Rating Action: Moody's takes rating actions on two Irish NPL deals
Global Credit Research - 28 Jul 2020
Frankfurt am Main, July 28, 2020 -- Moody's Investors Service, ("Moody's") has today confirmed the rating of one note and downgraded the ratings of four notes in two Irish NPL deals. The downgrades reflect the slower and potentially lower than anticipated cash-flows in the transactions in the context of reduced operability of judicial system, economic disruption and negatively affected investor sentiment following the coronavirus outbreak. The confirmation reflects sufficient credit enhancement and liquidity to maintain the rating. Today's action concludes the placing under review for downgrade of these notes due to the economic disruption caused by the coronavirus outbreak.
Issuer: EUROPEAN RESIDENTIAL LOAN SECURITISATION 2019-NPL1 DAC
....EUR 34.2M Class B Notes, Downgraded to Ba2 (sf); previously on Jun 3, 2020 Baa3 (sf) Placed Under Review for Possible Downgrade
....EUR 29.6M Class C Notes, Downgraded to Caa1 (sf); previously on Jun 3, 2020 B3 (sf) Placed Under Review for Possible Downgrade
Issuer: European Residential Loan Securitisation 2019-NPL2 DAC
....EUR 621.5M Class A Notes, Confirmed at A2 (sf); previously on Jun 3, 2020 A2 (sf) Placed Under Review for Possible Downgrade
....EUR 59.6M Class B Notes, Downgraded to Ba1 (sf); previously on Jun 3, 2020 Baa3 (sf) Placed Under Review for Possible Downgrade
....EUR 59.6M Class C Notes, Downgraded to B3 (sf); previously on Jun 3, 2020 B2 (sf) Placed Under Review for Possible Downgrade
EUROPEAN RESIDENTIAL LOAN SECURITISATION 2019-NPL1 DAC and European Residential Loan Securitisation 2019-NPL2 DAC are backed by pools comprised mostly of non-performing mortgage loans to private obligors in Ireland. Both transactions closed within the last 12 months and have thus had limited time to build up additional credit enhancement cushions.
The downgrades reflect the slower and potentially lower than anticipated cash-flows in the transactions in the context of reduced operability of judicial system, economic disruption and negatively affected investor sentiment following coronavirus outbreak. The confirmation reflects sufficient credit enhancement and liquidity to maintain the rating.
Slower and potentially lower anticipated cash-flows
NPL transactions' cash flows depend on the timing and the amount of collections, generated mainly from the sales of properties securing the loans. Measures imposed to contain the spread of the coronavirus directly and severely affected the operability of judicial systems, creating a backlog which will delay NPLs securitisations' gross recoveries. Until courts return to normal activity, recoveries for transactions will be delayed.
In Ireland, an important driver behind NPL transactions' performance is the possibility of loan restructurings and re-performance. In the current economic environment the ability to achieve sustainable restructuring solutions is likely to be impeded.
Negatively affected investor sentiment
NPL transactions are exposed to investment sentiment and how the property markets are functioning. Real estate prices could deteriorate to a varying extent, depending on the magnitude of the economic slowdown, property characteristics and location.
Due to the current circumstances, Moody's has considered additional stresses in its analysis, including a 6 month delay in the recovery timing and more negative house price developments. As a result, Moody's has downgraded the ratings of the notes that the agency views as more vulnerable to a deterioration of timeline and amount of cash-flows. This higher anticipated vulnerability could be driven by one or more of a number of factors, including: (i) the composition of the loan portfolios; (ii) the credit enhancement under the Notes and the deleveraging since the last rating action; and (iii) the transactions' performance to date.
In the coming months, liquidity available in the transactions may be needed to ensure payments of senior costs and interest on Notes, given reduced cash flows. Moody's expects available liquidity in the transactions to be sufficient to cover over 18 months of senior costs and coupon payments.
We will continue to monitor performance data of each transaction, evolution of operability of the judicial system and property price developments.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the cash flows generated from the recovery process on the non-performing loans from the collapse in Irish economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
The principal methodology used in these ratings was "Non-Performing and Re-Performing Loan Securitizations Methodology" published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1222103. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the ratings include: (1) the recovery process of the non-performing loans producing significantly higher cash-flows in a shorter time frame than expected; and (2) improvements in the credit quality of the transaction counterparties.
Factors or circumstances that could lead to a downgrade of the ratings include: (1) significantly lower or slower cash-flows generated from the recovery process on the non-performing loans due to either a longer time for the courts to process the foreclosures and bankruptcies, a change in economic conditions from our central scenario forecast or idiosyncratic performance factors. For instance, should economic conditions be worse than forecasted and the sale of the properties generate less cash-flows for the issuer or take a longer time to sell the properties, all these factors could result in a downgrade of the ratings; (2) deterioration in the credit quality of the transaction counterparties; and (3) increase in sovereign risk.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis relies on a Monte Carlo simulation that generates a large number of collateral loss or cash flow scenarios, which on average meet key metrics Moody's determines based on its assessment of the collateral characteristics. Moody's then evaluates each simulated scenario using model that replicates the relevant structural features and payment allocation rules of the transaction, to derive losses or payments for each rated instrument. The average loss a rated instrument incurs in all of the simulated collateral loss or cash flow scenarios, which Moody's weights based on its assumptions about the likelihood of events in such scenarios actually occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Michal Kuehnel Analyst Structured Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Michelangelo Margaria Senior Vice President/Manager Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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