DBRS Morningstar Confirms Ratings on Class A and Class B, Upgrades Ratings on Class C and D Issued by Grand Canal Securities 2 DAC; Changes Trends to Stable

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Grand Canal Securities 2 DAC (the Issuer):

-- Class A confirmed at A (sf)
-- Class B confirmed at BBB (low) (sf)
-- Class C upgraded to BB (sf) from BB (low) (sf)
-- Class D upgraded to B (sf) from B (low) (sf)

DBRS Morningstar also changed the trends on all classes of notes to Stable from Negative.

The transaction represents the issuance of the Class A, Class B, Class C, Class D, Class E1, Class E2, Class E3, and Class F notes (collectively, the Notes). The rating on the Class A notes addresses timely payment of interest and ultimate payment of principal. The ratings on the Class B, Class C, and Class D notes address ultimate payment of interest and ultimate payment of principal. DBRS Morningstar does not rate the Class E1, Class E2, Class E3, Class P, and Class F notes of the Issuer.

Proceeds from the issuance of the Notes were used to purchase the beneficial title and trust (from trust loans) of first-charge (including subsequent charges) performing and nonperforming Irish residential mortgage loans from Mars Capital Ireland Holdings DAC (the Seller). The mortgage loans were originated by Irish Nationwide Building Society and Springboard Mortgages Limited, and subsequently acquired by the Seller in March/February 2015 and October 2014.

The portfolio had a total outstanding balance of EUR 517.7 million as of 31 October 2017 (the Cut-Off Date) and was secured by Irish residential properties, with geographic concentration in Dublin (20.4% of the total outstanding balance). About 12.2% of the pool by outstanding balance consisted of buy-to-let loans, and approximately 83.8% was nonperforming and in various stages of the litigation process.

Primary servicing of the portfolio is undertaken by Mars Capital Finance Ireland DAC (Mars Capital or the Servicer) that is also responsible for all master servicing activities. Intertrust Finance (Ireland) Limited was appointed as the backup master servicer facilitator.

RATING RATIONALE
The confirmations and the upgrades follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 December 2020, focusing on: (1) a comparison between actual recoveries and the Servicer’s initial business plan forecast; (2) the collection performance observed over the past months, 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.
­- Portfolio characteristics: loan pool composition as of December 2020 and the evolution of its core features since issuance, including the portfolio breakdown by arrears status and the observed increase in the share of reperforming loans since issuance.
-- Transaction liquidating structure: the order of priority, which entails a fully sequential amortisation of the Notes. The payment of interest and principal on the Class B notes is fully subordinated to the repayment of interest and principal on the Class A notes. Similarly, the payment of interest and principal on the Class C and Class D notes is lower ranking than the payments due on the Class B and C notes, respectively.
-- Liquidity support: the transaction’s benefits liquidity structure, which includes four reserve funds available to mitigate temporary collection shortfalls on the payment of (1) senior costs and interest on the Class A notes, (2) interest on the Class B notes, (3) interest on the Class C notes, and (4) interest on the Class D notes, respectively.

According to the most recent investor report issued in January 2021, the outstanding amounts of the Class A, Class B, Class C, and Class D notes were equal to EUR 134.4 million, EUR 9.3 million, EUR 10.1 million, and EUR 11.9 million, respectively. The balance of the Class A notes amortised by approximately 42% since issuance. The current aggregate transaction balance is EUR 421.0 million.

As of December 2020, the actual cumulative gross collections after closing were equal to EUR 103.4 million. The Servicer’s initial business plan assumed total gross collections of EUR 135.9 million during the same period. Hence, the transaction is underperforming 23.9% compared with the Servicer’s initial expectations.

The transaction benefits from four reserve funds to support liquidity shortfalls on senior costs, interest due in relation to the rated notes and, ultimately, the repayment of principal on the same, if available:
-- The Class A reserve fund, which was funded to an initial balance equal to 3.0% of the Class A notes and can amortise to 3.0% of the outstanding balance of the Class A notes;
-- The Class B reserve fund, whose initial amount was equal to 7.0% of the initial Class B notes balance and does not have a target amount;
-- The Class C reserve fund, whose initial amount was equal to 12.0% of the initial Class C notes balance and does not have a target amount; and
-- The Class D reserve fund, whose initial amount was equal to 15.0% of the initial Class D notes balance and does not have a target amount.

Credits to the Class B, C, and D reserves are made outside the waterfall based on the proceeds of the interest rate cap allocated proportionately to the respective size of the Class B, C, and D notes relative to the notional cap.

According to the January 2021 investor report, the Class A reserve fund amounted to EUR 4.2 million, which is in line with the target balance, and the Class B, Class C, and Class D reserve fund balances amounted to EUR 0.18 million, EUR 0.38 million, and EUR 0.42 million, respectively.

The final maturity date of the transaction is in December 2058.

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 nonperforming loan (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, DBRS Morningstar gives partial credit to house price increases from 2023 onward 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.

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 includes the Issuer, Mars Capital Finance Ireland DAC and The Bank of New York Mellon, London Branch, which comprise, in addition to the information received at issuance, a data tape as of 31 December 2020, detailed performance data as of 31 December 2020, and a monthly investor report dated 25 January 2021.

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 trends on the Class A, Class B, Class C and Class D notes to Negative.

The lead analyst responsibilities for this transaction have been transferred to Sebastiano Romano.

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 determine the rating (the Base Case):
-- The expected principal and interest collections in a declining interest rate scenario at the A (sf) rating level, a 5% and 10% reduction in the expected collections.
-- 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 at BBB (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 at BBB (low) (sf).

-- The expected principal and interest collections in a declining interest rate scenario at the BBB (low) (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead a downgrade of the Class B notes at BB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead a downgrade of the Class B notes at BB (sf).

-- The expected principal and interest collections in a declining interest rate scenario at the BB (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead a downgrade of the Class C notes at BB (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead a downgrade of the Class C notes at B (high) (sf).

-- The expected principal and interest collections in a declining interest rate scenario at the B (sf) rating level, a 5% and 10% reduction in the expected collections.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead a confirmation of the Class D notes at B (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead a downgrade of the Class D notes below B (low) (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: Sebastiano Romano, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 6 November 2017

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500

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/359884/master-european-structured-finance-surveillance-methodology.
-- 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.
-- 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), ttps://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.