Press Release

DBRS Morningstar Confirms Credit Ratings on PRPM Lagado 2022-1 DAC With Stable Trends

Nonperforming Loans

October 26, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit ratings on the following notes issued by PRPM Lagado 2022-1 DAC (the Issuer):

-- Class A at AA (low) (sf)
-- Class B at A (sf)

All trends are Stable.

The transaction represents the issuance of the Class A, Class B, and Class Z notes (collectively, the notes). The credit 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. The credit rating on the Class B notes addresses the ultimate payment of interest and principal. DBRS Morningstar’s credit ratings do not address additional note payments (as defined in the transaction documents). DBRS Morningstar does not rate the Class Z notes.

Various financial institutions, including GE Capital Woodchester Home Loans Limited; Bank of Scotland Ireland; Irish Nationwide Building Society; Anglo Irish Bank; KBC Bank; Allied Irish Banks, p.l.c.; and Danske Bank A/S (together, the original lenders), originated the portfolio. The original lenders sold the loans in various closings to vehicles controlled by different investment funds between 2012 and 2018 (the original acquisitions). Subsequently, in 2020 and 2021, these investment funds sold the loans to the current transaction’s seller and, consequently, this is considered a secondary trade transaction.

The portfolio’s total gross book value as of the 31 July 2022 cut-off date was EUR 690.5 million, composed mainly of secured residential loans held by individuals.

After the original acquisitions, Pepper Finance Corporation (Ireland) DAC (Pepper) conducted the servicing and administration activities and remained administrator after closing. Mars Capital Finance Ireland DAC (Mars) also entered into an administration agreement with the Issuer at closing and acts as backup servicer to the transaction. In July 2023, 526 loans were migrated to Mars Capital Finance Ireland DAC.

CREDIT RATING RATIONALE
The credit rating confirmations follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of the portfolio recoveries as of June 2023, 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 past six months; and (4) a comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: The loan pool composition as of June 2023 and the evolution of its core features.
-- Transaction liquidating structure: The order of priority, which 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). Class B interest will be subordinated to principal payments on the Class A Notes if a Class B subordination event occurs, defined as the cumulative collection ratio and the net present value (NPV) ratio falling below 90%.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure and covering potential interest shortfall on the Class A notes. The cash reserve target balance equal to 6.2% of the Class A Notes’ balance at closing and with a variable target schedule for the first 12 IPDs and 4.0% thereafter. It is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report dated July 2023, the outstanding principal amounts of the Class A, Class B, and Class Z notes were EUR 114.5 million, EUR 15.0 million, and EUR 40.0 million, respectively. As of July 2023, the balance of the Class A notes had amortised by 12.9% since issuance and the current aggregated transaction balance was EUR 169.5 million.

As of the June 2023 collection date, the transaction was performing below the administrator’s initial expectations. The actual cumulative gross collections were EUR 24.5 million whereas the administrator’s initial business plan estimated cumulative gross collections of EUR 31.6 million for the same period. Therefore, as of June 2023, the transaction was underperforming by 22.4% compared with the business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 7.9 million at the AA (low) (sf) and EUR 8.0 million at A (sf) stressed scenarios for the same period. Therefore, as of June 2023, the transaction was performing significantly above DBRS Morningstar’s initial AA (low) (sf) and A (sf) stressed scenarios with respect to the initial credit ratings of the notes.

Excluding actual collections, the administrator’s expected future collections from July 2023 account for EUR 306.9 million. In a declining interest rate scenario, the updated DBRS Morningstar AA (low) (sf) and A (sf) rating stresses assume a haircut of 44.8% and 38.9% to the administrator’s executed business plan, respectively, considering future expected collections.

The final maturity date of the transaction is October 2075.

DBRS Morningstar’s credit rating on the Class A and Class B notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit rating provides opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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 www.dbrsmorningstar.com/research/416784.

DBRS Morningstar analysed the transaction structure using 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” (22 October 2023), https://www.dbrsmorningstar.com/research/422281/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 credit 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/421590/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 credit ratings include the Issuer, U.S. Bank Global Corporate Trust, Pepper Finance Corporation (Ireland) DAC and Mars Capital Finance Ireland DAC, which comprise, in addition to the information received at issuance, the investor report as of July 2023; the loan-by-loan report as of June 2023; and performance data as September 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 credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

This is the first credit rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Pablo Iturriaga.

Information regarding DBRS Morningstar credit 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 credit ratings (the base case):

-- Recovery rates used: Cumulative base case recovery amount (declining interest rate scenario) of approximately EUR 169.4 million and EUR 187.6 million at the AA (low) (sf) and A (sf) levels, 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 downgrade of the Class A notes to A (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to 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 BBB (high) (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 BBB (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://registers.esma.europa.eu/cerep-publication/. 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 credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Iturriaga, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 4 November 2022

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The credit 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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