New Issue: European Residential Loan Securitisation 2020-NPL1 … · 2020. 11. 27. · Hudson Advisors Ireland DAC, on previous nonperforming and reperforming transactions. This is

New Issue: European Residential LoanSecuritisation 2020-NPL1 DAC

Primary Credit Analyst:

Alexandru Ciocan, Dublin + 353 (0)1 568 0613; [email protected]

Secondary Contact:

Aarondeep Hothi, London + 44 20 7176 0111; [email protected]

Table Of Contents

Overview

The Credit Story

Collateral And Originator

Servicing

Credit Analysis And Assumptions

Macroeconomic And Sector Outlook

Transaction Summary

Cash Flow Modeling And Analysis

Counterparty Risk

Sovereign Risk

Surveillance

Appendix

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Table Of Contents (cont.)

Related Criteria

Related Research


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Ratings' permission. See Terms of Use/Disclaimer on the last page.

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New Issue: European Residential LoanSecuritisation 2020-NPL1 DAC

Ratings Detail

Ratings

Class Rating*

Class

balance

(mil. €)

Credit

enhancement

(%)§ Index

Margin

(%)

Additional

note payment

(%)†

Coupon

cap (%)§§

Additional

note payment

date

Legal final

maturity

A A- (sf) 153.5 61.9 One-month

EURIBOR

2.00 1.50 5.00 Nov. 24, 2023 Jan. 24,

2060

P NR 32.5 N/A N/A N/A N/A N/A N/A Jan. 24,

2060

Z NR 195.9 N/A One-month

EURIBOR

5.00 N/A 5.00 N/A Jan. 24,

2060

*Our rating addresses timely receipt of interest and ultimate repayment of principal on the class A notes. §This is the initial credit support based

on the subordination of the junior notes and the reserve fund. †Additional note payments are payed from the additional note payment date and

are not rated.

§§The coupon cap applies after 60 months from closing date and is a cap on the all-inclusive interest rate of the notes.

NR--Not rated. N/A--Not applicable. TBD--To be determined.

Overview

• S&P Global Ratings has assigned its credit rating to European Residential Loan Securitisation 2020-NPL1 DAC's

class A Irish RMBS notes. At closing, the transaction also issued unrated class P and class Z notes.

• European Residential Loan Securitisation 2020-NPL1 DAC is a static RMBS transaction that securitizes a portfolio

of €380.9 million loans, which consist of owner-occupied and buy-to-let nonperforming mortgage loans secured

over residential and commercial properties in Ireland. Of the pool, 93.3% has been in long-term arrears for more

than three months.

• The loans were originated by Permanent TSB with 94.5% originated between 2001 and 2009.

• Our rating on the class A notes addresses the timely payment of interest and the ultimate payment of principal. The

timely payment of interest on the class A notes is supported by the class A reserve fund, which was fully funded at

closing to its required level of 5.5% of the class A notes' balance. Furthermore, as the transaction features a

combined waterfall, principal can be used to pay senior fees and interest on the most senior class outstanding.

• Start Mortgages DAC, the administrator, is responsible for the day-to-day servicing and implementation of the

business plan devised by Hudson Advisors Ireland DAC, the issuer administration consultant. In addition, the issuer

administration consultant approves loan restructures that are outside administrator's standard procedures and

approves portfolio loan sales.

• There are no rating constraints in the transaction under our structured finance sovereign risk criteria.

• At closing, the issuer used the issuance proceeds to purchase the beneficial interest in the mortgage loans from the

seller. The issuer grants security over all its assets in favor of the security trustee. We consider the issuer to be

bankruptcy remote under our legal criteria.


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last page.

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• Under our operational risk criteria, we have considered both the administrator and issuer administration consultant

as performance key transaction parties. The transaction is capped at 'AA' under this framework, driven by the junior

position of the issuer administration consultant fee in the waterfall, which makes it less likely to incentivize a

replacement if required.

• The documented replacement triggers and collateral posting framework under the cap agreement support a

maximum rating of 'A' under our counterparty risk criteria. Therefore, the transaction is capped at 'A' in our

analysis.

The Credit Story

The Credit Story

Strengths Concerns and mitigating factors

The administrator, Start Mortgages DAC, is an

experienced servicer with well-established and fully

integrated servicing systems and policies. It also worked

together with the issuer administration consultant,

Hudson Advisors Ireland DAC, on previous

nonperforming and reperforming transactions.

