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Rating action

The ratings are as follows:

Class A (XS2267897234): EUR 293.2m: assigned preliminary rating of (P) AAA_SF

Class B (XS2267897580): EUR 30.1m: assigned preliminary rating of (P) AA+_SF

Class C (XS2267897747): EUR 24.8m: assigned preliminary rating of (P) A+_SF

Class D (XS2267898042): EUR 17.3m: assigned preliminary rating of (P) BBB_SF

Class E (XS2267898125): EUR 13.2m: assigned preliminary rating of (P) BB_SF

Class F (XS2267898398): EUR 5.8m: assigned preliminary rating of (P) B+_SF

Class G (XS2267898471): EUR 10.3m: assigned preliminary rating of (P) B-_SF

Class RFN (XS2267898554): EUR 8.3m: not rated

Class Z1 (XS2267898802): EUR 5.0m: not rated

Class Z2 (XS2267899362): EUR 13.2m: not rated

Class X (XS2267899446): not rated

Preliminary ratings rely on the information made available to Scope up to 13/1/2021. 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.

Transaction overview

Shamrock Residential 2021-1 DAC is a true-sale securitisation of an Irish residential mortgage pool. The purpose of the transaction is to refinance loan pools acquired by Daire Residential DAC and it is serviced by Start Mortgages DAC (Start) and Pepper Finance Corporation (Ireland) DAC (Pepper).

The preliminary portfolio dated 31 October 2020 contains a mix of delinquent (20%), current and historically restructured (43%), as well as current and never restructured loans (37%). It is mostly secured by first-lien residential properties located in Ireland and comprises 2,405 loans to 1,844 obligors. The portfolio benefits from a moderate weighted average current loan-to-value ratio of 81%. The properties are concentrated in Dublin (40%).

The structure comprises 11 classes of notes with fully sequential principal amortisation and two cash reserve funds (liquidity and non-liquidity reserve fund). Class A will pay a floating rate indexed to 1-month Euribor, plus a margin of 0.85% or a step-up margin of 1.5% from July 2023. The ratings on the Class B to G notes reflect a periodic minimum of: i) the index plus margin or step-up margin on the notes, as applicable; and ii) the net weighted average coupon, ranging from 1.2% as of closing to 1.7% as of the maturity date, in accordance with the transaction documentation and Scope’s assumption of asset coupons and senior fees.

Rating rationale

The ratings reflect the legal and financial structure of the transaction; the quality of the underlying collateral; the experience and incentives of Start and Pepper as the servicers in the transaction; and the exposure to the transaction’s key counterparties.

The ratings are mainly supported by credit enhancement, moderate current loan-to-values, and non-amortising cash reserve funds. The credit quality of the rated notes is mainly constrained by a relatively high expected lifetime portfolio default rate, Ireland’s volatile property market, and limited excess spread.

The transaction is exposed to the following key counterparties: Start and Pepper as the servicers, Elavon Financial Services DAC (Elavon) as the account bank and paying agent, and BNP Paribas as the interest rate cap provider. Counterparty risk is mitigated by the credit quality of the counterparties, as well as structural mechanisms such as replacement rating triggers as well as the limited time exposure. Scope assessed the credit quality of BNP Paribas and used available public credit ratings for Elavon.

Key rating drivers

Credit enhancement (positive). The Class A to G notes benefit from sufficient credit enhancement provided by subordination, overcollaterisation and reserve funds².

Moderate current loan-to-value ratio (positive). The moderate current loan-to-value incentivises borrowers to pay, mitigating (re)default risks. The portfolio’s current loan-to-value reflects the property market recovery in Ireland and gradual deleveraging; it is close to that of peer transactions issued in Ireland¹.

Strong liquidity (positive). Liquidity shortfalls are extremely unlikely for Class A, as it is supported by a liquidity reserve covering 24 months of senior fees and Class A interests. In addition, principal proceeds can be diverted to cover Class A interest shortfall risk, in accordance with the transaction’s waterfalls (principal-to-interest via a revenue shortfall mechanism as well as yield supplement overcollateralisation). Liquidity support for Class B to G is weaker as they will rely on a non-liquidity reserve fund, which is around six months of senior fees and all rated notes’ interests but increases with the amortisation of Class A. The revenue shortfall mechanism will only protect the most senior outstanding tranche².

High (re)default risk (negative). A high proportion of the loans were restructured in the past or are currently being restructured. Scope’s lifetime portfolio default rate distribution captures high expected defaults, indicated by the higher risks from reperforming loans as well as the uncertainty from those loans which are currently three months in arrears and may not become reperforming³.

