DBRS Morningstar Assigns Ratings to Clavel Residential 2 DAC

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to the following classes of notes issued by Clavel Residential 2 DAC (the Issuer):

-- Class A Notes at AA (high) (sf)
-- Class B Notes at A (sf)
-- Class C Notes at BBB (high) (sf)
-- Class D Notes at BB (high) (sf)
-- Class E Notes at B (sf)
-- Class F Notes at CCC (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the final maturity date in 2076. The ratings on the Class B, Class C, Class D, Class E, and Class F Notes (together with the Class A Notes, the rated notes) address the ultimate payment of interest and the ultimate repayment of principal on or before the final maturity date. DBRS Morningstar did not assign ratings to the Class RFN, Class Z1, Class Z2 and Class X Notes (together with the rated notes, the notes) also issued in the transaction. All the notes except for the Class RFN and Class X Notes are collateralised (the collateralised notes). The ratings on the rated notes do not address the likelihood of receipt of any net weighted-average (WA) coupon (WAC) additional amounts.

The Issuer will use proceeds from the issuance of the rated notes to pay various fees and expenses and to purchase a series of unitranche bonds (the fondo de titulización (FT) purchaser bonds), issued by a Spanish securitisation fund (FT Lantana or the FT purchaser), which are backed by a portfolio of reperforming Spanish residential mortgage loans represented by mortgage transfer certificates. FT Lantana transfers the FT purchaser bonds to the seller, and subsequently, the seller transfers them to the Issuer on the closing date.

Banco Santander SA (Banco Santander), Banesto SA (Banesto), and Banco Popular, S.A. (Banco Popular) (together, the originators) originated the mortgage loans. In April 2013, Banesto was integrated into Banco Santander and in June 2017, Banco Santander announced the acquisition of Banco Popular, which became effective in October 2018.

The notes will be paid sequentially following the principal priority of payments, which provides the notes with credit enhancement in the form of subordination. A reserve fund (RF), set up at closing, will provide liquidity support to the rated notes. At closing, the RF balance will amount to 2.0% of the initial balance of the collateralised notes. The RF is split into a liquidity reserve fund (LRF) and a nonliquidity reserve fund (NLRF).

The LRF will provide liquidity support to the Class A Notes in case of an interest shortfall and is also available to cover senior expenses and payments on the interest rate (IR) cap. The RF will be equal to 2.0% of the outstanding balance of the Class A Notes and will be floored at 1.0% of the Class A Notes’ initial balance.

The NLRF will provide liquidity support to the rated notes in case of an interest shortfall and will clear principal deficiency ledger balances on the Class A to Class F Notes’ subledgers. The NLRF required amount is equal to the RF required amount less the LRF required amount. The excess from the NLRF will become part of the available principal funds when all the rated notes are redeemed.

Furthermore, the transaction benefits from a yield supplement overcollateralisation (YSO) release amounting to 10% of the portfolio at the closing date. This YSO will provide additional liquidity support to the notes.

The rated notes will pay interest linked to three-month Euribor on a quarterly basis. Following the payment date in April 2025 (the step-up date), the margin payable on the rated notes will increase.

Banco Santander is acting as the primary servicer and Aktua Soluciones Financieras Holdings, SL, the Spanish subsidiary of Intrum Ireland Limited, will act as the special servicer, carrying out the management of loans in arrears for more than 150 days.

Banco Santander is also acting as the collection account bank. Banco Santander will transfer the mortgage loan collections to an account in the name of the FT Purchaser at Banco Santander within two business days of receipt. All borrower payments under the mortgage loans will be held in this account until the FT purchaser bonds make payments to the Issuer four days before each payment date. The transaction contains downgrade provisions relating to the account bank whereby, if Banco Santander is downgraded below “A”, the Issuer will replace the collection account bank. The downgrade provisions are consistent with DBRS Morningstar’s criteria for the AA (high) (sf) rating assigned to the Class A Notes in this transaction.

Elavon Financial Services DAC (Elavon) is the Issuer account bank, custodian, and paying agent for this transaction. DBRS Morningstar privately rates Elavon and concluded that Elavon meets its minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to the Issuer account bank whereby, if Elavon is downgraded below “A”, the Issuer will replace the Issuer account bank. The downgrade provisions are consistent with DBRS Morningstar’s criteria for the AA (high) (sf) rating assigned to the Class A Notes in this transaction.

BNP Paribas SA (BNP Paribas; rated AA (low) with a Stable trend by DBRS Morningstar) will provide an IR cap with a strike rate that starts at 3.0% and increases over time. DBRS Morningstar concluded that BNP Paribas meets its minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to the IR cap provider. The downgrade provisions are consistent with DBRS Morningstar’s criteria for the AA (high) (sf) rating assigned to the Class A Notes in this transaction.

DBRS Morningstar was provided with a portfolio equal to EUR 537.1 million as of 30 September 2022 (the cut-off date), which consisted of 5,021 loans extended to 4,623 main borrowers. Of the portfolio balance, 99.9% of the loans were restructured while, as of the cut-off date, 80.7% were performing, 10.7% were no more than one month in arrears, 8.4% were between one and three months in arrears, and 0.2% were more than three months in arrears. However, there will be no loans at 90+ days past due (DPD) payment as of 31 October 2022, following exclusions from the portfolio which would have otherwise breached certain representations and warranties.