This is nonperforming transaction, with 93.3% of the pool more than three months in

arrears at the end of September 2020. We have incorporated these features in our

foreclosure frequency assumptions.

The capital structure is sequential for the application of

principal proceeds. Credit enhancement can therefore

build up over time for the rated notes, enabling the

capital structure to withstand performance shocks.

Of the pool, 54.1% is in long-term arrears and has an average pay rate below 10%. We

have treated these loans as being defaulted in our analysis by giving only recovery

benefit, and we have adjusted the recovery timing depending on the foreclosure

strategy perused by the servicer.

The class A reserve fund was fully funded at closing to

meet revenue shortfalls for each respective class. The

class A reserve fund can be also used to pay senior fees.

Furthermore, the transaction can use principal receipts

to pay for senior fees and interest shortfalls on the most

senior class.

Based on our analysis of the historical property sales data provided by the servicer on

similar loans from the originator and the difference between updated property

valuations and indexed original property valuations of the current pool, we concluded

that there is the risk that the original property valuations may be overstated.

Considering this and possible legal title issue with some of the loans (see below), we

have applied a 30% valuation haircut to the original property valuations.

The interest rate cap minimizes the exposure to liquidity

risks in a rising interest rate environment.

Of the pool, 3.5% (46 loans) may have a legal title issue. As this may diminish the

amount of recoveries, we have considered this risk as part of the valuation haircut

assumptions. Furthermore, we have tested our cash flows with reduced funds generated

by the assets.

The pool features cross-collateralization, as there are multiple loans secured by the

same properties, or one loan secured by multiple properties or one property linked to

multiple borrowers. We have incorporated this risk in our analysis.

While the seller provides certain representations and warranties on the assets, we

consider the overall package of the representations and warranties provided, along with

the seller's obligations in cases of a breach, to be weaker than what we typically see in

European RMBS transactions. We have therefore increased our originator adjustment

by 0.15.

The audit report generated more errors than we typically see in European RMBS

transactions. In addition, some material fields for our analysis were not checked against

the loan documentations. We have therefore increased our originator adjustment by

0.15.

Under our base-case scenario, limited excess spread provides credit enhancement in

the transaction, as the weighted-average margin on the loans is around 2.3%. In

addition, for 54.1% of the pool, we do not give credit to any interest generated, as these

loans are defaulted and have very low pay rates.

COVID-19: Our credit and cash flow analysis and related assumptions consider the

transaction's ability to withstand the potential repercussions of the coronavirus

outbreak, namely, higher defaults, longer recovery timing, and additional liquidity

stresses. Considering these factors, we believe that the available credit enhancement is

commensurate with the rating assigned. As the situation evolves, we will update our

assumptions and estimates accordingly.



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New Issue: European Residential Loan Securitisation 2020-NPL1 DAC

Collateral And Originator

The pool was originated by Permanent TSB, one of the largest banks in Ireland. Start Mortgages DAC (Start) and LSF

Irish Holding 101 DAC agreed to acquire the pool from Permanent TSB on Sept. 11, 2019. In December 2019, the

rights and obligations of LSF Irish Holding 101 DAC were novated to the seller, LSF XI Glas II Investments DAC. The

acquisition of the pool by Start and LSF XI Glas II Investments DAC was completed on Feb. 7, 2020. Also, in February

2020, the legal title was transferred to Start, which also was appointed as the servicer for the portfolio.

At closing, the beneficial title was transferred from the seller to the issuer, while Start will remain the legal titleholder.

The borrowers will not be notified of the sale unless a perfection trigger event occurs.

We received loan-level data as of Sept. 30, 2020, on the pool, which is secured by residential assets and a small portion

of commercial assets. We also received historical arrears data up to September 2020, which we have incorporated in

our analysis. The total secured pool balance is €380,897,407. We have excluded from our analysis €937,231 of

written-off loan balance.

Table 1

Collateral Key Features*

Pool cut-off date Sept. 30, 2020

Jurisdiction Ireland

Principal outstanding of the pool (€) 380,897,407 (excluding €937,231of written-off loan balance)

Number of loans 1,745

Number of borrowers 1,349

Number of properties 1,571

Average loan balance (€) 218,279

Weighted-average original LTV ratio (%) 81.1

Weighted-average indexed current LTV ratio (%) 145.8

Weighted-average seasoning (months) 169.3

Commercial properties (%) 2.4

Buy-to-let properties (%) 28.7

Interest only (%) 35.6

Self-employed (%) 39.0

Top three regional concentration (by balance) Dublin (27.5%), Cork (8.2%), Louth (6.6%)

Weighted-average 'A' RMVD (%) 41.9

Arrears >= one month (%) 94.4

*Calculations are according to S&P Global Ratings' methodology, which considers cross-collateralization. RMVD--Repossession market value

declines.

