DBRS Morningstar Assigns Provisional Ratings to SOL LION II RMBS, Fondo de Titulización

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings of AAA (sf) to the Series A1 notes, Series A2 notes, Series A3 notes, Series A4 notes, Series A5 notes, and Series A6 notes to be issued by SOL LION II RMBS, Fondo de Titulización (SOL LION II or the Issuer), a securitisation fund incorporated under Spanish securitisation law.

The provisional ratings assigned to the Series A1 notes, Series A2 notes, Series A3 notes, Series A4 notes, Series A5 notes, and Series A6 notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date. DBRS Morningstar does not rate the Class B notes or the Class C notes that will be issued in this transaction.

The notes will fund the purchase of Spanish residential mortgage loans secured over first-lien, owner-occupied properties located in Spain. ING Bank N.V., Spanish branch originated and services the mortgage loans. Titulizacion de Activos, SGFT, SA (the management company) manages the transaction.

The transaction has a three-year revolving period, during which the Issuer may acquire further mortgage loans if certain conditions are met. DBRS Morningstar has stressed the portfolio to assess the worst case to which the portfolio characteristics can migrate in accordance with the eligibility criteria. In order to purchase additional mortgage loans, the Issuer will use its available funds and will also be entitled to increase the outstanding balance of the notes during the first 12 months by no more than 20% of their initial balance. At no time, the outstanding balance of the notes will exceed EUR 15.75 billion. Such increase among notes will be made pro rata in order to maintain the initial proportion among notes existing at the closing date. After the end of the revolving period or if there is a revolving period early termination event, the Series A1 notes will start amortising.

The Series A1 notes to the Series A6 notes benefit from the subordination of the Class B notes and the Class C notes plus the EUR 120 million reserve fund, which is available to mitigate the credit risk and the liquidity risk of the mortgage loans. The nonamortising reserve fund will be established and fully funded at closing with the proceeds from the subordinated loan provided by ING Bank, Spanish branch. The target amount will be EUR 120 million until the Series A1 notes to the Series A6 notes have been redeemed. The Series A1 notes will benefit from full sequential amortisation, whereas principal on the Series A2 notes will not be paid until the Series A1 notes have been redeemed in full. However, if there is a liquidation of the Issuer, the amortisation will become prorated among each series of notes. Principal amortisation includes a provision mechanism through the use of excess spread in the priority of payments for defaulted loans (i.e., loans greater than or equal to 12 months in arrears).

DBRS Morningstar was provided with the provisional portfolio equal to EUR 14.9 billion as of 31 August 2020, which consisted of 146,992 loans extended to 146,310 borrowers. The weighted-average (WA) original loan-to-value (LTV) ratio stands at 70.7% whereas the DBRS Morningstar-calculated WA current indexed LTV calculated is 55.1% with a WA seasoning of 5.3 years. The majority of the portfolio (83.1% of the portfolio’s balance) comprises floating-rate loans linked to the 12-month Euribor that reset every six months; the remaining 16.9% of the portfolio’s balance comprises fixed-rate loans that will change to floating rate in approximately 8.1 months on a WA basis. The notes pay a floating rate of interest linked to three-month Euribor. In order to hedge the interest rate risk that arises due to the mismatch between the fixed-rate mortgages (before they switch to floating rate) and the floating-rate loans, the Issuer will enter into an interest rate swap with ING Bank, Spanish branch (the swap counterparty). The swap notional balance tracks the performing balance of the fixed-rate mortgage loans while they are in their fixed period. The Issuer pays the swap rate (0.50%) and in return receives the three-month Euribor.

Loans representing 0.31% of the portfolio’s balance have an outstanding payment holiday as a consequence of the Coronavirus Disease (COVID-19) pandemic on both interest and principal for a period of three months. Additionally, 0.79% of the portfolio’s balance represent loans that have an outstanding payment holiday only on principal for a period that ranges between three to 12 months. The current WA interest rate of the portfolio is 1.08% and the WA margin of the floating-rate loans is 1.01%. The repayment type for all the loans in the portfolio is French amortisation.

The mortgage loan portfolio is well distributed across Spain. The top three regional exposures are Madrid (31.1% by current balance), Catalonia (26.8%), and Andalusia (15.2%). The majority of the portfolio comprises loans granted for home purchase (89.5% of the current balance) while 9.2% are remortgages and 1.3% are renovation loans. Loans granted to self-employed borrowers represent 8.9% of the portfolio. No loans in the portfolio have been in arrears longer than three months.

The servicer can grant loan modifications without consent of the management company; these modifications include the possibility to extend the maturity date and reduce the margin on loans subject to certain limits. To account for these loan modifications in its cash flow analysis, DBRS Morningstar extended the maturity to the longest possible date for 15% of the portfolio and stressed the margin of 10% of the portfolio to the minimum margin allowed per the permitted variations.

