Press Release

DBRS Morningstar Upgrades and Confirms Credit Ratings on Rathlin Residential 2021-1 DAC, Maintains Stable Trends

Nonperforming Loans

October 27, 2023

DBRS Ratings GmbH (DBRS Morningstar) took the following credit rating actions on the notes issued by Rathlin Residential 2021-1 DAC (the Issuer):

-- Class A Notes upgraded to A (sf) from A (low) (sf)
-- Class B Notes confirmed at BB (sf)
-- Class C Notes confirmed at B (sf)

All trends are Stable.

The transaction represents the issuance of Class A, Class B, Class C, Class Z1, and Class Z2 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 final legal maturity date. The credit ratings on the Class B and Class C Notes address the ultimate payment of interest and principal. DBRS Morningstar’s credit ratings do not address payment of additional note payments (as defined in the transaction documents). DBRS Morningstar does not rate the Class Z1 or Class Z2 notes.

The Issuer used proceeds from the issuance of the notes to purchase a first-charge portfolio composed of nonperforming, semiperforming, and reperforming Irish residential mortgage loans originated by Ulster Bank Ireland DAC with a total outstanding balance of EUR 645.7 million as of 31 July 2021 (the portfolio).

Pepper Finance Corporation (Ireland) DAC (the administrator) conducts the servicing and administration of the portfolio.

CREDIT RATING RATIONALE
The credit rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: Assessment of the portfolio recoveries as of August 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 last six months, and (4) a comparison between current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: The loan pool composition as of August 2023 and the evolution of its core features, including the portfolio breakdown by arrears status and the observed increase in the share of reperforming loans since issuance.
-- Transaction liquidating structure: 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, the Class C Notes will amortise following the full repayment of the Class B Notes, and the Class Z1 and the Class Z2 notes will begin to amortise following the full repayment of all the rated notes—except for cases in which the Class Z1 notes may receive amounts from interest rate cap reductions). Additionally, the repayment of interest on the Class B Notes is fully subordinated to the repayment of both interest and principal on the Class A Notes, and the repayment of interest on the Class C Notes has a lower ranking to the payments due on the Class B Notes.
-- Liquidity support: The transaction benefits from a liquidity structure that entails the existence of three reserve funds available to mitigate temporary collection shortfalls on the payment of (1) senior costs and interest on the Class A Notes, (2) interest on the Class B Notes, and (3) interest on the Class C Notes.

TRANSACTION AND PERFORMANCE
According to the latest investor report dated September 2023, the principal amounts outstanding on the Class A, Class B, Class C, Class Z1, and Class Z2 notes were equal to EUR 184.7 million, EUR 24.5 million, EUR 14.5 million, EUR 27.7 million, and EUR 248.9 million, respectively. The balance of the Class A and Class Z1 notes amortised by approximately 41.9% and 25.4%, respectively, since issuance. The current aggregated transaction balance is equal to EUR 500.3 million.

As of August 2023, the transaction was performing better than the administrator’s initial expectations. The actual cumulative gross collections were equal to EUR 143.5 million whereas the administrator’s initial business plan estimated cumulative gross collections of EUR 72.1 million for the same period.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 39.2 million in the A (low) (sf) stressed scenario, EUR 42.9 million in the BB (sf) stressed scenario, and EUR 46.5 million in the B (sf) stressed scenario for the same period.

Excluding actual collections, the administrator’s expected future collections from September 2023 account for EUR 481.8 million. In a declining interest rate scenario, the updated DBRS Morningstar A (sf), BB (sf), and B (sf) credit rating stresses assume a haircut of 48.1%, 38.2%, and 35.1% to the administrator’s executed business plans, respectively, considering future expected collections.

The transaction benefits from three reserve funds to support liquidity shortfalls on senior costs, interest due in relation to the rated notes, and, ultimately, the repayment of principal on the rated notes, if available:
-- The Class A reserve fund, which was fully funded at closing to an initial amount equal to 4.0% of the Class A Notes’ balance and amortises based on the same;
-- The Class B reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 7.5% of the Class B Notes’ balance; and
-- The Class C reserve fund, which does not amortise and was fully funded at closing to an initial amount equal to 11.0% of the Class C Notes’ balance.

Credits to the Class B and Class C reserves are made outside the waterfall based on the proceeds of the interest rate cap allocated proportionately to the respective size of the Class B and Class C Notes relative to the cap notional.

According to the September 2023 investor report, the Class A reserve was fully funded, the Class B reserve had an outstanding balance of EUR 0.6 million, and the Class C reserve had an outstanding balance of EUR 0.3 million.

The final maturity date of the transaction is 27 November 2075.

DBRS Morningstar’s credit ratings on the Class A, Class B, and Class C Notes address 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 credit 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 credit 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, the administrator, and U.S. Bank Global Corporate Trust, which comprise, in addition to the information received at issuance, the investor report as of September 2023, the loan-by-loan report as of August 2023, and detailed performance data as of August 2023.

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

At the time of the initial credit 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.

The last credit rating action on this transaction took place on 28 October 2022, when DBRS Morningstar confirmed its credit ratings on the Class A, Class B, and Class C Notes at A (low) (sf), BB (sf), and B (sf), respectively, and changed the trends to Stable from Negative on all classes of notes.

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

-- Recovery rates used: Cumulative base case recovery amount (declining interest rate scenario) of approximately EUR 249.9 million, EUR 297.8 million, and EUR 312.6 million at the A (sf), BB (sf), and B (sf) stress levels, 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 maintain the credit rating 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 downgrade of the Class A Notes to BBB (high) (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 BB (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 below B (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class C Notes below B (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade of the Class C Notes below B (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: Alfonso Candelas, Senior Vice President
Initial Rating Date: 28 October 2021

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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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