Asset description

The portfolio consists of owner-occupied and buy-to-let nonperforming loans secured over residential and commercial

properties in Ireland. Around 28.7% of the assets are buy-to-let loans, while 2.4% of the properties are used for

commercial purposes.

The loans were originated by Permanent TSB, with 94% issued between 2001 and 2009, and the weighted-average



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seasoning is 14.1 years.

Chart 1

The weighted-average OLTV ratio of the collateral pool is 81.1%, and we capped the OLTV ratio at the borrower level

at 100% because the loan underwriting criteria did not allow lending above 100% (see chart 1). The weighted-average

CLTV ratio of 145.8% is based on our methodology and incorporates 30% valuation haircuts for two reasons: the

original valuations may be overstated and the possible legal title issues.

We have concluded that there is the risk that the original property valuations may be overstated because we observed

a significant difference between historical sale amounts versus indexed original valuations to the sale date of the same

properties. The historical sales data was provided by the servicer on similar loans from the originator. Also, we have

received and analyzed updated valuations for the current pool (based on a combination of drive-by and desktop

valuations), and we observed a similar difference between these updated valuations versus the indexed original

valuation.

Regarding the legal titles, around 3.5% of the pool (46 loans by count) has been flagged as having possible title issues.

These include uncertainty about the lien, and for some of the loans, the legal title has not yet been transferred to Start.

While Start is working on these title issues, because they may reduce the pool's recoveries, we have considered this



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risk as part of our valuation haircut. In addition, Start has experienced similar issues in a previous nonperforming

transaction and has provided us with data that shows it was able to address them successfully. Finally, we have tested

the sensitivity of our cash flows analysis with reduced funds generated by a portion of the assets with potential title

issues to assess the impact of this risk, and the rating remains robust.

Chart 2



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Chart 3

The assets are well distributed across Ireland, with Dublin (27.5%), Cork (8.2%), and Louth (6.6%) representing the

largest shares (see chart 4). However, the concentration in Louth and Leitrim exceeds the thresholds specified in our

criteria by 1.6% and 0.8% respectively, and therefore we have applied adjustments in our foreclosure frequency

calculations.



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Chart 4

We have received five years of historical performance data on these assets, which shows poor performance with high

levels of arrears (see chart 5).



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Chart 5

The portfolio has a high level of nonperforming loans as 93.3% of the pool has been in arrears for more than three

months, and 58.0% of the pool has been in arrears for more than 60 months (see chart 6). The number of months in

arrears is based on data provided by the servicer.



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Chart 6

Servicing

The servicer's effectiveness and liquidation strategies are more important for nonperforming RMBS than for traditional

deals. This is because most nonperforming loans require more intensive efforts and specialized workout expertise,

channels, and tools to recover the economic value of the assets within the shortest practicable time frame.

The servicing business plan has been devised by the issuer administration consultant, Hudson Advisors Ireland DAC

(Hudson). The day-to-day servicing of the portfolio and the implementation of the business plan will be conducted by

the administrator, Start. In addition, Hudson approves loan restructures that are outside Start's standard procedures

and can agree to portfolio loan sales. The primary objective of the servicing plan is to proactively use restructuring

techniques as outlined under the Central Bank of Ireland's Mortgage Arrears Resolution Process to help cure

borrowers in long-term arrears. These restructures include reduced payments, term extensions, and eventual arrears

capitalizations. Should these fail, the business plan aims to realize the real estate value in the most efficient manner

available.

Start is an experienced servicer in the Irish market with well-established and fully integrated servicing systems and



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policies. It also has worked with Hudson on previous nonperforming and reperforming transactions. We reviewed

Start's servicing and default management processes, and we believe it can perform its functions in the transaction.

Under our operational risk criteria, we have considered both the administrator and issuer administration consultant as

performance key transaction parties, and the transaction is capped at 'AA'. The cap is mainly driven by the issuer

administration consultant fee's junior position in the waterfall, which makes it less likely to find a replacement if

needed.

