes at BB (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Asim Zaman, Assistant Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 2 December 2016

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

Rating European Non-Performing Loan Securitisations (8 June 2016)
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda 02 November 2016)
Legal Criteria for European Structured Finance Transactions (14 September 2016)
Unified Interest Rate Model Methodology for European Securitisations (2 November 2016)
Derivative Criteria for European Structured Finance Transactions (3 October 2016)
Operational Risk Assessment for European Structured Finance Servicers (14 October 2016)
Operational Risk Assessment for European Structured Finance Originators (14 October 2016)

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375