DBRS Morningstar Upgrades Class A Notes of Hefesto, STC, S.A. (Evora Finance) to A (high) (sf) and Upgrades Class B Notes to BBB (high) (sf), Changes All Trends to Stable

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class A Notes issued by Hefesto, STC, S.A. (Evora Finance) (the Issuer) to A (high) (sf) from BBB (sf) and upgraded its rating on the Class B Notes to BBB (high) (sf) from B (low) (sf) and changed all trends to Stable from Negative, as a result of the transaction’s performance to date.

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 31 August 2017 portfolio cut-off date, the Notes were backed by a EUR 580 million portfolio by gross book value (the Portfolio) consisting of unsecured and secured nonperforming loans (NPLs) originated by Caixa Económica Montepio Geral.

Since the transfer of the Portfolio, the secured loans have been serviced by Whitestar Asset Solutions S.A. and the unsecured loans are serviced by HG PT, 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 December 2020, 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 the Class R notes, the order of priority includes 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 118.2% and 122.7%, 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 sum of Class A and Class B 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 6.1 million, EUR 19.5 million, EUR 29.5 million, and EUR 1.2 million, respectively. The balance of the Class A Notes has amortised by approximately 95.0% since issuance. The current aggregated transaction balance is EUR 56.3 million.

As of October 2020, the transaction was performing better than the Special Servicers’ initial expectations. The actual cumulative gross collections equalled EUR 147.5 million, whereas the Special Servicers’ initial business plans estimated cumulative gross collections of EUR 136.3 million for the same period. Therefore, as of October 2020, the transaction was overperforming by EUR 11.2 million (8.2%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 86.0 million at the BBB (sf) stressed scenario and of EUR 121.5 million at the B (low) (sf) stressed scenario. Therefore, as of October 2020, the transaction was also overperforming compared with DBRS Morningstar’s stressed initial expectations.

In December 2020, the Special Servicers provided DBRS Morningstar with revised business plans starting from 1 November 2020. In these updated business plans, the Special Servicers assumed higher recoveries compared with initial expectations. The total cumulative gross collections (including actual collections) from the updated business plans were EUR 227.6 million, which is 4.0% higher compared with the EUR 218.8 million expected in the initial business plans.

Without including actual collections, the Special Servicers’ expected collections from November 2020 are now EUR 80.1 million versus EUR 80.9 million in the initial business plans. Hence, the Special Servicers’ expectation for collection on the remaining Portfolio was approximately maintained. The updated DBRS Morningstar expectations assume a haircut of 36.7% and 34.0% to the Special Servicers’ latest business plans at A (high) (sf) and BBB (high) (sf), respectively, considering expected collections.

The upgrade is mainly driven by the better than expected performance of the transaction since issuance, which has led to a faster-than-anticipated deleveraging compared with the initial expectations. The stable trend reflects an adequate ability for the transaction to withstand potential reductions in the collections expectations amid the outbreak of coronavirus pandemic.

The Class A Notes may pass higher rating stress scenarios; however, DBRS Morningstar believes higher ratings would not be commensurate with the risk of the transaction in consideration with the potential higher variability of NPLs’ cash flows. The rating of the Class A notes also considers the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents (minimum rating of BBB (low)).

The final maturity date of the transaction is in November 2037.

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.

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 December 2020, 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. However, this did not impact the rating analysis.

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 trend 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 50.7 million and EUR 52.8 million at the A (high) (sf) and BBB (high) (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 confirmation of the Class A notes at A (high) (sf) and to a downgrade of the Class B notes to BBB (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class A notes at A (high) (sf) and to a downgrade of the Class B notes to BB (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. 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: 19 October 2017

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Non-Performing Loans Securitisations (13 May 2020), https://www.dbrsmorningstar.com/research/360970/rating-european-non-performing-loans-securitisations.
-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 January 2021), https://www.dbrsmorningstar.com/research/372339/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- 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.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-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.
-- 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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.