Credit Analysis And Assumptions

We have conducted a loan-level analysis to assess the mortgage pool's credit quality. For each loan in the portfolio, we

estimated the likelihood that the borrower will default on its payments (the foreclosure frequency) and the amount of

loss upon the property's subsequent sale (the loss severity, expressed as a percentage of the outstanding loan). We

base this on the individual loan, borrower, and property-level characteristics under our relevant criteria for each. We

determine the total amount of the defaulted balance that is not recovered for the entire portfolio by calculating the

weighted-average foreclosure frequency (WAFF) and the weighted-average loss severity (WALS).

The pool features cross-collateralization, as there are multiple loans secured by the same properties, or one loan

secured by multiple properties, or one property linked to multiple borrowers. As there are very limited cases in which

there is cross-collateralization between multiple borrowers, we have we have modeled the pool at a borrower level.

Given the various asset characteristics in the portfolio, directly applying our global RMBS criteria in our analysis was

not appropriate. We have instead followed our rating to principles process, which takes into consideration the loan's

pay rate, the servicer's restructuring and enforcement strategy, the recovery stage of the defaulted assets, and the

expected foreclosure cost.

Around 39.7% of the pool includes loans that are greater than three months in arrears but have a relatively high pay

rate (66%). This compares with an average pay rate of 7.6% for the rest of the loans that are in long-term arrears. Since

it is likely that these loans will be restructured and will become current, we have adjusted our arrears foreclosure

frequency at the 'BBB', 'BB', and 'B' rating levels from 100% to 5x foreclosure frequency for these assets.

Although Permanent TSB is a prime lender, considering the high amount of nonperforming loans in this pool, we have

applied a base originator adjustment of 1.3x for this transaction. In addition, we have increased our originator

adjustment by 0.15x based on the representations and warranties package. While the seller provides certain

representations and warranties on the assets, we consider the overall package provided, along with the seller's

responsibility in cases of a breach, to be weaker than what we typically see in European RMBS transactions. The

package includes a two-year sunset provision and limits the seller's liability to 5% of the current balance of the

respective loan. In addition, we have further increased our originator adjustment by 0.15x based on audit results. The

audit report generated more errors than we typically see in European RMBS transactions, and some material fields for

our analysis were not checked against the loan documentations.

In the loss severity calculation, we have applied a 3% variable foreclosure cost of the repossession value in line with



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our criteria and a fixed foreclosure cost of around €13,000, in line with the estimate in the business plan devised by

issuer administration consultant.

In our credit analysis, we have split the pool into two subpools. The first subpool captures loans that are less than three

months in arrears (6.2% of the entire pool) and loans that are more than three months in arrears but have a relatively

high pay rate (39.7% of the entire pool). The second subpool captures the loans that are more than three months in

arrears and have low pay rates. We considered all the loans in the second subpool as defaulted, and they receive a

WAFF of 100%. Tables 2 and 3 show the credit results for each subpool. These assumptions increase at each rating

level because notes with a higher rating should be able to withstand a higher level of defaults and loss severity. Our

credit analysis reflects the characteristics of loans, properties, assets, and associated borrowers.

Table 2

Portfolio WAFF And WALS--First Subpool

Rating level WAFF (%) WALS (%) Credit coverage (%)

AAA 98.3 62.8 61.8

AA 97.9 59.3 58.1

A 97.6 53.1 51.8

BBB 85.7 49.5 42.4

BB 74.2 46.8 34.8

B 67.0 44.3 29.7

Table 3

Portfolio WAFF And WALS--Second Subpool

Rating level WAFF (%) WALS (%) Credit coverage (%)

AAA 100.0 70.8 70.8

AA 100.0 68.0 68.0

A 100.0 62.9 62.9

BBB 100.0 59.9 59.9

BB 100.0 57.6 57.6

B 100.0 55.5 55.5

Macroeconomic And Sector Outlook

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus

pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end

of the year are promising, but this is merely the first step toward a return to social and economic normality; equally

critical is the widespread availability of effective immunization, which could come by the middle of next year. We use

this assumption in assessing the economic and credit implications associated with the pandemic (see our research

here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

We now expect eurozone GDP to contract 7.8% this year, up from 7.3% in our May projections. For Ireland, our

current expectations are described in table 4.



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Table 4

Irish Market Statistics

2019 2020F 2021F 2022F

Nominal house prices, % change y/y 1.0 (1.6) (1.1) 4.6

Real GDP (% change) 5.57 (6.5) 3.9 3.3

Unemployment rate 5.0 15.5 10.3 6.0

Sources: S&P Global Ratings. Y/Y--Year on year. F--Forecast.

