DBRS Morningstar Upgrades Rating on European Residential Loan Securitisation 2020-NPL1 DAC, Changes Trend to Stable from Negative

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class A notes issued by European Residential Loan Securitisation 2020-NPL1 DAC (the Issuer) to AA (low) (sf) from A (sf) and changed the trend to Stable from Negative.

The transaction represents the issuance of Class A, Class P, and Class Z notes (collectively, 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 legal final maturity date. DBRS Morningstar does not rate the Class P or Class Z notes.

At issuance, the notes were backed by a EUR 381.8 billion by gross book value portfolio consisting of first-charge nonperforming Irish residential mortgage loans originated by Permanent TSB p.l.c. (the originator).

Start Mortgages DAC (the administrator) services the receivables. Hudson Advisors Ireland DAC operates as the Issuer administration consultant and, as such, acts in an oversight and monitoring capacity and offers input into asset resolution strategies.

RATING RATIONALE
The upgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of the portfolio recoveries as of September 2022, with a focus on: (1) a comparison between actual gross collections and the administrator’s initial business plan forecast; (2) recovery performance observed over the past months; (3) the historical collections trend and average pay rate recorded in the last six months; and (4) a comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: The loan pool composition as of 30 September 2022 and the evolution of its core features, including the portfolio breakdown by arrears status following the disposal of a portion of the underlying pool of receivables in October 2022. The disposed portfolio was mostly comprised of accounts with less than 3 months in arrears and had an outstanding balance of about EUR 65.9 million as of September 2022. The proceeds deriving from the portfolio sale accounted for EUR 54.5 million, representing 83% of the disposed outstanding balance as of September 2022.
-- Transaction liquidating structure: The principal on the Class P and Class Z notes is paid only after the Class A notes have been redeemed in full. The Class P notes may receive principal repayment before a redemption of the Class A notes in the event of a portfolio sale and interest rate cap reductions. Out of the EUR 54.5 million proceeds deriving from the portfolio sale, EUR 3.6 million were used within October 2022 interest payment date to pay down the principal on the Class P in line with the provisions outlined in the transaction documents.
-- Liquidity: The transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A notes and senior fees. The cash reserve target amount is equal to the greater of (1) 5.5% of the outstanding balance of the Class A notes; and (2) 0.25% of the initial amount of the Class A notes. According to the October 2022 investor report, the Class A reserve was fully funded and had an outstanding balance of EUR 4.7 million.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

According to the latest investor report dated 24 October 2022, the outstanding principal amounts of the Class A notes, Class P notes, and Class Z notes were equal to EUR 31.6 million, EUR 28.8 million, and EUR 195.9 million, respectively. The balances of the Class A and Class P notes have amortised by 79.4% and 11.3% since issuance, respectively. The current aggregated transaction balance is EUR 256.2 million.

As of September 2022 collection date, the transaction was performing above the administrator’s initial expectations. The actual cumulative gross collections were equal to EUR 136.2 million, including EUR 54.5 million in proceeds from the disposal, whereas the administrator’s initial business plan estimated cumulative gross collections of EUR 109.9 million for the same period. Therefore, as of September 2022, the transaction was overperforming by 23.9% compared with the business plan expectations. Excluding the proceeds deriving from the portfolio sale, the transaction would have been underperforming the administrator’s initial expectations by 25.7% in line with the levels observed since December 2021.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 9.7 million in the A (sf) stressed scenario for the same period.

Excluding actual collections, the administrator’s expected future collections from October 2022 account for EUR 233.8 million. In a declining interest rate scenario, the updated DBRS Morningstar AA (low) (sf) rating stresses assume a haircut of 70.4% to the administrator’s executed business plans, considering future expected collections. DBRS Morningstar notes that the class A notes pass higher rating stress scenarios, but the rating considers the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

The final maturity date of the transaction is 26 January 2060.

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 rating 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 administrator, and U.S. Bank Global Corporate Trust which comprise, in addition to the information received at issuance, the investor report as of October 2022; the loan-by-loan report as of September 2022; and performance data 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 23 November 2021, when DBRS Morningstar confirmed its rating on the Class A notes at A (sf) 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 to the parameters used to confirm the ratings (the base case):

-- Recovery rates used: Cumulative base case recovery amount (declining interest rate scenario) of approximately EUR 69.2 million at the AA (low) (sf) 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 AA (low) (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 AA (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: 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.

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: 23 November 2020

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

-- Rating European Nonperforming Loans Securitisations (6 May 2022),
https://www.dbrsmorningstar.com/research/396256/rating-european-nonperforming-loans-securitisations.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (19 May 2022),
https://www.dbrsmorningstar.com/research/397033/master-european-structured-finance-surveillance-methodology.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (7 October 2022), https://www.dbrsmorningstar.com/research/403744/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- European CMBS Rating and Surveillance Methodology (17 December 2021), https://www.dbrsmorningstar.com/research/389947/european-cmbs-rating-and-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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: 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.