DBRS Finalises Provisional Ratings on the Notes Issued by ERLS 2017-PL1 DAC

DBRS Ratings Limited (DBRS) has today finalised its provisional ratings on the notes issued by European Residential Loans Securitisation 2017-PL1 DAC (the Issuer) as follows:

-- €300,947,000 Class A Notes rated AAA (sf)
-- €85,268,000 Class B Notes rated AA (sf)
-- €33,439,000 Class C Notes rated A (sf)
-- €51,158,000 Class D Notes rated BBB (sf)
-- €51,830,000 Class E Notes rated BB (sf)
-- €33,439,000 Class F Notes rated B (sf)

The Class X Notes and the Class Z Notes are not rated by DBRS and will be retained by the seller.

The Class A Notes are rated for timely payment of interest and ultimate payment of principal. The Class B Notes, Class C Notes, Class D Notes, Class E Notes and the Class F Notes are rated for ultimate payment of interest and ultimate payment of principal. An increased margin on the Class A and B Notes is payable from the step-up date falling in March 2019. Additional amounts are also due to the Class C, Class D, Class E and Class F Notes on and from the first interest payment date following the step-up date. Such additional amounts are not rated by DBRS. The Issuer will enter into an Interest Rate Cap Agreement with BNP Paribas S.A. (BNP). The cap agreement will terminate on 24 March 2024 or, if earlier, the date as of which all amounts due under the Class A, Class B, Class C, Class D, Class E and Class F Notes have been repaid and/or redeemed in full. The Issuer will pay the interest rate cap fee of 0.22% per annum on the interest rate cap notional balance and, in return, will receive payments to the extent that one-month Euribor is above 2% for the relevant interest period. The cap notional balance will be in accordance with the notional amount payment schedule.

The transaction benefits from a non-amortising Reserve Fund, which is split into a General Reserve and Liquidity Reserve. The non-amortising General Reserve fund will have a target amount equal to 3% of the Class A to Class Z Note balance minus the target amount of the Liquidity Reserve. The General Reserve will provide liquidity and credit support to the rated notes. The Liquidity Reserve is amortising with a target amount equal to 3% of the Class A Notes and will provide liquidity support to the Class A Notes. Amortised amounts of the Liquidity Reserve will form part of the General Reserve.

On each interest payment date, the Additional Note Payment Reserve will be credited using excess spread. Amounts standing to the credit of the additional note payment reserve will be available to cover additional note payment shortfalls. On the relevant redemption date of the notes, amounts standing to the credit of the additional note payment reserve will be applied as available revenue funds.

Proceeds from the issuance of the Class A to Z Notes will be used to purchase first charge performing (25%) and re-performing Irish residential mortgage loans. The outstanding balance of the provisional mortgage portfolio is EUR 651,442,277 (28 February 2017). The mortgage loans were originated by Bank of Scotland (Ireland) Limited (BoSI; 68.0%), Start Mortgages DAC (Start; 28.0%) and NUA Mortgages Limited (NUA; 4.0%). The mortgage loans are secured by Irish residential properties. Lone Star Funds, through the respective seller, acquired the mortgage loans originated by Start and NUA in December 2014. The mortgage loans originated by BoSI were acquired by the respective seller in February 2015. Servicing of the mortgage loans is conducted by Start; Start is also expected to be appointed as Administrator of the assets for the transaction. Primary servicing activities have been delegated to Homeloan Management Limited (HML) under a subservicing agreement. There is no obligation for Start to continue to delegate to HML, and HML is not a party to the securitisation documents. Hudson Advisors Ireland DAC will be appointed as the Issuer Administration Consultant and, as such, will act in an oversight and monitoring capacity.

The origination vintages of the portfolio are concentrated between 2006 and 2008 (70.3%). The weighted-average (WA) indexed current loan-to-value (CLTV) of the portfolio is equal to 82.7%, with 61.8% having an indexed CLTV greater than 80%. The proportion of the portfolio in negative equity represents 38.2%. The pool is primarily concentrated in non-Dublin areas at 59.6%, with the remaining 40.4% located in Dublin. Irish house prices in Dublin and non-Dublin have rebounded 64.3% and 44.3%, respectively, following the peak-to-trough drop of 59.7% and 55.7%, respectively. Restructured loans comprise 75.9% of the mortgage portfolio, with 47.9% of the pool restructured in the last 24 months. DBRS has assessed the performance of restructured loans in its default analysis. The WA pay rate of loans before restructuring is 76.2%. Post restructuring, the WA pay rate has been 103.8%. As of 28 February 2017, 81.8% of the mortgage loans are current with 0.1% of loans greater than or equal to three months in arrears.