Based on our macroeconomic forecasts, we revised the 'B' foreclosure frequency assumptions in our global residential

loans criteria for Ireland's archetypal pool to 1.85% from 1.5% on May 1, 2020. We have also considered the ability of

the transaction to withstand additional liquidity stresses and extended foreclosure timing assumptions of six months.

As the situation evolves, we will update our assumptions and estimates accordingly.



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Transaction Summary

Chart 7

The issuer is an Irish special-purpose entity (SPE), which we consider to be bankruptcy remote. We analyzed its

corporate structure in line with our legal criteria.

Interest will be paid monthly on the interest payment dates (IPDs), beginning in December 2020. The rated notes pay

interest equal to one-month EURIBOR plus a class-specific margin. All the notes will reach legal final maturity in

January 2060.

Payment of interest

Our rating addresses the timely payment of interest and the ultimate payment of principal on the class A notes.



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Additional note payment

After the additional note payment date in November 2023, class A noteholders will be entitled to additional note

payments. However, our rating does not address the payment of class A additional note payment. In our view, the

initial coupons on the notes are not "de minimis," and nonpayment of the additional note payments are not considered

an event of default under the transaction documents.

Reserve fund

The class A reserve fund will be available to cover senior fees and class A interest, and it will have a required amount

of 5.5% of the class A balance. It can amortize in line with the class A outstanding balance, and it has a floor equal to

0.25% of the class A balance as of the closing date. This reserve fund can be replenished from the combined waterfall.

Any excess amounts are released at the top of the combined waterfall and can be used to pay down the notes.

Interest rate cap

The transaction benefits from an interest rate cap for 60 months with a strike rate of 0.0% for the first 36 months and

0.5% for the following 24 months. The interest cap provider should make payments to the issuer to the extent that

one-month EURIBOR will exceed the strike rate. The notional is initially the sum of the closing balance of the class A

notes, but the issuer has the option to reduce the cap's notional to a floor of the sum of current balance of the class A

notes over time. We have factored this in our analysis, assuming that the notional will be reduced.

We have also tested the sensitivity of the structure without the cap in place.

Coupon cap rate

Upon the interest rate cap's expiration, there will be a cap on the all-inclusive interest rate of the notes. As such, the

index will be capped at the coupon cap less margin less the additional note payment rate.

Principal to pay interest

The transaction features a combined waterfall, which enables the issuer to use principal receipts to pay shortfalls in

senior fees and interest on most senior class outstanding.

Payment priorityTable 5

Priority Of Payments

1 Senior fees and expenses

2 Class A interest

3 Class A reserve fund top-up

4 Class A principal

5 Class A additional note payment

6 Issuer consultant fees

7 Class P principal

8 Class Z interest

9 Class Z principal

Item 1 of the above priority of payments also captures payments from the issuer to a replacement interest rate cap

provider in case collateral amounts posted, or termination payments payable by the outgoing interest rate cap

provider, are insufficient to cover the costs of replacement. As this item is senior in the waterfall, it may diminish the



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issuer's ability to make payments on the notes. We do not typically see such an item explicitly listed senior in the

waterfall. However, we consider the related risk to be remote because firstly, under the cap documents, the outgoing

cap provider is responsible for covering the cost of replacement or finding a guarantor, which is in line with interest

cap agreements that we typically see for other transactions. Secondly, as a first instance, if the costs are not covered

by the outgoing cap provider, amounts posted as collateral will be used. Only if the available amounts are insufficient

can the issuer's funds be used to cover these amounts. Finally, the documents do not require the issuer to enter a new

interest rate cap agreement.

Portfolio sale

The issuer administration consultant can instruct the administrator to assist the issuer's sale of all (or part only) of the

mortgage portfolio to a third party subject to a minimum portfolio sale price of 80% of the current balance.

The proceeds of a sale are applied in the following manner:

• The portfolio sale proceeds, which represent up to 75% of the current balance of the mortgage loans sold net of

portfolio sale costs to be applied as available funds in accordance with the waterfall.

• The portfolio sale proceeds, which represent over 75% of the current balance of the mortgage loans sold net of

portfolio sales costs are paid as class P principal amounts (subject to loss severity triggers).

In our analysis, we have tested the structure's resilience to portfolio sales, and the rating remains robust.

