Press Release

DBRS Morningstar Removes Ratings on Retiro Mortgage Securities DAC from Under Review with Positive Implications, Confirms Ratings with Stable Trends

Nonperforming Loans

April 14, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings on the notes (the Rated Notes) issued by Retiro Mortgage Securities DAC (the Issuer) as follows:

-- Class A1 at A (sf)
-- Class A2 at BBB (sf)
-- Class B at BB (sf)
-- Class C at BB (low) (sf)

All trends are Stable. DBRS Morningstar removed the ratings from Under Review with Positive Implications, where they were placed on 15 March 2022.

DBRS Morningstar's ratings on the Class A1 and Class A2 notes (together, the Class A notes) address the timely payment of interest and the ultimate repayment of principal by the final legal maturity date. Ratings on the Class B and Class C notes address the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class D or Class E notes (together with the Rated Notes, the Notes) issued in this transaction.

As of November 2020, the current balance of the loans was EUR 678.4 million. Nonperforming loans (NPLs) represented the vast majority of the portfolio by current balance (91.9%) while more than half of the portfolio by property valuation was real estate owned (REOs). The portfolio resulted from the aggregation of four subportfolios (Wind, Tag, Normandia, and Tambo) acquired over time by OCM Luxembourg OPPS X S.à r.l., which operates as the sponsor and retention holder in the transaction. Redwood MS Limited (Redwood) and VicAsset Holdings LLC (VicAsset) are acting as master servicers in this transaction.

RATING RATIONALE
The confirmations follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 31 December 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.
-- Portfolio characteristics: loan pool composition as of December 2021 and the evolution of its core features since issuance.
-- Transaction liquidating structure: the order of priority entails a fully sequential amortisation of the Notes (i.e., the Class A2 notes will begin to amortise following the full repayment of the Class A1 notes unless an enforcement notice has been delivered; the Class B notes will begin to amortise following the full repayment of the Class A2 notes; and the same applies to the Class C notes). Moreover, interest on the Class B notes is fully subordinated to the repayment of both interest (including Class A additional note payments) and principal repayment of the Class A notes, and interest payments on the Class C notes are subordinated to both interest (including Class B additional note payments) and principal payments on the Class B notes.
-- Liquidity support: the transaction benefits from an amortising liquidity reserve fund available to mitigate temporary collection shortfalls on the payment of senior costs and interest on the Class A notes and from separate nonamortising Class B and Class C reserve funds providing liquidity support to the respective classes of Notes. The liquidity reserve fund target amount is equal to 5.0% of the Class A notes’ principal outstanding balance and was fully funded as of January 2022 payment date.

TRANSACTION AND PERFORMANCE
According to the latest investor report from January 2022, the outstanding principal amounts of the Class A1, Class A2, Class B, Class C, Class D, and Class E notes were EUR 191.5 million, EUR 77.0 million, EUR 34.0 million, EUR 15.0 million, EUR 30.0 million, and EUR 54.0 million, respectively. As of the January 2022 payment date, the balance of the Class A1 notes had amortised by approximately 26.3% since issuance and the current aggregated transaction balance was EUR 401.5 million.

As of December 2021, the transaction was performing below the special servicers’ business plan expectations. The actual cumulative collections (pre servicing fees and corporate costs) equalled EUR 84.4 million whereas the special servicers’ initial business plan estimated cumulative collections (before servicing fees and corporate costs) of EUR 118.0 million for the same period. Therefore, as of December 2021, the transaction was underperforming by EUR 33.6 million (-28.5%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative collections (before servicing fees and corporate
costs) for the same period of EUR 49.5 million at the A (sf) stressed scenario, EUR 55.0 million at the BBB (sf) stressed scenario, EUR 61.7 million at the BB (sf) stressed scenario, and EUR 63.5 million at the BB (low) (sf) stressed scenario. Therefore, as of December 2021, the transaction was overperforming compared with DBRS Morningstar’s initial stressed expectations.

Without including actual collections, the special servicers’ expected collections (before servicing fees and corporate costs) from January 2022 are EUR 526.4 million. The updated DBRS Morningstar A (sf), BBB (sf), BB (sf), and BB (low) (sf) rating stresses assume haircuts of 44.3%, 39.7%, 31.8%, and 30.3% to the special servicers’ executed business plans, respectively, considering future expected collections (before servicing fees and corporate costs).

The final maturity date of the transaction is in July 2075.

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 for certain property types.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. 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/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-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, Redwood, VicAsset, and Citibank N.A. which comprise, in addition to the information received at issuance, the investor report as of January 2022 and the loan-by-loan data as of December 2021.

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 15 March 2022, when DBRS Morningstar placed the ratings on the Rated Notes Under Review with Positive Implications.

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 A1 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 A1 notes to A (sf)

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A2 notes to BBB (low) (sf)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A2 notes to BB (high) (sf)

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class B notes to BB (low) (sf)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class B notes to B (sf)

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class C notes to B (low) (sf)
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class C 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: 31 March 2021

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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