Rating action

The ratings are as follows:

Class A1 (XS2439881108): EUR 190.0m: assigned preliminary rating of (P) A-_SF

Class A2 (XS2439881280): EUR 25.0m: assigned preliminary rating of (P) BBB-_SF

Class B (XS2439881447): EUR 12.0m: assigned preliminary rating of (P) BB_SF

Class C (XS2439881520): EUR 10.0m: assigned preliminary rating of (P) B_SF

Class Z1 (XS2439881876): not rated

Class Z2 (XS2439882171): not rated

Class X: not rated

Preliminary ratings rely on the information made available to Scope Ratings GmbH (Scope) up to 1 February 2022. Scope will assign final ratings conditional to a review of the final version of all transaction documents and legal opinions. Final ratings may deviate from preliminary ratings.

The combined notional of the class Z1 and class Z2 notes is EUR 166,278,000.

Transaction overview

Warrington Residential 2022-1 DAC is a EUR 403.3m GBV securitisation of Irish non-performing residential mortgage loans. The mortgages were originally granted by five Irish lenders. Mars Capital Finance Ireland DAC, a special loan servicer active in Ireland, will service the portfolio on behalf of the issuer.

The 1,629 mortgage loans finance properties across Ireland, with a focus on the Dublin and Cork areas. The collateral indexed value is EUR 526.2m, down from the original value of EUR 753.2m. The servicer expects some of the mortgages to become re-performing, based on historical pay rates, updated valuations and borrower interaction, which may trigger a repurchase at a predetermined minimum price.

Barclays Bank Ireland plc will be the servicer collections account bank, Elavon Financial Services DAC (Elavon) is the transaction account bank, and Morgan Stanley & Co. International plc is the interest cap provider. Mars Capital is the special servicer managing the portfolio asset restructuring and collateral foreclosures on behalf of the issuer.

The transaction is expected to close on 22 February 2022 and the expected legal final maturity is 24 December 2056.

Rating rationale

The ratings reflect the transaction’s legal and financial structure, the underlying collateral’s quality, Mars Capital’s experience and incentives as transaction servicer, and the transaction’s exposure to key counterparties.

The ratings are primarily driven by the expected recovery amounts and timing of collections from the NPL portfolio and the collections from the re-performing assets. The expected collections and timing assumptions consider the portfolio’s characteristics as well as Scope’s economic outlook for Ireland and assessment of the special servicer’s capabilities. The ratings are supported by the overcollateralisation available to the notes, the liquidity protection, and the interest rate hedging agreement.

The transaction is exposed to the following key counterparties: Mars Capital as the servicer, Barclays as the collection account bank, Elavon as the transaction account bank, and paying agent, and Morgan Stanley as the interest rate cap provider. Counterparty risk is mitigated by the credit quality of the counterparties, structural mechanisms such as replacement rating triggers as well as the limited time exposure. Scope has assessed the credit quality of the counterparties considering public information.

Key rating drivers

Credit enhancement (positive). Note classes A1 to C benefit from substantial credit enhancement provided by subordination, overcollateralisation and liquidity reserves.¹

Frequent payers in the portfolio (positive). A significant portion of borrowers in the portfolio (904 out of 1,629) are still making mortgage payments, either as originally agreed or on a restructured plan. The mortgages will likely be bought back at a minimum price of 80% as soon as they are re-performing. Until then, collections on these assets will support the transaction.¹

Regional distribution (positive). The underlying residential property pool is concentrated in Dublin and Cork, the two largest cities in Ireland, as well as in neighbouring suburbs. Residential property price improvements in Ireland have been more pronounced in urban than in rural areas.¹

Regulatory work-out process (positive). The regulation for special servicers in Ireland emphasises a work-out process that returns the borrower to a sustainable financing situation, rather than quickly foreclosing on the property. This approach is more likely to maximise collections from re-performing borrowers and lower accepted discounts in case of a property sale.¹

Volatile property market (negative). Despite continuous improvements, Ireland’s property market is among the most volatile and thus most risky in Europe. This is reflected in Scope’s property value assumptions and haircuts. Prices have returned to the highs seen before the 2007 Great Financial Crisis, reflecting high demand for residential properties in Ireland. However, demand may decline if the macroeconomic recovery stops.²

Liquidity and interest rate risk (negative). Given the irregularity of cash inflows, the transaction relies on dedicated reserves to ensure the timely payment of interest and senior costs.¹

Rising interest rate scenarios, which are getting more likely given the rising inflation in the Eurozone, are increasing liquidity needs. The same is true for the Covid-induced delays in legal processes.

The interest rate risk is partly mitigated by the portion of borrowers making frequent payments, the interest cap agreement, the interest rate caps embedded in the notes coupons and the high percentage of contracts in late-stage legal proceedings.

