Press Release

DBRS Morningstar Upgrades Class A Notes of Hefesto STC, S.A. (Project Guincho) to BBB (high) (sf), Confirms Class B Notes at CCC (sf); All Trends Negative

Nonperforming Loans

March 25, 2021

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class A notes issued by Hefesto STC, S.A. (Project Guincho) (the Issuer) to BBB (high) (sf) from BBB (low) (sf) and confirmed its rating on the Class B notes at CCC (sf). All trends are Negative.

The transaction represents the issuance of Class A, Class B, Class J, and Class R notes (collectively, the Notes). The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal while the rating on the Class B notes addresses the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class J or Class R notes.

As of the 30 September 2018 portfolio cut-off date, the Notes were backed by a EUR 481 million portfolio by gross book value (the Portfolio) consisting of unsecured and secured nonperforming loans (NPLs) originated by Banco Santander Totta S.A.

Since the transfer of the Portfolio, the secured loans held by individuals are serviced by Whitestar Asset Solutions S.A., the secured loans held by corporates are serviced by HG PT, Unipessoal, Lda, and the unsecured loans are serviced by Proteus Asset Management, Unipessoal Lda. (collectively, the Special Servicers).

RATING RATIONALE
The rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: an assessment of Portfolio recoveries as of 31 October 2020, focusing on: (1) a comparison between actual collections and the Special Servicers’ initial business plans forecast; (2) the collection performance observed since issuance, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) a comparison between the current performance and DBRS Morningstar’s initial expectations.
-- The Special Servicers’ updated business plans: a review of the updated business plans, received by DBRS Morningstar in February 2021, and a comparison with the initial business plans’ expectations.
-- Portfolio characteristics: the loan pool composition as of October 2020 and the evolution of its core features since issuance.
-- Transaction liquidating structure: except for Class R notes, the order of priority entails a fully sequential amortisation of the Notes (i.e., the Class B notes will begin to amortise following the full repayment of the Class A notes and the Class J notes will amortise following the repayment of the Class B notes). Additionally, interest payments on the Class B notes become subordinated to principal payments on the Class A notes if the cumulative gross collection ratio or the net present value cumulative profitability ratio is lower than 90%. These triggers were not breached on the November 2020 interest payment date, at which time the actual figures were 176.2% and 147.0%, respectively, according to the latest investor report.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering against potential interest shortfall on the Class A notes and senior fees. The cash reserve, whose target amount is equal to 3.0% of the Class A notes principal outstanding balance, is currently fully funded.

According to the latest investor report in November 2020, the outstanding principal amounts of the Notes were equal to EUR 48.6 million, EUR 14.0 million, EUR 25.0 million, and EUR 1.6 million, respectively. The balance of the Class A notes has amortised by approximately 42.2% since issuance. The current aggregated transaction balance is EUR 89.2 million.

As of October 2020, the transaction was performing better than the Special Servicers’ initial expectations. The actual cumulative gross collections equalled EUR 49.1 million, whereas the Special Servicers’ initial business plans estimated cumulative gross collections of EUR 34.7 million for the same period. Therefore, as of October 2020, the transaction was overperforming by EUR 14.4 million (41.5%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 14.8 million at the BBB (low) (sf) stressed scenario and of EUR 22.5 million at the CCC (sf) stressed scenario. Therefore, as of October 2020, the transaction was overperforming compared with DBRS Morningstar’s initial stressed expectations.

In February 2021, the Special Servicers provided DBRS Morningstar with revised business plans starting from 1 November 2020. In these updated business plans, the Special Servicers assumed slightly lower recoveries compared with initial expectations. The total cumulative gross collections (including actual collections) from the updated business plans were EUR 152.6 million, which is 2.3% lower compared with the EUR 156.2 million expected in the initial business plans.

Without including actual collections, the Special Servicers’ expected collections from November 2020 are now EUR 103.6 million versus EUR 121.5 million in the initial business plans. Hence, the Special Servicers’ expectation for collection on the remaining Portfolio was revised downward. The updated DBRS Morningstar expectations assume a haircut of 42.3% and 2.9% to the Special Servicers’ latest business plans at BBB (high) (sf) and CCC (sf), respectively, considering expected collections.

The final maturity date of the transaction is in November 2038.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The coronavirus and the resulting isolation measures have resulted in a sharp economic contraction, increases in unemployment rates, and reduced investment activities. DBRS Morningstar anticipates that collections in European NPL securitisations will continue to be disrupted in the coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. 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 incorporated its expectation of a moderate medium-term decline in property prices; however, partial credit to house price increases from 2023 onwards is given in non-investment-grade scenarios. The Negative trends reflect the ongoing uncertainty amid the coronavirus.

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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.

For more information on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 the Issuer and/or its agents (J.P. Morgan Securities PLC; Citibank, N.A.; and the Special Servicers), which comprise, in addition to the information received at issuance, the updated business plans received in February 2021, updated servicer reports and data tape as of October 2020, and the investor report as of November 2020.

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

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. At the time of the initial rating and in this review, DBRS Morningstar has applied an additional haircut to the collections’ vectors following the results of the third-party assessments.

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

The last rating action on this transaction took place on 8 May 2020, when DBRS Morningstar changed the trends on the Class A and Class B notes to Negative from Stable.

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 with the parameters used to confirm the rating (the Base Case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 59.8 million and EUR 100.6 million at the BBB (high) (sf) and CCC (sf) stress levels, respectively, a 5% and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A notes to BB (high) (sf) and to a confirmation of the Class B notes at CCC (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to CCC (sf) and to a confirmation of the Class B notes at CCC (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alberto Cruces de la Rosa, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 November 2018

DBRS Ratings GmbH
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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.

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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