DBRS Finalises Provisional Ratings on European Residential Loan Securitisation 2018-1 DAC

DBRS Ratings Limited (DBRS) finalised its provisional ratings assigned to the following classes of notes issued by European Residential Loan Securitisation 2018-1 DAC (the Issuer):
-- Class A at A(sf)
-- Class B at BBB(sf)

The Class P notes and the Class Z notes are unrated and will be retained by the seller. The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal. The rating on the Class B notes addresses ultimate payment of interest and ultimate payment of principal. The transaction benefits from an amortising Class A reserve fund and a separate Class B reserve fund, which will provide liquidity support to the rated notes and principal repayment support, if available, at maturity of the rated notes.

Proceeds from the issuance of the Class A, Class B, Class P and Class Z notes have been used to purchase first-charge performing and non-performing Irish residential mortgage loans. This mortgage portfolio was previously part of the European Residential Loan Securitisation 2016-1 DAC (ERLS 2016-1) transaction. The seller and the legal title holder of the mortgages, Shoreline Residential DAC, purchased the loans from ERLS 2016-1 and will sell them on to the Issuer. The outstanding balance of the total portfolio transferred to the Issuer was EUR 356 million. Approximately 53% 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 residential properties in Ireland and a small proportion (i.e. 0.3% of the analysed mortgage portfolio) of residential properties outside of Ireland. INBS was effectively nationalised in August 2010 following a state bailout. In 2011, under state ownership, INBS was merged with Anglo Irish Bank to form the Irish Banking Resolution Corporation (IBRC). In February 2013, IBRC was put into special liquidation 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 has been appointed as Administrator of the assets for the transaction. Hudson Advisors Ireland DAC (Hudson) has been 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 credit enhancement available to the Class A notes as a percentage of the total portfolio is at 39.5%. Likewise, the credit enhancement available to the Class B notes is at 34.3%.

Following the step-up date in March 2021, the margin above one-month Euribor payable on the rated notes will increase. The Issuer has entered into an interest rate cap agreement with HSBC Bank Plc. The cap agreement will terminate on 21 March 2023 or earlier on the date as of which all amounts due under the Class A and Class B notes have been repaid and/or redeemed in full or no amounts remain to be paid under the Class A and Class B notes pursuant to the conditions of the notes. On the termination date of the cap agreement, the coupon cap on the notes will become applicable. The Issuer paid the interest rate cap fees in full on the closing date and will receive payments to the extent one-month Euribor is above 1% for the relevant interest period in return. The Issuer can unwind or sell part of the interest rate cap at the mark-to-market position provided that the notional amount of the interest rate cap does not fall below the outstanding balance of the Class A and Class B notes.

The coupon payable on the rated notes becomes subject to a capped rate on the payment date falling on 31 March 2023. The coupon cap on the Class A and Class B notes is 5% and 6%, respectively. Interest payable on the Class B notes can be deferred.

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 that 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 a portfolio sale reserve. This reserve will be available to support the payment of interest on the Class A notes, if needed.

The Class P notes may receive excess amounts from any portfolio sale as repayments of principal. Excess amounts are calculated as the sale proceeds greater than 85% of 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. Consequently, the Class P notes may amortise before the rated notes. Payments made to the Class P notes are capped at the 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) acts as the account bank for this transaction. DBRS privately rates Citibank and has concluded that it 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) (sf), the Issuer will have to 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 its cash flow analysis.

The ratings are based on the following analytical considerations:
-- Transaction capital structure including the form and sufficiency of available credit enhancement.
-- The credit quality of the 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 tool. 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 rated notes according to the terms of the transaction documents. The transaction cash flows were analysed using the expected collections from the mortgage loans. The transaction structure was analysed using Intex DealMaker.
-- The most current sovereign rating of the Republic of Ireland, which DBRS rates at A(high)/R-1(middle) with a Stable trend as of the date of this report.
-- The consistency of the transaction’s legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include Shoreline Residential 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 not 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 is the first rating action since the Initial 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”):

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

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 and US regulations only.

Lead Analyst: Kali Sirugudi, Vice President
Rating Committee Chair: Quincy Tang, Managing Director
Initial Rating Date: 8 March 2018

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
--Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
--Legal Criteria for European Structured Finance Transactions
--Interest Rate Stresses for European Structured Finance Transactions
--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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.