The transaction’s account bank agreement and respective replacement trigger require ING Bank, Spanish branch, acting as the treasury account bank, to find (1) a replacement account bank or (2) an account bank guarantor with 60 days when ING Bank N.V.’s DBRS Morningstar rating is downgraded below “A”. The DBRS Morningstar Critical Obligations Rating (COR) of ING Bank N.V. is AA (high), while DBRS Morningstar’s Long Term Senior Debt and Issuer rating on ING Bank N.V. is at AA (low). The account bank applicable rating is the higher of one notch below ING Bank N.V. COR and ING Bank N.V.’s Long Term Senior Debt rating.

The prospectus for the transaction discloses that at the time of this rating action there is a civil lawsuit against the management company as a result of its actions in relation to certain funds and their corresponding derivative agreements, for which compensation is claimed in the amount of EUR 13.2 million. The lawsuit is described by the lawyers of the management company in the prospectus as having a low chance of success. DBRS Morningstar did not make any quantitative adjustments in its analysis of SOL LION II in relation to this risk. However, in case the management company defaults, a new management company must be appointed to replace it within a period of four months without triggering a liquidation of the fund. If the management company has not appointed a new management company within four months of the event causing the replacement, there will be an early liquidation of the fund and redemption of the notes. The replacement of the management company and appointment of the new management company will be reported to the rating agencies. DBRS Morningstar will continue monitoring the situation as it develops.

DBRS Morningstar based its ratings on a review of the following analytical considerations:

-- The transaction’s capital structure 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.
-- The probability of default (PD), loss given default (LGD), and expected loss (EL) outputs DBRS Morningstar calculated on the mortgage portfolio, which are used as inputs into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’s “European RMBS Insight: Spanish Addendum” methodology.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Series A1, Series A2, Series A3, Series A4, Series A5, and Series A6 notes according to the terms of the transaction documents.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as a downgrade, and replacement language in the transaction documents.
-- DBRS Morningstar’s sovereign rating on the Kingdom of Spain at “A” with a Stable trend as of the date of this press release.
-- The transaction parties’ financial strength to fulfil their respective roles.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.

The transaction structure was analysed using Intex DealMaker.

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 payment holidays and delinquencies may continue to increase in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar assumed that there was a moderate decline in residential property prices.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The 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 DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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: “European RMBS Insight: Spanish Addendum” (26 August 2020).

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

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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

These may be found at: http://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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include ING Bank N.V., Spanish branch.

DBRS Morningstar was provided with loan-level data as of 31 August 2020 and historical performance data (including static vintage default data and dynamic arrears data) covering the period from January 2008 to September 2020. In addition, DBRS Morningstar received prepayment data from September 2013 to October 2019 and repossession data on 240 loans.

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

DBRS Morningstar was supplied with one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its 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 concerns 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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):

-- In respect of the Series A1 notes, a PD of 22.5% and LGD of 38.6%, corresponding to the AAA (sf) rating scenario, was stressed.
-- In respect of the Series A2 notes, a PD of 22.5% and LGD of 38.6%, corresponding to the AAA (sf) rating scenario was stressed assuming a 25% and 50% increase on both the PD and LGD.
-- In respect of the Series A3 notes, a PD of 22.5% and LGD of 38.6%, corresponding to the AAA (sf) rating scenario was stressed assuming a 25% and 50% increase on both the PD and LGD..
-- In respect of the Series A4 notes, a PD of 22.5% and LGD of 38.6%, corresponding to the AAA (sf) rating scenario was stressed assuming a 25% and 50% increase on both the PD and LGD..
-- In respect of the Series A5 notes, a PD of 22.5% and LGD of 38.6%, corresponding to the AAA (sf) rating scenario was stressed assuming a 25% and 50% increase on both the PD and LGD..
-- In respect of the Series A6 notes, a PD of 22.5% and LGD of 38.6%, corresponding to the AAA (sf) rating scenario was stressed assuming a 25% and 50% increase on both the PD and LGD..

Series A1 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

Series A2 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

Series A3 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

Series A4 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Series A5 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Series A6 Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

For further information on DBRS Morningstar 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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 25 November 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v 4.3.1.0. https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology
-- European RMBS Insight: Spanish Addendum (26 August 2020)
https://www.dbrsmorningstar.com/research/366107/european-rmbs-insight-spanish-addendum
-- 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 (19 November 2020) https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020) https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020) https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020)
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-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: http://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 modified on 3 December 2020 to correct one incorrect reference to the account bank as Santander instead of NG Bank N.V. The correct account bank was referenced on all other mentions in the press release.