DBRS Morningstar Finalises Provisional Ratings on Fingal Securities RMBS DAC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings assigned to the notes issued by Fingal Securities RMBS DAC (Fingal RMBS or the Issuer) as follows:

-- Class A notes rated AAA (sf)
-- Class B notes rated AA (sf)
-- Class C notes rated A (sf)
-- Class D Notes rated BBB (high) (sf)

DBRS Morningstar does not rate the Class Z and Class R notes.

Fingal RMBS is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in Ireland. The notes were issued to fund the purchase of Irish residential mortgage loans originated by Bank of Scotland plc and secured over properties located in Ireland. Bank of Scotland sold the portfolio in May 2018 to Erimon Home Loans Ireland limited, a bankruptcy-remote SPV wholly owned by Barclays Bank plc. Pursuant to this transaction, Erimon has sold the portfolio to Fingal RMBS.

As at 31 March 2020, the mortgage portfolio consisted of 4,516 loans with a total portfolio balance of approximately EUR 797.0 million. The weighted-average (WA) indexed loan-to-value, calculated by DBRS Morningstar giving limited credit to house price increases, is 69.9% with a WA seasoning of 13.4 years. Almost all the loans included in the portfolio (99.9%) are floating-rate loans linked either to the European Central Bank (ECB) rate or a variable rate linked to the ECB rate. The notes pay a floating rate of interest linked to three-month Euribor. DBRS Morningstar has accounted for this interest rate mismatch in its cash flow analysis. Approximately 22.0% of the portfolio are loans that have been originated to buy-to-let borrowers. No loans in the portfolio are greater than three months in arrears.

Credit enhancement for the Class A notes is calculated at 25.5% and is provided by the subordination of the Class B, Class C, Class D, and Class Z notes, and the general reserve fund. Credit enhancement for the Class B notes is calculated at 20.15% and is provided by the subordination of the Class C, Class D, and Class Z notes, and the general reserve fund. Credit enhancement for the Class C notes is calculated at 17.0% and is provided by the subordination of the Class D and Class Z notes and the general reserve fund. Credit enhancement for the Class D notes is calculated at 15.6% and is provided by the subordination of the Class Z notes and the general reserve fund.

The transaction benefits from a cash reserve available to support the Class A to Class D notes. The cash reserve was fully funded at closing at 1.5% of the initial balance of the rated notes minus the liquidity reserve fund. The liquidity reserve fund is sized at 1.5% of the Class A balance and provides liquidity support to cover revenue shortfalls on senior fees and interest on the Class A notes. The notes will additionally be provided with liquidity support from principal receipts, which can be used to cover interest shortfalls, provided a debit is applied to the principal deficiency ledgers in reverse sequential order.

A key structural feature is the provisioning mechanism in the transaction, which is linked to the arrears status of a loan besides the usual provisioning based on losses. The degree of provisioning increases with the increase in number of months in arrears status of a loan. This is positive for the transaction as provisioning based on the arrears status will trap any excess spread much earlier for a loan, which may ultimately end up in foreclosure.

The Issuer Account Bank, Paying Agent, and Cash Manager is Citibank, N.A., London Branch. The DBRS Morningstar private rating of the Issuer Account Bank is consistent with the threshold for the Account Bank outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

The rating assigned to the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date. The ratings assigned to the Class B to Class D notes address the ultimate payment of interest and principal. Additionally, the rating on the Class B notes addresses timely payments once the Class B notes have become the most senior notes outstanding. DBRS Morningstar based its ratings primarily on the following:

-- The transaction capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS Morningstar calculated the probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage loan portfolio.
-- 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 PD and LGD outputs provided by DBRS Morningstar’s “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”. Transaction cash flows were analysed using Intex DealMaker.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the Terms and Conditions of the notes.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and consistency with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many structured finance transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, additional adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, DBRS Morningstar’s Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. For details see the following commentaries: https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit-ratings and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the ratings of DBRS Morningstar-rated RMBS transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/360599.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (10 December 2019) and European RMBS Credit Model v 1.0.0.0.

DBRS Morningstar 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 at: https://www.dbrsmorningstar.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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Barclays Bank plc. This includes loan-by-loan data on the portfolio as of 31 March 2020, dynamic arrears data from December 2007 to January 2020, and repossession data on sales between 2018 and 2019.

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

At the time of the initial ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

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

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

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

In respect of the Class A notes, the PD and LGD at the AAA (sf) stress scenario of 31.31% and 64.62%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to AA (high) (sf)
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to AA (low) (sf)
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to AA (high) (sf)
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to AA (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to AA (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf)

In respect of the Class B notes, the PD and LGD at the AA (sf) stress scenario of 25.71% and 54.62%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class B notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf)
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf)
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf)
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf)

In respect of the Class C notes, the PD and LGD at the A (sf) stress scenario of 22.04% and 49.88%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class C notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf)
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf)
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (high) (sf)
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf)

In respect of the Class D notes, the PD and LGD at the BBB (high) (sf) stress scenario of 19.36% and 46.30%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class D notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to BBB (sf)
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf)
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (sf)
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BB (high) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade of the rating to BB (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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: Alessandra Maggiora, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 12 May 2020

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

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019) and European RMBS Credit Model v 1.0.0.0 https://www.dbrsmorningstar.com/research/354403/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.

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

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

This press release was amended on 3 June 2020 to change the initial rating date from 11 May 2020 to 12 May 2020.