DBRS Morningstar Confirms Ratings on TAGUS - Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No.3)

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the notes (collectively, the Rated Notes) issued by TAGUS - Sociedade de Titularização de Créditos, S.A. (Ulisses Finance No.3) (the Issuer) as follows:

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

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in June 2039. The ratings on the Class B Notes, Class C Notes, Class D Notes, Class E, and Class F Notes address the ultimate repayment of interest (timely when most senior) and the ultimate repayment of principal by the legal final maturity date.

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the May 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Rated Notes to cover the expected losses at their respective rating levels; and
-- No purchase termination events.

The transaction is a Portuguese securitisation of auto loan receivables granted and serviced by 321 Crédito – Instituição Financeira de Crédito, S.A., a subsidiary of Banco CTT, S.A., after the acquisition that closed in May 2019. The transaction closed in June 2022 and includes an initial 12-month revolving period, which is scheduled to end on the June 2023 payment date (included). As of the May 2023 payment date, the EUR 200.0 million portfolio (excluding defaulted receivables) consisted primarily of loans granted for the purchase of used vehicles (over 99% of the outstanding pool balance).

PORTFOLIO PERFORMANCE
As of the May 2023 payment date, loans that were one to two months and two to three months in arrears represented 0.8% and 0.2% of the portfolio balance, respectively. Gross cumulative defaults represented 0.4% of the original portfolio balance, with cumulative recoveries of 26.7% to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of the receivables and maintained its base case PD assumption at 6.9% and updated its LGD assumption to 53.9%.

CREDIT ENHANCEMENT
The subordination of the junior obligations provides credit enhancement to the Rated Notes. As of the May 2023 payment date, credit enhancement to the Class A, Class B, Class C, Class D, Class E, and Class F Notes was 16.0%, 12.0%, 6.0%, 3.0%, 0.5%, and 0.0%, respectively. Credit enhancement has remained stable due to the revolving period and will continue to be stable due to the pro rata amortisation mechanism, until a sequential redemption event occurs.

The cash reserve account is available to cover senior expenses and interest shortfalls on the Class A Notes, and, if not deferred, on the Class B, Class C, Class D, Class E, and Class F Notes. The cash reserve account was funded at closing with EUR 1.5 million and its required balance is set at 0.8% of the Rated Notes’ balance, subject to a floor of EUR 0.8 million. As of the May 2023 payment date, the cash reserve was at its target level of EUR 1.5 million.

Deutsche Bank AG acts as the account bank for the transaction. Based on DBRS Morningstar's reference rating of
“A” on Deutsche Bank (one notch below its Long Term Critical Obligations Rating of A (high)), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Rated Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Crédit Agricole Corporate & Investment Bank (CACIB) acts as the swap counterparty for the transaction. DBRS Morningstar’s private rating on CACIB is consistent with the ratings assigned to the Rated Notes, as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations

Environmental (E) Factors
The initial portfolio has a high exposure to older petrol and diesel engine vehicles that are unlikely to be classified as Euro 6 as 58.4% of receivables at closing were related to vehicles registered prior to 2016. DBRS Morningstar considers that risks related to greenhouse gas emissions may be associated with future restrictions on these vehicle types, including bans and additional taxes. These risks may lead to changes in expected vehicle valuations and borrower behaviours that could subsequently influence future default, recovery, and prepayment activity. DBRS Morningstar considers that this exposure combined with the longer than typical contract tenors is a relevant environmental factor within its analysis.

There were no Social or 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 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), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 payment reports and investor reports provided by Deutsche Bank and loan-level data provided by European DataWarehouse GmbH.

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 1 June 2022, when DBRS Morningstar finalised its provisional ratings on the Class A, Class B, Class C, Class D, Class E, and Class F Notes at AA (sf), A (high) (sf), BBB (sf), BB (sf), B (sf), and B (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Preben Cornelius Overas.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the pool of loans for the Issuer are 6.9% and 53.9%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to fall to BBB (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to fall to AA (low) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to fall to BB (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD, expected rating of BB (sf)
-- 50% increase in PD, expected rating of B (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)

Class D Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of B (sf)
-- 25% increase in PD, expected rating of BB (low) (sf)
-- 50% increase in PD, expected rating of B (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating below B (low) (sf)

Class E Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in LGD, expected rating below B (low) (sf)
-- 25% increase in PD, expected rating of B (sf)
-- 50% increase in PD, expected rating below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating below B (low) (sf)

Class F Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in LGD, expected rating below B (low) (sf)
-- 25% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating below B (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Preben Cornelius Overas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 17 May 2022

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.

-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- 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.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- 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.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-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.