Morningstar DBRS Takes Credit Rating Actions on Retiro Mortgage Securities DAC

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the notes issued by Retiro Mortgage Securities DAC:

-- Class A2 notes upgraded to A (sf) from BBB (high) (sf) with Stable trend
-- Class B notes upgraded to BBB (sf) from BB (high) (sf) with Stable trend
-- Class C notes confirmed at BB (low) (sf) with Negative trend

The credit rating on the Class A2 notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date. The credit ratings on the Class B and Class C notes address the ultimate payment of interest and principal. DBRS Morningstar does not rate the Class D or Class E notes (together with the rated notes, the notes) also issued in this transaction. The credit rating on the Class A1 notes was discontinued-repaid on 12 February 2024, following the full redemption of the notes.

The notes are collateralised by a portfolio of nonperforming loans (NPLs) and real estate owned (REO) assets. As of November 2020, the balance of the loans was EUR 678.4 million. NPLs represented the vast majority of the portfolio by balance (91.9%), while REOs represented more than half of the portfolio by property valuation. As of December 2023, the balance of the loans was EUR 244.6 million, and aggregate REO valuation amounted to EUR 159.2 million. The portfolio resulted from the aggregation of four subportfolios (Wind, Tag, Normandia, and Tambo) acquired over time by OCM Luxembourg OPPS X S.à r.l., which operates as the sponsor and retention holder in this transaction. Redwood MS Limited (Redwood) and VicAsset Holdings, LLC (VicAsset) act as the master servicers in this transaction.

CREDIT RATING RATIONALE
The credit rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of 31 December 2023, focusing on (1) a comparison between actual collections and the master servicers’ initial business plan forecast; (2) the collection performance observed over recent months; (3) a comparison between the current performance and Morningstar DBRS’ expectations; and (4) the amortisation of the rated notes.
-- Portfolio characteristics: Portfolio composition as of December 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 began to amortise following the full repayment of the Class A1 notes; the Class B notes will begin to amortise following the full repayment of the Class A2 notes unless an enforcement notice has been delivered; and the Class C notes will begin to amortise following the full repayment of the Class B notes). Moreover, interest on the Class B notes is fully subordinated to the repayment of both interest (including Class A additional note payments) and principal on the Class A notes, and interest payments on the Class C notes are subordinated to the repayment of both interest (including Class B additional note payments) and principal on the Class B notes.
-- Liquidity support: The transaction benefits from an amortising liquidity reserve fund available to mitigate temporary collection shortfalls on the payment of senior costs and interest on the Class A notes, and from separate nonamortising Class B and Class C reserve funds providing liquidity support to the respective classes of notes. The liquidity reserve fund target amount is equal to 5.0% of the Class A notes’ principal outstanding balance and was fully funded as of the January 2024 payment date.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.
According to the latest investor report from January 2024, the outstanding principal amounts of the Class A2, Class B, Class C, Class D, and Class E notes were EUR 71.6 million, EUR 34.0 million, EUR 15.0 million, EUR 30.0 million, and EUR 54.0 million, respectively. As of the January 2024 payment date, the Class A1 had fully amortised while the Class A2 notes had amortised by approximately 7.1% since issuance. The current aggregated transaction balance was EUR 204.6 million.

As of December 2023, the transaction was performing below the master servicers’ business plan expectations. The actual cumulative collections (before servicing fees and corporate costs) equalled EUR 295.0 million whereas the master servicers’ initial business plan estimated cumulative collections (before servicing fees and corporate costs) of EUR 436.3 million for the same period. Therefore, as of December 2023, the transaction was underperforming by EUR 141.3 million (-32.4%) compared with the initial business plan expectations. The underperformance relates to the Normandia and Tambo subportfolios.

At issuance, DBRS Morningstar estimated cumulative collections (before servicing fees and corporate costs) for the same period of EUR 173.4 million at the A (sf) stressed scenario, EUR 186.7 million at the BBB (high) (sf) stressed scenario, EUR 211.2 million at the BB (high) (sf) stressed scenario, and EUR 224.8 million at the BB (low) (sf) stressed scenario. Therefore, as of December 2023, the transaction was overperforming compared with Morningstar DBRS’ initial stressed expectations.

Without including actual collections, the master servicers’ expected collections (before servicing fees and corporate costs) from January 2024 are EUR 208.1 million. The updated Morningstar DBRS A (sf), BBB (sf), and BB (low) (sf) rating stresses assume haircuts of 38.8%, 34.2%, and 27.3% to the master servicers’ executed business plans, respectively, considering future expected collections (before servicing fees and corporate costs).

Considering the increased subordination, the Class A2 Notes may pass higher credit rating stress scenarios; however, Morningstar DBRS believes that higher credit ratings would not be commensurate with the risk of the transaction considering the underperformance, potential higher variability of NPLs’ cash flows and the exposure to the transaction account bank and downgrade provisions outlined in the transaction documents.

The final maturity date of the transaction is in July 2075.

Morningstar DBRS’ credit rating on the rated notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated Notes are the related Interest Payment Amounts (excluding any additional note payments accrued from April 2024) and the related Class Balances.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, on this transaction, Morningstar DBRS' ratings do not address the payment of any additional note payments accrued from April 2024.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include the Issuer, Redwood, VicAsset, and Citibank, N.A., which comprise, in addition to the information received at issuance, the investor report as of January 2024 and the loan-by-loan data as of December 2023.

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

At the time of the initial credit rating, Morningstar DBRS was supplied with third-party assessments. However, this did not affect the credit rating analysis.

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

Morningstar DBRS 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 14 April 2023, when Morningstar DBRS confirmed its ratings on the Class A1 and C Notes at A (sf) and BB (low) (sf), respectively, upgraded its ratings on the Class A2 and B to BBB (high) (sf) from BBB (sf) and to BB (high) (sf) from BB (sf), respectively, and maintained the stable trend on all Notes. Also, on 12 February 2024, Morningstar DBRS discontinued its rating on the Class A1 notes following their repayment in full.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Recovery rates used: Cumulative base-case net recovery amount of approximately EUR 127.4 million, EUR 137.0 million, and EUR 151.4 EUR at the A (sf), BBB (sf), and BB (low) (sf) stress levels, a 5% and 10% decrease in the base-case recovery rate.

-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a confirmation on the Class A2 notes at A (sf).
-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a confirmation on the Class A2 notes at A (sf).

-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a downgrade on the Class B notes to BB (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a downgrade on the Class B notes to BB (high) (sf).

-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 5%, ceteris paribus, would lead to a downgrade on the Class C notes to CCC (high) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease in the recovery rate of 10%, ceteris paribus, would lead to a downgrade on the Class C notes below CCC (sf).

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

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Clarice Baiocchi, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 31 March 2021

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259]

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating European Nonperforming Loans Securitisations (5 June 2023), https://dbrs.morningstar.com/research/415383.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730.
-- Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219.
-- European RMBS Insight Methodology (27 March 2023), https://dbrs.morningstar.com/research/411634.
-- European RMBS Insight: Spanish Addendum (8 March 2024), https://dbrs.morningstar.com/research/429109.
-- European CMBS Rating and Surveillance Methodology (17 January 2024), https://dbrs.morningstar.com/research/426818.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030.

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.