DBRS Morningstar assessed the historical performance of the mortgage loans and factored restructuring arrangements into its analysis by selecting a portfolio score of “Low” in its European RMBS Insight Model.

The WA seasoning of the portfolio is 11.8 years whereas the WA remaining term is 23.4 years. The WA original loan-to-value (LTV) ratio stands at 76.3% while the WA indexed current LTV is 64.1%. DBRS Morningstar also considered the latest valuations provided by the Issuer in its analysis, which would increase the WA indexed LTV of the portfolio to 94.6%.

Currently, 92.0% of the portfolio comprises floating-rate loans linked to 12-month Euribor while 7.5% is linked to other Spanish indices. The remaining 0.5% of the portfolio comprises fixed-rate loans. The notes are floating rate linked to three-month Euribor. Any basis risk mismatch will remain unhedged. DBRS Morningstar took basis risk into account in its cash flow analysis.

Loans corresponding to 24.4% of the total amount are currently in their grace period, with deferred principal payments and reduced IRs. DBRS Morningstar considered these in its assessment.

During the first three years, some delinquent loans (150+ days DPD) may be repurchased from the portfolio at a discount. DBRS Morningstar considers that the risk of a repurchase on some loans below par is partially mitigated by the fact that more than 90% of the loans would suffer a loss of less than 30% if they were repurchased this way, which is lower than DBRS Morningstar's loss given default (LGD) assumption in the B (low) (sf) scenario.

In its role as servicer, Banco Santander can renegotiate with the borrower the terms of any loan that is less than five months in arrears, without the Issuer's authorisation, subject to the satisfaction of certain conditions. Permitted variations are limited to margin reduction and maturity extension. Furthermore, there is a limit of 10.0% of the initial balance in terms of maturity extension. DBRS Morningstar considered the optionality in its analysis by extending the maturity and decreasing the margin for some loans in its cash flow analysis.

RATING RATIONALE
DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar received historical mortgage performance data as well as loan-level data for the mortgage portfolio. DBRS Morningstar calculated probability of default (PD), LGD, and expected loss levels on the mortgage portfolio, which it uses as inputs in the cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum”.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay the noteholders according to the terms and conditions in the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker. DBRS Morningstar considered additional sensitivity scenarios of 0% conditional repayment rate stress.
-- The transaction parties’ financial strength to fulfil their respective roles and the structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology as well as the appropriate legal opinions that address the assignment of the assets to the Issuer.
-- DBRS Morningstar’s sovereign rating on the Kingdom of Spain of “A” with a Stable trend as of the date of this press release.

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).

Notes:
All figures are in Euros unless otherwise noted.

The principal methodologies applicable to the ratings are: “European RMBS Insight: Spanish Addendum” (26 April 2022) and European RMBS Insight Methodology (28 March 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.

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 historical performance data from April 2017 up to September 2022 and loan-level data as at 30 September 2022, provided by the arranger.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):

-- In respect of the Class A Notes, the PD of 57.9% and LGD of 49.7%, corresponding to a AA (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class B Notes, the PD of 51.1% and LGD of 43.2%, corresponding to an “A” (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class C Notes, the PD of 45.3% and LGD of 37.9%, corresponding to a BBB (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class D Notes, the PD of 36.8% and LGD of 34.7%, corresponding to a BB (high) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class E Notes, the PD of 27.6% and LGD of 31.8%, corresponding to a B (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.
-- In respect of the Class F Notes, the PD of 18.8% and LGD of 27.1%, corresponding to a CCC (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD.

Class A Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to A (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).

Class B Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to BBB (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to B (high) (sf).

Class C Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to BB (low) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to BB (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to BB (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to BB (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to B (low) (sf).

Class D Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to B (high) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to B (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to CCC (sf).

Class E Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to B (low) (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to NR.

Class F Notes Risk Sensitivity:
-- A hypothetical increase of the PD of 25%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 50%, ceteris paribus, would lead to a downgrade to NR.
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the LGD of 50%, ceteris paribus, would lead to a downgrade to CCC (sf).
-- A hypothetical increase of the PD of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to NR.
-- A hypothetical increase of the PD of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to NR.
-- A hypothetical increase of the PD of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to NR.
-- A hypothetical increase of the PD of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to NR.

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: Tomas Rodriguez-Vigil Junco, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 15 December 2022

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
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: https://www.dbrsmorningstar.com/about/methodologies.

-- European RMBS Insight: Spanish Addendum (26 April 2022),
https://www.dbrsmorningstar.com/research/395805/european-rmbs-insight:-spanish-addendum.
-- European RMBS Insight Methodology (28 March 2022) and European RMBS Insight model v 5.7.1.0,
https://www.dbrsmorningstar.com/research/394309/european-rmbs-insight-methodology.
-- 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-approachtoenvironmental-social-and-governance-risk-factors-in-credit-ratings.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.

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.