Press Release

DBRS Morningstar Confirms Credit Rating on European Residential Loan Securitisation 2020-NPL1 DAC with Stable Trend

Nonperforming Loans

November 10, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit rating on the Class A Notes issued by European Residential Loan Securitisation 2020-NPL1 DAC (the Issuer) at AA (low) (sf) with a Stable trend.

The transaction represents the issuance of Class A, Class P, 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. DBRS Morningstar does not rate the Class P or Class Z Notes.

At issuance, the Notes were backed by a EUR 381.8 billion by gross book value portfolio consisting of first-charge nonperforming Irish residential mortgage loans originated by Permanent TSB p.l.c.

Start Mortgages DAC (the administrator) services the receivables. Hudson Advisors Ireland DAC operates as the Issuer administration consultant and, as such, acts in an oversight and monitoring capacity and offers input into asset resolution strategies.

CREDIT RATING RATIONALE
The credit rating action follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of the portfolio recoveries as of 30 September 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 September 2023 and the evolution of its core features, including the portfolio breakdown by arrears status following the disposal of a portion of the underlying pool of receivables in September 2022. The disposed portfolio mostly comprised accounts less than three months in arrears and had an outstanding balance of about EUR 65.9 million as of September 2022. The proceeds from the portfolio sale accounted for EUR 54.5 million, representing 83% of the disposed outstanding balance as of September 2022.
-- Transaction liquidating structure: The principal on the Class P and Class Z Notes is paid only after the Class A Notes have been redeemed in full. The Class P Notes may receive principal repayment before a redemption of the Class A Notes in the event of a portfolio sale and interest rate cap reductions. Of the EUR 54.5 million proceeds from the portfolio sale, the Issuer used EUR 3.6 million on the September 2022 interest payment date to pay down the principal on the Class P Notes in line with the provisions outlined in the transaction documents.
-- Liquidity support: The transaction benefits from an amortising cash reserve providing liquidity to the structure, covering potential interest shortfalls on the Class A Notes and senior fees. The cash reserve target amount is equal to the greater of (1) 5.5% of the outstanding balance of the Class A Notes and (2) 0.25% of the initial amount of the Class A Notes. According to the October 2023 investor report, the Class A reserve was fully funded and had an outstanding balance of EUR 0.4 million.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

TRANSACTION AND PERFORMANCE
According to the latest investor report dated 24 October 2023, the principal amounts outstanding on the Class A, Class P, Class Z Notes were EUR 4.1 million, EUR 28.8 million, EUR 195.9 million, respectively. The balance of the Class A and Class P Notes amortised by approximately 97.4% and 11.3%, respectively, since issuance. The current aggregated transaction balance is EUR 228.7 million.

As of September 2023, the transaction was performing better than the administrator’s initial expectations. The actual cumulative gross collections were EUR 163.0 million whereas the administrator’s initial business plan estimated cumulative gross collections of EUR 129.6 million for the same period.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 68.5 million in the A (sf) stressed scenario for the period from issuance to September 2023.

Excluding actual collections, the administrator’s expected future collections from October 2023 account for EUR 214.2 million. In a declining interest rate scenario, the updated DBRS Morningstar AA (low) (sf) credit rating stresses assume a haircut of 74.6% to the administrator’s executed business plans, considering future expected collections. DBRS Morningstar notes that the Class A Notes may pass higher credit rating stress scenarios, but the credit rating considers the exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

The final maturity date of the transaction is 26 January 2060.

DBRS Morningstar’s credit rating on the Class A Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Class Balance.

DBRS Morningstar’s credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the rating on the Class A Notes does not address 1.5% Additional Note Payments accruing from and including the Additional Note Payment Date.

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 October 2023, the loan-by-loan report as of September 2023, and detailed performance data as of September 2023.

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

At the time of the initial credit rating, 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 rating 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 23 November 2022, when DBRS Morningstar upgraded its credit rating on the Class A Notes to AA (low) (sf) from A (sf) and changed the trend to Stable from Negative.

The lead analyst responsibilities for this transaction have been transferred to Sijia Aulenbacher.

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

-- 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 AA (low) (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 AA (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://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: Sijia Aulenbacher, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 November 2020

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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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