Press Release

DBRS Morningstar Confirms Rating on Class A Notes and Upgrades Ratings on Class B Notes Issued by Hefesto STC, S.A. (Project Guincho); Maintains Stable Trends

Nonperforming Loans

March 20, 2023

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

The trends on all classes of notes remain Stable.

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 servicers). In May 2021, Whitestar took over management of the unsecured positions from Proteus Asset Management, Unipessoal, Lda.

RATING RATIONALE
The confirmation and upgrade follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 31 October 2022, focusing on: (1) a comparison between actual collections and the servicers’ initial business plan forecast; (2) the collection performance observed over recent months; and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Updated business plan: The servicers’ updated business plan as of October 2022, received in January 2023, and the comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of October 2022 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 2022 interest payment date, at which time the actual figures were 100.4% and 158.3%, 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.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

According to the latest investor report from November 2022, the outstanding principal amounts of the Class A, Class B, Class J, and Class R notes were EUR 10.7 million, EUR 14.0 million, EUR 25.0 million, and EUR 0.4 million, respectively. As of the November 2022 payment date, the balance of the Class A notes had amortised by approximately 87.2% since issuance and the current aggregated transaction balance was EUR 50.1 million.

As of October 2022, the transaction was performing below the servicers’ business plan expectations. The actual cumulative gross collections equalled EUR 99.6 million whereas the servicers’ initial business plan estimated cumulative gross collections of EUR 112.9 million for the same period. Therefore, as of October 2022, the transaction was underperforming by EUR 13.3 million (-11.8%) compared with the initial business plan expectations. The cumulative collection ratio (net of recovery expenses), slightly above the unit, signals that the underperformance in terms of gross collections was offset by costs containment as compared to the servicers’ initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 67.8 million at the BBB (low) (sf) stressed scenario and of EUR 91.6 million at the CCC (sf) stressed scenario. Therefore, as of October 2022, the transaction was overperforming compared with DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in January 2023, the servicers delivered an updated portfolio business plan. The updated portfolio business plan combined with the actual cumulative gross collections of EUR 99.6 million as of October 2022 resulted in a total of EUR 160.3 million, which is 2.6% higher than the total gross disposition proceeds of EUR 156.2 million estimated in the initial business plan. Excluding actual collections, the servicers’ expected future collections from November 2022 account for EUR 60.7 million. The updated DBRS Morningstar A (sf) and B (high) (sf) rating stresses assume haircuts of 55.6% and 45.3%, respectively, to the servicers’ updated business plan, considering future expected collections. The Class A notes may pass higher rating stress scenarios; however, DBRS Morningstar believes that higher ratings would not be commensurate with the risk of the transaction considering the potential higher variability of NPLs’ cash flows, the exposure to the transaction account bank, and the downgrade provisions outlined in the transaction documents.

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

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 21 December 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/407678/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-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.

DBRS Morningstar analysed the transaction structure in 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” (7 February 2023), Master European Structured Finance Surveillance Methodology | DBRS Morningstar.

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 surveillance section of 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, Whitestar, HG PT, and Citibank, N.A. which comprise, in addition to the information received at issuance, the investor report as of November 2022; the semiannual servicers reports as of October 2022; the loan-by-loan report as of October 2022; and the updated business plan received in January 2023.

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 22 March 2022, when DBRS Morningstar upgraded its rating on the Class A notes to A (sf) from BBB (high) (sf), confirmed its rating on the Class B notes at CCC (sf), and changed the trends on both classes of notes to Stable from Negative.

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):

-- Recovery rates used: Cumulative base case recovery amount of approximately EUR 27.0 million and EUR 33.2 million at the A (sf) and B (high) (sf) stress level, respectively, 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 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 at 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 B 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 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: 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: 13 November 2018

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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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