Indexation impact on property valuations (negative). Current valuations reflect the significant increase in residential property price indices in Ireland. Since 2015 (the average year of valuation for the financed properties), property prices have increased by more than 39% in Dublin and 67% in all of Ireland excluding Dublin. The latest property valuations have been conducted as drive-by or full inspections, which partially mitigates the uncertainty on the current property valuations.¹

Upside rating-change drivers

Higher than expected reperforming asset share may positively impact the ratings due to increased and earlier collections.

An outperformance on recovery timing could occur if courts advance on proceeding backlogs faster than expected. The pandemic led to a slowdown in court activity.

Downside rating-change drivers

Macroeconomic uncertainty in Ireland caused by Brexit and a global growth slowdown (e.g. Covid impacts) may weigh negatively on collateral performance due to the retrieval of foreign investment in Ireland, leading to a lasting deterioration in employment and a potential sovereign crisis.

The portfolio contains EUR 24.0m of mortgages loans to obligors, where some of these obligor’s mortgages have an unclear lien status. The servicer is aiming to resolve these cases and establish the first lien status. A failure for a significant portion may have an adverse impact on the assigned ratings. The questionable positions are excluded from seller/warranty provider representations and warranties.

Quantitative analysis and assumptions

Scope analysed the transaction’s specific cash flow characteristics. Asset assumptions were captured through rating-conditional gross recovery vectors. The analysis considers the capital structure, the coupon payable on the notes, the hedging structure, the servicing fees structure, and the transaction’s senior fees and legal costs.

The respective ratings assigned to the notes reflect the instruments’ expected losses over their weighted average life commensurate with Scope’s idealised expected loss table.

Scope performed a specific analysis to determine proceeds from foreclosed properties and reperforming mortgages. Collections from foreclosed properties mainly reflect the most recent property appraisal values, which were stressed to account for appraisal type, liquidity and market value risks. Scope derived recovery timing assumptions using line-by-line asset information, detailing the type of legal proceeding, the respective court, and the legal stage of the proceeding at the portfolio’s transfer date. Scope also considered that mortgages for up to EUR 55.2m of gross book value will be re-performers. These mortgages will be sold at a certain point in the transaction life at a price of at least 80%.

Scope analysed historical data provided by the servicer and accounted for the current macro-economic environment, taking a forward-looking view on the macro-economic developments.

For the analysis of the rated notes, Scope assumed gross recovery rates ranging from 63.5% for class C to 51.1% for class A1 for the portion of the mortgage portfolio that will be subject to foreclosures. The applied average combined security value haircuts range from 22.4% for the class C to 45.5% for the class A1, comprising of i) rating-conditional quick-sale discounts of 12% for the class C, up to 16.5% for the class A1; ii) rating-conditional valuation haircuts from 6.2% to 30.6%; and iii) property sale costs of 6%.

For the re-performing share, Scope expects EUR 8.9m of total collections until the sale of the mortgages and EUR 36.8m of sale proceeds. Scope assumed a sale of the re-performing mortgages 2.5 years after closing.

In its analysis, Scope considered transaction’s servicer fees structure and assumed legal expenses as outlined in the transaction documents. Scope captured single asset exposure risks by applying recovery rate haircuts of 13.3% to the 10 largest borrowers.

The impact on the rated instruments from considering the mortgages with questionable lien status as unsecured and considering a 30% base case recovery rate applicable to these exposures did only show limited changes in our results.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations in the main input parameters: the recovery rates and recovery timings on the worked-out share of the mortgage portfolio. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for rated notes change compared to the assigned credit ratings in the event of i) a decrease in secured recovery rates by 10%; and ii) an increase in the recovery lag by one year:

• Class A1: i) three notches; ii) one notch
   
• Class A2: i) four notches; ii) one notch
   
• Class B: i) three notches; ii) one notch
   
• Class C: i) four notches; ii) zero notches

Rating driver references
1. Internal documents of the issuer and arranger (Confidential)
2. Historical property disposal data and house price evolution (Confidential)

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF EL Model Version 1.1 incorporating the relevant asset assumptions, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 6 August 2021; General Structured Finance Rating Methodology, 17 December 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Cash Flow SF EL Model v1.1), available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#!governance-and-policies/regulatory-EU. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The Rated Entity and its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Sebastian Dietzsch, Director
Person responsible for approval of the Credit Ratings: Benoit Vasseur, Executive Director
The Credit Ratings were first released by Scope Ratings on 14 February 2022.

Potential conflicts¹
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings. Scope Ratings provided the following Ancillary Service(s) to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate.

1. Editor's note: This section was amended on 27 December 2022. On the publication date of 14 February 2022, this section originally stated: " See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings."

Conditions of use / exclusion of liability
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