Rating action

Scope Ratings GmbH (Scope) has performed the following rating action after completing a monitoring review on the notes issued by Warrington Residential 2022-1 DAC:

Class A1 (ISIN: XS2439881108), EUR 168.2m: upgraded to A+_SF from A-_SF

Class A2 (ISIN: XS2439881280), EUR 25.0m: upgraded to BBB+_SF from BBB-_SF

Class B (ISIN: XS2439881447), EUR 12.0m: upgraded to BB+_SF from BB_SF

Class C (ISIN: XS2439881520), EUR 10.0m: upgraded to B+_SF from B_SF

Class Z1 (ISIN: XS2439881876): not rated

Class Z2 (ISIN: XS2439882171): not rated

Class X: not rated

Scope’s review was based on servicer, investor and payment reporting as of the November 2023 payment date.

As per the documentation, the ratings for Class A1 and Class A2 reflect timely payment of interest and principal, while for Class B and Class C, the ratings reflect ultimate payment of interest and principal payment by final maturity. The payment of the additional note interest for any of the instruments is not covered by the ratings.

Transaction overview

Warrington Residential 2022-1 DAC is a EUR 403.3m gross-book-value (GBV) securitisation of Irish non-performing residential mortgage loans originated by five Irish residential mortgage lenders and serviced by Mars Capital, a special loan servicer active in Ireland. Unlike in other NPL transactions, a significant portion of the portfolio is paying some interest and principal, making loan restructuring a more viable option than property foreclosure. The deal closed on 22 February 2022.

As of the November 2023 payment date, actual gross collections amounted to EUR 74.6m, which represents 141.7% of the original business plan. The sources of total gross collections are ongoing collection proceeds (21.2%), property sale proceeds (40.9%) and portfolio sale proceeds (37.9%).

There has been a steady increase in the balance of loans with less than or equal to 3 months in arrears since closing, indicating successful loan restructuring activities performed by the servicer as anticipated at closing.

The class A1 notes have amortised by 32.9% of its notional at closing. There has been no unpaid interest on the class B and C notes that continue to benefit from cured payments from dedicated reserves. Notes junior to the class A1 notes have also received some principal repayment from the portfolio sale in February 2023.

Rating rationale

The review addressed i) the collateral’s observed performance as of the November 2023 payment date; ii) Scope’s forward-looking assumptions, which incorporate expected macroeconomic changes over the transaction’s remaining life; iii) updates to the transaction’s liability structure, liquidity and interest rate hedging; and iv) the issuer’s exposure to key transaction counterparties.

Key rating drivers

The transaction’s key rating drivers are broadly aligned with those in Scope’s last rating action release dated 14 February 2022. Beyond the key rating drivers, other relevant rating factors which we considered during the annual review were the following:

Regular collections level (positive)¹. Portfolio collections excluding portfolio sale proceeds account for 102% of our B rating case expectations to date. Redemption and interest proceeds from non-closed positions off-set the below expectations collections on closed positions According to our calculations, profitability of closed debtors related to the portion of mortgage portfolio that will be subject to foreclosures is 93.3% under the B case assumptions at closing.

Rating-change drivers

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

Negative². Slowdown of the Irish economy and the potential deterioration of borrowers’ affordability conditions could impair servicers’ performance on collections.

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 a share of the mortgages 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 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 maintains its assumptions regarding total collections until the sale of the mortgages. Scope accounts for the portfolio sale that provided EUR 28.3m proceeds on payment date 12, and expects further sale proceeds around payment date 30.

Scope considers 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.

Sensitivity analysis

Scope tested the rating’s resilience to deviations in expected recovery rates and recovery timing. This analysis has the sole purpose of illustrating the rating’s sensitivity 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) zero notches; ii) zero notches
   
• Class A2: i) zero notches; ii) zero notches
   
• Class B: i) zero notches; ii) zero notches
   
• Class C: i) zero notches; ii) zero notches

Rating Driver References
1. Transaction documents and reporting (Confidential)
2. Scope research

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

Cash flow analysis
Scope Ratings performed a cash flow analysis for the transaction using Scope Ratings Cash Flow Structured Finance Expected Loss Model Version 1.2. This incorporated the relevant asset assumptions, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for these Credit Ratings, (Non-Performing Loan ABS Rating Methodology, 3 August 2023; Counterparty Risk Methodology, 13 July 2023; General Structured Finance Rating Methodology, 25 January 2023), are available on https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
The model used for these Credit Ratings is (Cash Flow Structured Finance Expected Loss Model Version 1.2), available in Scope Ratings’ list of models, published under https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: 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. The external due diligence asset audit was considered when preparing the Credit Ratings and it had 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 Rating and the principal grounds on which the Credit Ratings is based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Rating 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, Senior Director.
Person responsible for approval of the Credit Ratings: Antonio Casado, Managing Director.
The final Credit Ratings were first assigned by Scope Ratings on 22 February 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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