Press Release

DBRS Morningstar Places Credit Ratings on LSF11 Boson Investments S.à.r.l. (Compartment 2) Under Review with Negative Implications

Nonperforming Loans

December 08, 2023

DBRS Ratings GmbH (DBRS Morningstar) placed its A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (sf) credit ratings on the Class A1, Class A2, Class B, and Class C notes, respectively, issued by LSF11 Boson Investments S.à.r.l. (Compartment 2) (the Issuer) Under Review with Negative Implications (UR-Neg.).

The credit ratings on the Class A1 and Class A2 notes (together, the Class A notes) address the timely payment of interest and the ultimate repayment of principal by the legal final 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 payments of Additional Note Payments (as defined in the transaction documents). DBRS Morningstar does not rate the Class D or Class P notes (together with the rated notes, the notes) also issued in this transaction.

The notes are collateralised by a pool of secured Spanish nonperforming loans (NPLs) and real estate owned assets (REOs) originated by Banco de Sabadell S.A (Sabadell) and acquired by Lone Star from Sabadell via one of its subsidiaries, LSF11 Boson Investments S.à.r.l. (Compartment 1) (formerly LSF113 S.à.r.l.; the transferor) in December 2020 (the original purchase date). In July 2021, Sabadell and the transferor also entered into a subparticipation agreement in respect of certain nonaccelerated loans included in the portfolio. The transferor allocated all its contractual positions to the Issuer in 2021. As of the July 2021 cut-off date, the gross book value of the loan pool was approximately EUR 626.8 million and the total outstanding balance of the subparticipated loans was EUR 21.7 million. The total real estate value (REV) backing the portfolio amounted to EUR 564.9 million and mostly consisted of residential properties situated in Spain (93.8% by REV). About 5.4% of the real estate assets by value were already repossessed as of the cut-off date.

Servihabitat Servicios Inmobiliarios, S.L.U. services the secured loans and REOs. Hudson Advisors Spain, S.L.U. is the asset manager and backup administrator facilitator and, as such, acts in an oversight and monitoring capacity, providing input on asset resolution strategies.

RATING RATIONALE
The UR-Neg. status follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: Assessment of the portfolio recoveries as of 31 October 2023, with a focus on: (1) a comparison of actual gross collections against the servicer’s initial business plan forecast; (2) the collection performance observed over the past months; and (3) a comparison of current performance and DBRS Morningstar’s expectations.
-- Portfolio characteristics: Loan pool composition as of 31 October 2023 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the notes (i.e., the Class A2 notes will begin to amortise following the full repayment of the Class A1 notes unless an enforcement notice has been delivered, the Class B notes will begin to amortise following the full repayment of the Class A2 notes, and the Class C notes will begin to amortise following the full repayment of the Class B notes).
-- Liquidity support: The Class A, Class B, and Class C reserve funds provide liquidity support to the respective classes of notes and currently stand at EUR 8.2 million, EUR 0.3 million, and EUR 0.5 million, respectively (amounts at closing of EUR 11.0 million, EUR 1.0 million, and EUR 1.8 million, respectively, and target amounts equivalent to 5.0%, 8.25%, and 11.0% of the outstanding balances, respectively).
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

Additionally, the Issuer operating expenses account, the Issuer general account, and the REO company (ReoCo) general account are aimed at providing support to both the Issuer and the ReoCo in respect of operating expenses, corporate costs, servicing fees and expenses, and subparticipation fees since inception. The accounts were funded at closing with proceeds from the issuance of the notes at EUR 1.0 million, EUR 2.0 million, and EUR 3.0 million, respectively, and they are replenished on each interest payment date (IPD) for an amount equal to the estimated budget for the following two IPDs. The total balance of the three accounts as of the November IPD was EUR 4.1 million.

According to the latest investor report dated 27 November 2023, the principal amount outstanding on the Class A1, Class A2, Class B, Class C, Class P, and Class D notes was EUR 139.6 million, EUR 20.0 million, EUR 12.0 million, EUR 16.0 million, EUR 2.0 million, and EUR 376.8 million, respectively. The balance of the Class A1 notes has amortised by approximately 30.2% since issuance. The current aggregated transaction balance is EUR 566.4 million.

As of October 2023, the transaction was performing significantly below the servicer’s initial expectations. The actual cumulative net collections (before servicing fees and corporate costs) was EUR 60.4 million, whereas the servicer’s initial business plan estimated cumulative net collections (before servicing fees and corporate costs) of EUR 100.8 million for the same period. Therefore, as of October 2023, the transaction was underperforming by EUR 40.3 million (-40.0%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative net collections (before servicing fees and corporate costs) for the same period of EUR 40.1 million, EUR 41.4 million, EUR 43.2 million, and EUR 43.7 million at the A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (sf) stressed scenarios, respectively. Therefore, as of November 2023, the transaction was above DBRS Morningstar’s initial stressed scenarios.

Pursuant to the requirements set out in the servicing agreement, the updated business plan for the transaction is expected to be released in January 2024. The servicer has been underperforming its executed business plan over the past 12 months.

The UR-Neg. status is based on (1) the current underperformance of the transaction compared with the executed business plan and (2) a material mismatch between the timing assumptions made at issuance and the actual performance of the portfolio. During the Under Review period, DBRS Morningstar will assess the expected updated business plan due in January 2024 and the changes from previous expectations in detail, which may result in changes to its stressed assumptions.

The final maturity date of the transaction is 30 November 2060.

DBRS Morningstar’s credit rating on the rated 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 do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents 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” 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 servicer, and Citibank, N.A., which comprise, in addition to the information received at issuance, the investor report as of November 2023 and the quarterly servicer report as of October 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 9 December 2022, when DBRS Morningstar confirmed its credit ratings on the Class A1, Class A2, Class B, and Class C notes at A (low) (sf), BBB (high) (sf), BB (high) (sf), and BB (sf), respectively, and changed the trends on the credit rating to Stable from Negative.

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.

These credit ratings are UR-Neg. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. Sensitivity analysis is not applicable.

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: 9 December 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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