Cash Flow Modeling And Analysis

We stress the transaction's cash flows to test the credit and liquidity support that the assets, subordinated tranches,

and reserves provide.

We apply these stresses to the cash flows at all relevant rating levels. In our stresses, the class A notes must pay timely

payment of interest and ultimate payment of principal. The rating on these notes also reflects their ability to withstand

the potential repercussions of the coronavirus outbreak, including higher defaults, longer foreclosure timings stresses,

and additional liquidity stresses.

Interest rates and basis risk

For around 54.1% of the pool that is in long-term arrears and has a very low pay rate, we have modeled these loans as

defaulted without generating any interest.

The rest of the pool pays floating-rate interest, with about 61% linked to the European Central Bank rate and 39%

paying a variable rate. Basis risk arises within the transaction given the mismatch between the indices paid by the

assets and the liabilities, which we have incorporated in our analysis. When modeling the yield on variable-rate loans,

we accounted for the servicer's variable-rate setting policy, whereby Start has full discretion to set the variable rate

subject to a floor level equal to one-month EURIBOR plus 2.5%. As we do not have the historical variable rate

information or detailed description on how the rate is calculated, we have applied the higher end of the variable rate

haircut described in our criteria as long it does not breach the documented floor.



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Spread compression

The asset yield on the pool can decrease if higher-paying assets default. Our cash flow analysis accounts for this by

assuming that the weighted-average yield on the portfolio drops by 0.25% at the 'A' level.

Fees

Contractually, the issuer is obliged to pay periodic fees to various parties providing services to the transaction such as

the servicer, legal titleholder, trustees, and cash managers, among others. We accounted for these in our analysis. In

particular, we applied a stressed core servicing fee of 0.70% including value-added tax per annum (the higher of 1.5x

actual fees and 0.70% of the pool balance) to account for the potential increase in costs to attract a replacement

servicer, based on our global RMBS criteria. In addition, we have applied the general servicing fee of 1.40% per annum

and net asset realization payment of 2.5% per annum at their contractual rates. Lastly, we have also applied a

€100,000 fixed fee per annum in our analysis.

Default and recovery timings

We used the WAFF and WALS derived in our credit analysis as inputs in our cash flow analysis. At each rating level,

the WAFF specifies the total balance of the mortgage loans we assume will default over the transaction's life.

For the first subpool (which consists of loans that are less than three months in arrears and loans that are more than

three months in arrears but have relatively high pay rates) defaults are applied on the outstanding balance of the assets

as of the closing date. We simulate defaults following two paths (i.e., one front-loaded and one back-loaded) over a

six-year period. During the recessionary period within each scenario, we assume 25% of the expected WAFF is applied

annually for three years (see table 6).

For the second subpool (which consists of loans that are in long-term arrears and have very low pay rates), we have

modeled them as 100% defaulted and did not apply the below curves.

Table 6

Default Timings For Front-Loaded And Back-Loaded Default Curves

Year after closing Front-loaded defaults (% of WAFF per year) Back-loaded defaults (% of WAFF per year)

1 25.0 5.0

2 25.0 10.0

3 25.0 10.0

4 10.0 25.0

5 10.0 25.0

6 5.0 25.0

For most of the loans, we assume recoveries on the defaulted assets will be received 42 months after default for

owner-occupier properties and 24 months for buy-to-let properties in line with our criteria.

For the owner-occupied properties, which will be enforced via the court process and are not subject to an assisted

voluntary surrender/supported voluntary surrender (AVS/SVS) strategy under the business plan, we have adjusted the

foreclosure timing based on the court process stage (see table 7).



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Table 7

Foreclosure Timings

Occupancy type and loan status

Foreclosure timings

(months)

% of the

pool

Buy-to-let 24 31.0

Owner-occupied (order for possession granted) 30 1.2

Owner-occupied (ongoing review, modification pipeline, pre-legal, active PIA, consensual

sale/MTR, pre-court, in-court)

60 10.4

Owner-occupied (AVS/SVS and other than above) 42 57.3

PIA--Personal insolvency arrangement. MTR--Mortgage to rent. AVS--Assisted voluntary surrender. SVS--Supported voluntary surrender.

We have also incorporated an increased foreclosure timing assumption of six months in our analysis given the

potential impact of COVID-19 on the forbearance process, and the reliance of the transaction's cash flows on

recoveries given the nonperforming nature of the assets.