Volatile property market (negative). Scope is pessimistic regarding Ireland’s property market, reflected in relatively high property haircuts. Scope assumed a rating scenario with property value cuts of 39% and 64% for B and AAA respectively. Nevertheless, expected recoveries given default are quite high due to the relatively moderate leverage of the portfolio (recoveries of 75% and 45% for B and AAA respectively)⁴.

Limited excess spread (negative). The transaction’s excess spread is low, which limits the usefulness of principal deficiency ledgers and makes the transaction rely more on reserve funds. Scope tested the rating impacts of different asset margin stress scenarios⁵.

Rating-change drivers

Better than expected asset performance may positively impact the ratings due to decreased (re)default risk and improved recovery proceeds. (upside)

Macroeconomic uncertainty in Ireland caused by Brexit and a global growth slowdown (e.g. Covid-19 impacts) may weigh negatively on the performance of the collateral pool, due to the retrieval of foreign investment in Ireland, leading to a long-lasting deterioration in employment levels and potential sovereign crisis.⁶ (downside)

Quantitative analysis and assumptions

Scope analysed the transaction’s structural features using a proprietary cash flow model. The cash flow model inputs also feature the key asset assumptions derived during the analysis of the transaction, including a stochastic distribution of portfolio defaults and rating-conditional recovery rates.

Scope calculated the expected loss of each tranche based on an inverse Gaussian default distribution for the assets, probability-weighting any loss. The cash flow tool also produced the expected weighted average life for the rated notes.

An expected portfolio default of 23% and a coefficient of variation of 27% were applied over the portfolio’s expected weighted average life of 9.7 years. Scope derived the default rate assumption based on a transaction-specific regression analysis using internal sources, complemented by public data on Ireland’s prime mortgage performance. The portfolio’s expected weighted average includes Scope’s assumption of the extension of loan terms following restructuring.

Scope assumed rating-conditional recovery rates by using its fundamental recovery framework, which applies line-by-line haircuts to indexed property appraisals. Rating-conditional recovery rates for each class are: Class A 45%, Class B 52%, Class C 59%, Class D 64%, Class E 70%, and Class F and G 75%. These haircuts mainly reflect market value losses under rating-specific stress scenarios, as well as a constant liquidation discount (i.e. a firesale discount).

Scope derived the default timing term structure by leveraging the portfolio amortisation schedule.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in the main input parameters: the portfolio’s expected default rate and the portfolio’s recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the ratings would change if the portfolio’s expected default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

Class A: sensitivity to probability of default, 1 notch; sensitivity to recovery rates, 1 notch.
Class B: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 6 notches.
Class C: sensitivity to probability of default, 4 notches; sensitivity to recovery rates, 9 notches.
Class D: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 8 notches.
Class E: sensitivity to probability of default, 2 notches; sensitivity to recovery rates, 8 notches.
Class F: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 6 notches.
Class G: sensitivity to probability of default, 4 notches; sensitivity to recovery rates, 4 notches.

Rating driver references
1. Loan-by-loan data tape of the securitised pool (confidential)
2. Transaction documentation (confidential)
3. Loan-by-loan historical payment records (confidential)
4. Historical property disposal data (confidential)
5. Scope’s Cash Flow Model (confidential)
6. 2021 Sovereign Outlook

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

Cash flow analysis
Scope analysed the transaction’s cash flows using the Scope Cash Flow SF EL Model Version 1.1. This model incorporates default and recovery rate assumptions over the portfolio’s amortisation period and 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 and an expected weighted average life for the notes.

Methodology
The methodologies used for the ratings, the ‘General Structured Finance Rating Methodology’ (14 December 2020) and the ‘Methodology for Counterparty Risk in Structured Finance’ (8 July 2020), are available on https://www.scoperatings.com/#!methodology/list.
The model used for the ratings Scope Cash Flow SF EL Model Version 1.1. is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary 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 rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please 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’s definitions of default and 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 factor) are incorporated into the 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 agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has received a third-party asset audit. The external asset audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating action, the rated entity was given the opportunity to review the ratings and the principal grounds on which the credit ratings are based. Following that review, the ratings were not amended before being issued.

Regulatory disclosures
The preliminary credit ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The credit rating and/or outlook is UK endorsed.
Lead analyst: Antonio Casado, Executive Director
Person responsible for approval of the rating: David Bergman, Managing Director
The preliminary ratings were first released by Scope on 18 January 2021.

Potential conflicts¹
Please see www.scoperatings.com 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 23 December 2022. On the publication date of 18 January 2021, this section originally stated: "Please see www.scoperatings.com 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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