The interest rate payable on the mortgage loans is linked to lender Variable Rates (VR; 28.2%), Fixed Rate Loans (3.7%) and ECB tracker loans (68.0%). The coupon payable on the notes is linked to one-month Euribor. A VR floor of one-month Euribor plus 2.50% will also be implemented, subject to compliance with applicable law, regulations and mortgage conditions. The WA coupon generated by the mortgage loans is equal to 1.92%; the WA margin above one-month Euribor is equal to 2.26%.

From closing until the third interest payment date, the sellers may sell to the Issuer a further portfolio (up to 2.7% of the initial balance of the portfolio) subject to the further portfolio conditions. The Issuer will fund such purchase from amounts available under the prefunding reserve. The sellers are not obligated to offer a sale of a further portfolio. If no additional portfolio is transferred to the Issuer, funds standing to the credit of the prefunding reserve will be applied as available principal funds.

The credit enhancement available to the rated notes consists of subordination and the General Reserve. The Credit Enhancement available to the Class A Notes will be equal to 56.65%, Credit Enhancement available to the Class B Notes will be equal to 43.90%, Credit Enhancement available to the Class C Notes will be equal to 38.90%, Credit Enhancement available to the Class D Notes will be equal to 31.40%, Credit Enhancement available to the Class E Notes will be equal to 23.65% and Credit Enhancement available to the Class F Notes will be equal to 18.65%.

The euro collection accounts are held with the Allied Irish Banks Plc (AIB). Funds deposited into the AIB collection accounts will be deposited on the next business day into the Issuer Transaction Euro Account held with Elavon Financial Services DAC, London Branch, which is privately rated by DBRS. DBRS has concluded that Elavon 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 “A,” the Issuer will replace the account bank. The downgrade provision is consistent with DBRS’s criteria for the initial rating of AAA (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.

The ratings are based on DBRS’s review of the following analytical considerations:
-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS calculated probability of default (PD), loss given default (LGD) and expected loss outputs (EL) on the mortgage portfolio. The PD, LGD and EL are used as an input into the cash flow model. The mortgage portfolio was analysed in accordance with DBRS’s “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.”
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D, Class E and Class F Notes according to the terms of the transaction documents. The transaction structure was modelled using Intex. DBRS considered additional sensitivity scenarios of 0% CPR stress. The Class D Notes did not pass 0% CPR in the rising interest rate scenarios. DBRS will continue to monitor the CPR rates as part of its surveillance process.
-- The sovereign rating of the Republic of Ireland rated A (high)/R-1(middle)/Stable (as of the date of this report).
-- 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 to the rating is: Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda.

DBRS has applied the principal methodology consistently.

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 data and information used for this rating includes LSF IX Java Investments, LSF IX Paris Investments and their agents.

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

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

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

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This rating concerns a newly issued financial instrument. This is the first DBRS rating action since the intial rating date.

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):

-- In respect of the Class A Notes, a PD of 68.56% and LGD of 73.71%, corresponding to the AAA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 62.43% and LGD of 63.61%, corresponding to the AA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 57.80% and LGD of 58.49%, corresponding to the A rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 51.83% and LGD of 51.62%, corresponding to the BBB rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E Notes, a PD of 42.67% and LGD of 43.72%, corresponding to the BB rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class F Notes, a PD of 31.71% and LGD of 37.74%, corresponding to the B rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS concludes the following impact on the rated notes:

Class A Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes at AA (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BB (low) (sf).

Class B Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (low) (sf).

Class C Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to B (high) (sf).

Class D Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to B (sf).

Class E Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead downgrade of the Class E Notes to B (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class E Notes to B (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to B (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (sf).

Class F Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to maintaining the rating on the Class F Notes at B (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class F Notes to below B (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to maintaining the rating of the Class F Notes at B (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class F Notes to below B (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: Vito Natale, Senior Vice President
Rating Date: 30 March 2017

Initial Rating Date: 8 March 2017

DBRS Ratings Limited
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United Kingdom
Registered in England and Wales: No. 7139960

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

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Legal Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model Methodology for European Securitisations
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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.