DBRS Assigns Provisional Ratings to European Residential Loan Securitisation 2017-NPL1 DAC

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following classes of Notes issued by European Residential Loan Securitisation 2017-NPL1 DAC (the Issuer):

-- Class A at A (sf)
-- Class B at BBB (sf)
-- Class C at BB (sf)

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 Class P and Class D Notes are unrated and will be retained by LSF IX Paris Investments DAC (the Seller). The transaction benefits from two reserve funds: the Class A Reserve Fund and the Class B Reserve Fund. The Class A Reserve Fund will have an initial balance equal to 4.5% of the Class A Notes and can amortise to 4.5% of the outstanding balance of the Class A Notes. The Class B Reserve Fund will be funded to an initial balance of 10.0% of the Class B Notes and does not have a target balance. Credits to the Class B reserve will be made outside of the waterfall based on the proceeds of the interest rate cap allocated proportionately to the size of the Class B Notes relative to the cap notional. Liquidity support to the Class C Notes is provided by the cap proceeds allocated proportionately to the size of the Class C Notes relative to the cap notional. These Class C interest payments are made outside of the waterfall as long as the Class C Notes are outstanding. Any unpaid accrued interest amount in the Class C Notes is reduced by the Class C Interest payments funded via the cap proceeds.

The underlying collateral primarily consists of Irish non-performing residential mortgages. There is a small percentage (2.35%) of performing residential mortgages. The portfolio is granular, as the largest borrower accounts for 1.01% of the analysed portfolio. All mortgages are concentrated in Ireland and 33.14% are located in Dublin. The mortgage loans were originated by Bank of Scotland (Ireland) Limited (BoSI) and are secured by Irish residential properties. Lone Star Funds (Lone Star) through the respective seller acquired the mortgage loans in February 2015. Servicing of the mortgage loans is conducted by Start Mortgages DAC (Start), which are also expected to continue as Administrators of the assets for the transaction. As of the closing date, primary servicing activities have been delegated to Homeloan Management Limited (HML) under a subservicing agreement. There is no obligation on Start to continue to delegate to HML. Also, HML is not a party to the transaction documents. Hudson Advisors Ireland DAC (Hudson) will be appointed as the Issuer Administration Consultant and, as such, will act in an oversight and monitoring capacity.

Following the step-up date in May 2021, the margin above one-month Euribor payable on the Class A, Class B and Class C Notes increases. The issuer will enter into an Interest Rate Cap agreement with Barclays Bank Plc. The cap agreement will end on the payment date falling in May 2022, on which date 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 0% for the first two years and 0.5% for the remaining three years. The Issuer can unwind or sell part of the Interest Rate Cap at the marked-to-market position provided the notional of the Interest Rate Cap notional 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 in May 2022. The coupon caps on the Class A, Class B and Class C Notes are equal to 5.00%, 6.00% and 6.00%, respectively.

The issuer may sell part of the portfolio subject to sale covenants. The sale price must be at least 70% of the aggregate current balance of the mortgage loans which are subject to a sale. Portfolio Sale Proceeds up to 70% of the outstanding principal balance, net of costs, will be part of the Available Funds.

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 70% 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.

Elavon Financial Services DAC, U.K. Branch (Elavon), is the Issuer Transaction Account Bank. DBRS privately rates Elavon with a Stable trend. DBRS has concluded 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 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 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 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 data and information used for this rating include LSF IX Paris Investments DAC and its agents.

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

At the time of the initial rating DBRS was supplied with 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 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 decrease the rating of the Class A Notes to 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 B Notes at BBB (sf).
-- DBRS concludes that a hypothetical decrease of the expected principal and interest collections by 10%, ceteris paribus, would decrease the rating of the Class B Notes to BB (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).

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

Lead Analyst: Elizabeth Lovett, Assistant Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 06 April 2017

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 (2 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.