Press Release

DBRS Morningstar Takes Rating Actions on Hefesto STC, S.A. (Project Guincho)

Nonperforming Loans

March 22, 2022

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Hefesto STC, S.A. (Project Guincho) (the Issuer):

-- Class A upgraded to A (sf) from BBB (high) (sf)
-- Class B confirmed at CCC (sf)

DBRS Morningstar also changed the trends on both classes of notes to Stable from 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 the 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. (Whitestar) and the secured loans held by corporates are serviced by HG PT, Unipessoal, Lda (HG PT; together with Whitestar, the Special Servicers). In May 2021, Whitestar took over management of the unsecured positions from Proteus Asset Management, Unipessoal, Lda.

RATING RATIONALE
The upgrade and confirmation follows a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 October 2021, focusing on: (1) a comparison between actual collections and the Special Servicers’ initial business plan forecast; (2) the collection performance observed over recent 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 expectations.
-- The Special Servicers’ updated business plan as of October 2021, received in January 2022, and a comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition as of October 2021 and the evolution of its core features since issuance.
-- Transaction liquidating structure: except for the 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 collection ratio or the net present value cumulative profitability ratio is lower than 90%. These triggers were not breached on the November 2021 interest payment date, at which time the actual figures were 128.2% and 158.1%, respectively, according to the latest investor report.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure, covering 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.

TRANSACTION AND PERFORMANCE
According to the latest investor report from November 2021, the outstanding principal amounts of the Class A, Class B, Class J, and Class R notes were EUR 22.4 million, EUR 14.0 million, EUR 25.0 million, and EUR 1.2 million, respectively. As of the November 2021 payment date, the balance of the Class A notes had amortised by approximately 73.4% since issuance and the current aggregated transaction balance was EUR 62.6 million.

As of October 2021, the transaction was performing above the Special Servicers’ business plans expectations. The actual cumulative gross collections equalled EUR 80.8 million whereas the Special Servicers’ initial business plan estimated cumulative gross collections of EUR 75.1 million for the same period. Therefore, as of October 2021, the transaction was overperforming by EUR 5.8 million (+7.7%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 41.5 million at the BBB (low) (sf) stressed scenario and of EUR 56.4 million at the CCC (sf) stressed scenario. Therefore, as of October 2021, the transaction was overperforming compared with DBRS Morningstar’s initial stressed expectations.

In January 2022, the Special Servicers provided DBRS Morningstar with revised business plans starting from 1 November 2020. The updated portfolio business plans, combined with the actual cumulative gross collections of EUR 80.8 million as of October 2021, result in a total of EUR 157.0 million, which is 0.5% higher than the total gross disposition proceeds of EUR 156.2 million estimated in the initial business plan.

Without including actual collections, the Special Servicers’ expected collections from November 2021 were EUR 76.1 million versus EUR 81.1 million in the initial business plans. Hence, the Special Servicers revised their expectation for collection on the remaining Portfolio downward. The updated DBRS Morningstar A (sf) rating stress assumes a haircut of 58.2% to the Special Servicers’ executed business plans, considering future expected collections. In DBRS Morningstar’s CCC (sf) scenario, the Special Servicers’ forecast was only adjusted in terms of actual collections to date as well as timing of future expected collections.

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

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures had caused an economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in commercial real estate prices.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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/384146 and https://www.dbrsmorningstar.com/research/360393.

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 2022).

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.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include the Issuer, Whitestar, HG PT, and Citibank N.A. which comprise, in addition to the information received at issuance, the investor report as of November 2021; the semiannual servicers reports as of October 2021; the loan-by-loan reports as of October 2021; and the updated business plan received in January 2022.

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.

The last rating action on this transaction took place on 25 March 2021, when DBRS Morningstar upgraded its rating on the Class A notes to BBB (high) (sf) from BBB (low) (sf) and confirmed its rating on the Class B notes at CCC (sf) with Negative trends.

The lead analyst responsibilities for this transaction have been transferred to Clarice Baiocchi.

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 confirm the rating (the base case):

-- 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 to A (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 to A (sf)

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a confirmation of the Class B notes to CCC (sf)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a confirmation of the Class B notes to CCC (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: Clarice Baiocchi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 November 2018

DBRS Ratings GmbH
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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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