Press Release

DBRS Morningstar Confirms Rating of BBB (low) (sf) with a Negative Trend on Hestia Financing S.a r.l.

Nonperforming Loans

June 06, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (low) (sf) rating on the Class A notes issued by Hestia Financing S.a r.l. (the Issuer). The trend on the rating remains Negative.

The transaction represents the issuance of Class A and Class Z notes (collectively, the Notes). The rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal. DBRS Morningstar does not rate the Class Z notes.

As of September 2019, the total claimable amount of the portfolio was approximately EUR 2.2 billion. Most of the portfolio relates to nonperforming loans (NPLs) secured over real estate collateral, with a total Open Market Value (OMV) of EUR 1.7 billion including only first-lien properties.

The portfolio was sold by Bank of Cyprus (BoC) to Oxalis Holding S.à r.l. (Oxalis or the Risk Retention Holder). After a three-month transitional period during which BoC serviced the assets, the portfolio is now serviced by a newly established servicer, Themis Portfolio Management Ltd (Themis), which is wholly owned by the vehicle holding the assets, Themis Portfolio Management Holdings Limited, a Cypriot Credit Acquiring Company (the CyCAC).

RATING RATIONALE
The rating confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 31 March 2023, focusing on: (1) a comparison between actual collections and the Servicer’s 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 Servicer’s updated business plan as of September 2022, received in March 2023, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of March 2023 and the evolution of its core features since issuance.
-- Cash Sweep Event: If a Cash Sweep Event occurs, then the transaction benefits from a sequential amortisation where the Class Z notes will begin to amortise following the full repayment of the Class A notes. In the event of a cash sweep, the transaction also benefits from a liquidating structure where interest on the Class Z notes is subordinated to principal payments on the Class A notes. If no Cash Sweep Event occurs, then only 80% of the available funds will be used to repay the Class A notes and the rest will be used to pay junior servicing fees, interest, and principal on the Class Z notes. A Cash Sweep Event occurred on the April 2023 interest payment date (IPD), being principal amount outstanding of the Class A Notes greater than the Target Note Amount in respect of such IPD.
-- Liquidity support: The transaction benefits from an amortising Class A reserve fund that provides liquidity support to the Class A notes, and principal support to the Class A notes at maturity, if available. The cash reserve target amount is equal to 4.5% of the Class A notes’ principal outstanding balance. It is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from April 2023, the outstanding principal amounts of the Class A and Class Z notes were EUR 337.9 million and EUR 1,721.7 million, respectively. As of the April 2023 payment date, the balance of the Class A notes had amortised by 28.9% since issuance and the current aggregated transaction balance is EUR 2,059.6 million.

As of March 2023, the transaction was performing below the Servicer’s initial business plan expectations. The actual cumulative gross collections equalled EUR 292.9 million whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 483.8 million for the same period. Therefore, as of March 2023, the transaction was underperforming by EUR 190.9 million (-39.5%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of EUR 261.7 million at the BBB (low) (sf) stressed scenario. Therefore, as of March 2023, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the receivable servicing agreement, in March 2023, the Servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of EUR 230.4 million as of September 2022, results in a total of EUR 1,054.2 million, which is 2.2% lower than the total gross disposition proceeds of EUR 1,078.5 million estimated in the initial business plan. Excluding actual collections, the Servicer’s expected future collections from January 2023 amount to EUR 781.2 million. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 33.3% to the Servicer’s updated business plan, considering future expected collections.

The final maturity date of the transaction is December 2066.

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 rating 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.

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 this rating include the Issuer and Themis, which comprise, in addition to the information received at issuance, the investor reports as of January 2023 and April 2023; the updated business plan as of September 2022; the quarterly servicer reports as of December 2022 and March 2023; and the quarterly loan-by-loan information as of December 2022.

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

At the time of the initial rating, 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 this rating 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 13 December 2021 when DBRS Morningstar finalised its rating on the Class A notes at BBB (low) (sf) with a Negative trend.

The lead analyst responsibilities for this transaction have been transferred to William Taliento.

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 520.6 million at the BBB (low) (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 confirmation on the Class A notes at BBB (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade on the Class A notes to BB (sf).

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Willian Taliento, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 5 November 2021

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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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