Delinquencies

To simulate the effect of delinquencies on liquidity, we model a proportion of scheduled collections equal to one-third

of the WAFF (in addition to assumed foreclosures reflected in the WAFF) to be delayed. We apply this in each of the

first 18 months of the recession and assume a full recovery of these delinquencies will occur 36 months after they

arise.

Prepayments

We have assumed no prepayments as nonperforming borrowers are unlikely to prepay their loans.

Interest rate scenarios

We modeled two interest rate scenarios in our analysis: up and down. Given that the transaction incorporates an

interest rate cap and a note coupon cap, upward interest rate stress assumptions exceeding the cap level may be

unduly beneficial for the transaction's cash flow projection. Therefore, we have also modeled to the strike rate under

the interest rate cap and to the coupon cap rate.

Summary

Combined, the default timings, recession timings, interest rates, and prepayment rates described above give rise to six

different scenarios at each rating level (see table 8).

Table 8

RMBS Stress Scenarios

Total number of scenarios Interest rate Default timing

6 Up, down, and to the strike and coupon cap rate Front-loaded and back-loaded

Commingling risk

Borrowers pay into a collection account held with Allied Irish Banks PLC in the legal titleholder's name.

If the legal titleholder were to become insolvent, the mortgage collection amounts in the collection account may

become part of the legal titleholder's bankruptcy estate. To mitigate this risk, collections are transferred weekly into

the issuer's bank account, and a declaration of trust in favor of the issuer is in place over the collection account. The

transaction documents contain replacement language in line with our counterparty criteria.



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Although we believe that the combination of downgrade language and declaration of trust mitigates against the loss of

collections if there is an insolvency, we have considered that collections could be delayed in an insolvency. We have

therefore applied a liquidity stress in which we delay 1.25 months of collections.

Set-off risk

At the migration date in February 2020, the borrowers were notified of the legal title ownership transfer from the

originators to Start. The representations and warranties confirm that the vendor has received no notification from any

borrowers in relation any right of set-off in connection with the assets. Taking in consideration the nature of the loans

in the pool, we therefore deem the potential exposure to any outstanding or future set-off claims against the originator

to be limited. Start is not a deposit-taking institution, the pool does not contain loans to Start's employees, and the

borrowers are not entitled to flexible drawings or further advances under the loan conditions, therefore we concluded

that there is no potential exposure to set-off risk against the current legal titleholder.

Scenarios related to COVID-19 outbreak

We tested scenarios related to potential repercussions of the coronavirus outbreak, namely higher defaults, longer

recovery timing, and additional liquidity stresses. Considering these factors, we believe that the available credit

enhancement for the class A notes is commensurate with the assigned rating.

Scenario analysis

We analyzed the effect of a moderate stress on our WAFF assumptions and its ultimate effect on our rating on the

notes. We ran two stress scenarios to demonstrate the rating transition of a note, and the results are in line with our

credit stability criteria.

Counterparty Risk

The issuer is exposed to Elavon Financial Services DAC as the transaction account provider, Allied Irish Banks PLC as

the servicer's collection account, Nomura International PLC as interest rate cap provider, and Nomura Holdings Inc. as

interest rate cap guarantor (see table 9). The documented replacement mechanisms and the guarantee provided

adequately mitigate the transaction's exposure to counterparty risk for the assigned rating in line with our counterparty

and guarantee criteria.

In particular, the documented replacement triggers and collateral posting framework under the cap agreements,

support a maximum rating of 'A' under our counterparty risk criteria. Therefore, the transaction is capped at 'A' in our

analysis.

Table 9

Supporting Ratings

Institution/role

Current counterparty

rating

Minimum eligible

counterparty rating

Remedy period

(calendar days)

Maximum

supported rating

Allied Irish Banks PLC as collection

account provider

BBB+/Negative/A-2 BBB- 30 AA-

Elavon Financial Services DAC as

transaction account provider

AA-/Stable/A-1+ BBB 30 AA-

Nomura International PLC as

interest rate cap provider

NR N/A N/A N/A



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Table 9

Supporting Ratings (cont.)

Institution/role

Current counterparty

rating

Minimum eligible

counterparty rating

Remedy period

(calendar days)

Maximum

supported rating

Nomura Holdings Inc. as interest

rate cap guarantor

BBB+/Stable/A-2 BBB 90 A

N/A--Not applicable. NR—Not rated.

