Press Release

DBRS Morningstar Downgrades Rating on ProSil Acquisition S.A., Changes Trend to Stable from Negative

Nonperforming Loans

November 17, 2022

DBRS Ratings GmbH (DBRS Morningstar) downgraded its rating on the Class A notes issued by ProSil Acquisition S.A. (the Issuer) to BB (sf) from BB (high) (sf) and changed the trend to Stable from Negative.

The transaction included the issuance of Class A, Class B, Class J, and Class Z notes (together, the notes). The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before the final legal maturity date. DBRS Morningstar does not rate the Class B, Class J, or Class Z notes.

The notes are collateralised by a pool of mostly secured Spanish nonperforming loans (NPLs) originated by Abanca Corporación Bancaria, S.A. and Abanca Corporación División Immobilaria S.L. ProSil Acquisition S.A., Cell Number 1, Cell Number 2, and Cell Number 3 (the transferor) sold the receivables to ProSil Acquisition S.A., Cell Number 5 (the Issuer). As of the closing date in March 2019, the gross book value of the loan pool was approximately EUR 494.7 million. Cortland Investors II S.à r.l. operates as sponsor and retention holder in the transaction and, over time, acquired the three portfolios that are part of the pool (Avia, Lor, and Sil). HipoGes Iberia S.L. (the servicer) services the loans and manages the following Spanish property companies as at the closing date: Beautmoon Spain, S.L.; Osgood Invest, S.L.; Butepala Servicios y Gestiones S.L.; and Vetapana Servicios y Gestiones S.L.

RATING RATIONALE
The downgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: Assessment of the portfolio recoveries as of September 2022, with a focus on: (1) a comparison of actual gross collections and the servicer’s initial business plan forecast; (2) the collection performance observed over the past months; and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: Loan pool composition as of September 2022 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 B notes will begin to amortise following the full repayment of the Class A notes and the Class J notes will amortise following the full 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 net present value (NPV) cumulative profitability ratio is lower than 90%. This trigger has been breached since the April 2020 interest payment date (IPD). As per the September 2022 servicing report, the cumulative collection ratio was 47.0% and the NPV cumulative profitability ratio was 88.4%.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure, covering a potential interest shortfall on the Class A notes and senior fees. The current amount of the cash reserve is equal to EUR 5.3 million and the target amount is equal to 4.5% of the Class A notes.

According to the latest investor report dated 28 October 2022, the principal amount outstanding on the Class A, Class B, Class J, and Class Z notes was equal to EUR 111.1 million, EUR 30.0 million, EUR 15.0 million, and EUR 16.0 million, respectively. The balance of the Class A notes amortised by approximately 34.7% since issuance. The current aggregated transaction balance is EUR 172.1 million.

As of September 2022, the transaction was performing significantly below the servicer’s initial expectations. The actual cumulative gross collections equal EUR 107.4 million, whereas the servicer’s initial business plan estimated cumulative gross collections of EUR 211.7 million for the same period. Therefore, as of September 2022, the transaction was underperforming by EUR 104.3 million (-49.3%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 68.1 million at the BBB (low) (sf) stressed scenario. Therefore, as of September 2022, the transaction was performing above DBRS Morningstar’s stressed initial expectations.

In October 2022, the servicer delivered an updated portfolio business plan (the updated business plan) as of July 2022. The updated business plan, combined with the actual cumulative gross collections of EUR 102.0 million as of 31 July 2022, resulted in a total of EUR 301.0 million expected gross collections, which was 7.5% lower than the total gross collections of EUR 325.3 million estimated in the initial business plan. Without including actual collections, the servicer’ expected future collections from October 2022 accounted for EUR 193.4 million (EUR 113.7 million in the initial business plan). Hence, the servicer revised its expectation for collections on the remaining portfolio upward and timing of collections is now expected later than initially envisaged. The updated DBRS Morningstar BB (sf) rating stress assumes a haircut of 27.6% to the servicer’s updated business plan, considering total future expected collections from October 2022 onwards.

The final maturity date of the transaction is 31 October 2039.

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 19 September 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/402907/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-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/402357 and https://www.dbrsmorningstar.com/research/360393.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (19 May 2022).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://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/401817/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, the servicer, and U.S. Bank Global Corporate Trust, which comprise, in addition to the information received at issuance, the updated business plan as of July 2022 delivered in October 2022; the investor report as of October 2022; and the quarterly servicer report as of September 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 30 July 2021, when DBRS Morningstar confirmed its BB (high) (sf) rating on the Class A notes and maintained the Negative trend.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 140.1 million at the BB (sf) stress level, 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 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).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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.

These ratings are 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: 10 July 2019

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: https://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: https://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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