Rating action

The ratings are as follows:

Class A (XS2441643827): EUR 425.9m: assigned a new rating of AAA_SF

Class B (XS2441644551): EUR 30.8m: assigned a new rating of AA+_SF

Class C (XS2441645012): EUR 28.0m: assigned a new rating of A+_SF

Class D (XS2441645285): EUR 21.0m: assigned a new rating of BBB+_SF

Class E (XS2441645442): EUR 21.0m: assigned a new rating of BB+_SF

Class F (XS2441645525): EUR 8.4m: assigned a new rating of B+_SF

Class G (XS2441645871): EUR 11.2m: assigned a new rating of B-_SF

Class RFN (XS2441645954): EUR 11.2m: not rated

Class Z (XS2441646093): EUR 14.1m: not rated

Class X (XS2441632895): EUR 2.0m: not rated

Transaction overview

Shamrock Residential 2022-1 DAC is a true-sale securitisation of an Irish residential mortgage pool. The purpose of the transaction is to refinance loan pools acquired by Coll Residential DAC and it is serviced by Mars Capital Finance Ireland DAC (Mars Capital) and Cabot Financial (Ireland) Ltd (Cabot Financial).

The underlying pool, as of January 2022, consists of 4,057 mainly reperforming mortgage loans originated by different retail lenders predominantly in Ireland. The mortgage loans finance 3,271 properties with a current indexed collateral value of EUR 1,191.4m. Many of these loans (69%) have been restructured during their already quite long life (weighted average seasoning 15.1 years) or are expected to be restructured to make them performing on a sustainable basis, in line with regulatory requirements from the Central Bank of Ireland. The portfolio benefits from a moderate weighted average loan-to-value ratio of 66% considering indexed latest valuations. The properties are concentrated in Dublin (38%).

The structure comprises 10 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 September 2024. 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 a maximum of 2.0%, in accordance with the transaction documentation and Scope’s assumption of asset coupons and senior fees.

The transaction closed on 16 March 2022. The legal final maturity is 24 January 2061.

Rating rationale

The ratings reflect the legal and financial structure of the transaction; the quality of the underlying collateral; the experience and incentives of Mars Capital and Cabot Financial 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. Class A, Class B, Class C, Class D, Class E, Class F, and Class G will amortise over an estimated weighted average life of 7.4, 15.7, 17.3, 18.3, 19.9, 21.0 and 19.4 years respectively, assuming no call and a zero constant prepayment rate (CPR).

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: Mars Capital and Cabot Financial as the servicers, Barclays Bank Ireland plc and Allied Irish Banks plc as the servicer’s account banks, Elavon as the transaction 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, structural mechanisms such as replacement rating triggers as well as the limited time exposure. We have assessed the credit quality of BNP Paribas and Elavon based on public information.

Key rating drivers

Credit enhancement (positive). The Class A to G notes benefit from sufficient credit enhancement provided by subordination, overcollateralisation and reserve funds.¹

Moderate current loan-to-value ratio (positive). Moderate current loan-to-values incentivise borrowers’ willingness to pay, mitigating (re)default risks. The portfolio’s current loan-to-value is close to that of peer transactions issued in Ireland and reflects the property market recovery in Ireland with gradual deleveraging.²

Strong liquidity (positive). Liquidity shortfalls are very unlikely for the rated notes. Liquidity reserves cover senior costs and rated notes interest for more than 24 months. In addition, principal proceeds can be diverted to cover for interest shortfall risk, in accordance with the transaction’s waterfalls (principal-to-interest via a revenue shortfall mechanism as well as yield supplement overcollateralisation – YSO). The revenue shortfall mechanism will only protect the most senior outstanding tranche.¹

High (re)default risk (negative). The portfolio consists mainly of reperforming loans following a past restructuring, and loans currently in arrears expected to be restructured soon. Our lifetime portfolio default rate distribution reflects the weak credit quality of the portfolio compared to performing portfolios. We used an inverse Gaussian portfolio default rate distribution with a mean of 21.5% and a coefficient of variation of 30%.³

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 our 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, fuelled by cheap credit. However, demand may decline if the macroeconomic recovery stops, or interest rates rise significantly.⁴

Limited excess spread (negative). The transaction’s excess spread is low, which limits the effectiveness of principal deficiency ledgers (PDL) and makes the transaction rely more on reserve funds. We tested the rating impact of different asset margin stress scenarios.¹

Rating-change drivers

Better than expected asset performance may positively impact the ratings. If restructurings prove to be sustainable solutions for the borrowers, default risk and recovery expectations may improve. (upside)

Macroeconomic uncertainty and risks of a global growth slowdown 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 a potential sovereign crisis. (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 21.5% and a coefficient of variation of 30% were applied over the portfolio’s expected weighted average life of about 10 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 54%, Class B 60%, Class C 66%, Class D 72%, Class E 77%, and Class F and G 81%. These haircuts mainly reflect market value losses under rating-specific stress scenarios, as well as a constant liquidation discount (i.e. a quick-sale 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, 2 notches.

Class B: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 8 notches.

Class C: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 8 notches.

Class D: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 8 notches.

Class E: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 8 notches.

Class F: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 5 notches.

Class G: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 3 notches.

Rating driver references
1. Transaction documentation
2. Loan-by-loan data tape of the securitised pool
3. Loan-by-loan historical payment records
4. Historical property disposal data and house price index data

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, (General Structured Finance Rating Methodology, 17 December 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for these Credit Ratings are (Cash Flow SF EL Model Version 1.1; Portfolio Model Version 1.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-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 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: Antonio Casado, Executive Director
The preliminary Credit Ratings were first released by Scope Ratings on 23 February 2022.
The final Credit Ratings were first released by Scope Ratings on 16 March 2022.

Potential conflicts
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 Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate.

Conditions of use / exclusion of liability
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.