Sovereign Risk

Our long-term credit rating on Ireland is 'AA-', and we assess the underlying assets' sensitivity to sovereign risk as

moderate. This enables the notes to achieve a maximum potential rating of up to 'AAA' if they can pass our 'A' cash

flow run addressing a sovereign default scenario. The notes are rated below the sovereign rating. Therefore, our rating

in this transaction is not constrained by our structured finance ratings above the sovereign criteria.

Surveillance

We will maintain surveillance on the transaction until the notes mature or are otherwise retired. To do this, we will

analyze regular servicer reports detailing the performance of the underlying collateral, monitor supporting ratings, and

make regular contact with the servicer to ensure that it maintains minimum servicing standards and that any material

changes in the servicer's operations are communicated and assessed.

Appendix

Transaction Participants

Role Participant

Issuer European Residential Loan Securitisation 2020-NPL1 DAC

Originator Permanent TSB

Seller and initial option holder LSF XI Glas II Investments DAC

Administrator, legal title holder, and back-up administrator facilitator Start Mortgages DAC

Issuer administration consultant Hudson Advisors Ireland DAC

Retention holder Lone Star International Finance DAC

Trustee U.S. Bank Trustees Ltd.

Share trustee Intertrust Nominees (Ireland) Ltd.

Arranger and lead manager Morgan Stanley & Co. International PLC

Principal paying agent, reference agent, and registrar Elavon Financial Services DAC

Cash manager U.S. Bank Global Corporate Trust Ltd.

Corporate services provider Intertrust Management Ireland Ltd.



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Related Criteria

• Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates In Structured Finance, Oct.

18, 2019

• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8,

2019

• Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities:

Methodology And Assumptions, Jan. 30, 2019

• Criteria | Structured Finance | RMBS: Global Methodology And Assumptions: Assessing Pools Of Residential

Loans, Jan. 25, 2019

• Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017

• General Criteria: Guarantee Criteria, Oct. 21, 2016

• Criteria | Structured Finance | General: Global Framework For Assessing Securitizations Of Nonperforming Loans,

Sept. 7, 2016

• Criteria | Structured Finance | General: Methodology: Criteria For Global Structured Finance Transactions Subject

To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015

• Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance

Transactions, Oct. 9, 2014

• Criteria | Structured Finance | General: Global Framework For Cash Flow Analysis Of Structured Finance

Securities, Oct. 9, 2014

• Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013

• Criteria | Structured Finance | General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications,

July 12, 2012

• General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012

• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• Pandemic Won't Derail European Housing Price Rises, Oct. 20, 2020

• Government Job Support Will Stem European Housing Market Price Falls, May 15, 2020

• Residential Mortgage Market Outlooks Updated For 13 European Jurisdictions Following Revised Economic

Forecasts, May 1, 2020

• Sovereign Risk Indicators, April 24, 2020

• Economic Research: Europe Braces For A Deeper Recession In 2020, April 20, 2020

• Reports Discuss How COVID-19 Could Affect European Structured Finance, March 30, 2020



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• European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020

• Will Mortgage Payment Suspensions Related To COVID-19 Affect European RMBS?, March 13, 2020

• Rise In Repayments Expected For U.K. Legacy Borrowers, Nov. 13, 2019

• More Than One-Third Of U.K. Legacy Borrowers Are "Mortgage Prisoners", Sept. 4, 2019

• 2017 EMEA RMBS Scenario And Sensitivity Analysis, July 6, 2017

• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic

Factors, Dec. 16, 2016

• European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic

Factors, Dec. 16, 2016



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Standard & Poor’s | Research | November 20, 2020 24

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Research:Auxiliary DeckOverviewThe Credit Story Collateral And OriginatorAsset description

ServicingCredit Analysis And AssumptionsMacroeconomic And Sector Outlook Transaction Summary Payment of interestAdditional note payment Reserve fundInterest rate capCoupon cap ratePrincipal to pay interestPayment priorityPortfolio sale

Cash Flow Modeling And AnalysisInterest rates and basis riskSpread compressionFeesDefault and recovery timingsDelinquenciesPrepaymentsInterest rate scenariosSummaryCommingling riskSet-off riskScenarios related to COVID-19 outbreakScenario analysis

Counterparty RiskSovereign RiskSurveillanceAppendix Related CriteriaRelated Research

Documents

New Issue: European Residential Loan Securitisation 2020-NPL1 … · 2020. 11. 27. · Hudson Advisors Ireland DAC, on previous nonperforming and reperforming transactions. This is